Budget Speech 21 February 2007 - PowerPoint PPT Presentation

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Budget Speech 21 February 2007

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public holidays. The trading of currency futures will be done ... Spot rates are quoted in Bid and Offer spreads ... of the announcement, USD/ZAR spot trades ... – PowerPoint PPT presentation

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Title: Budget Speech 21 February 2007


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2
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
Budget Speech 21 February 2007 Minister of
finance Trevor Manuel Further developing South
Africas financial markets and increasing
liquidity in the currency market by permitting
the JSE to establish a Rand futures market
3
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Content
  • Background
  • Why Yield-X
  • Currency Futures Product Specifications
  • Currency Future Qualifying Audience
  • Why Trade Currency Futures
  • Trading ZAR Currency Futures
  • Risk

4
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Background
  • Yield-X has been granted approval to launch Rand
    denominated
  • currency derivatives
  • To begin, Dollar/Rand currency futures will be
    traded
  • followed by the Euro/Rand and Sterling/Rand
    currency
  • Futures
  • Going forward numerous other Rand currency
    futures can be traded
  • No cross currencies (e.g. /) will be allowed to
    trade, but
  • synthetic futures can be created between the
    relevant
  • currencies

5
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Why on the Yield-X platform
  • The close correlation between currency and
  • interest rates
  • South African Reserve Bank (SARB) and National
  • Treasury required a system that could do
    pre-trade
  • approval instead of post trade checking
  • A product that will attract attention and bring
  • liquidity to the interest rate products on
    Yield-X

6
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Yield-X Market Times and Trading Front-end
  • Market times 9am - 5pm Monday Friday, except
  • public holidays
  • The trading of currency futures will be done
  • through the current Yield-X front-end
  • Off screen and on-screen trading is permitted on
    Yield-X

7
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Currency Futures Product Specifications
  • Underlying Instrument
  • Rate of exchange between one US Dollar and SA
    Rand
  • Standardized contracts
  • Fixed expiries in March, June, September and
    December
  • Rand Denominated
  • Contracts quoted in SA Rand per one US Dollar to
    4
  • decimal places
  • Cash Settled
  • No physical delivery of foreign currency
  • Minimum contract sizes
  • Mini contracts 1000 (foreign underlying
    currency e.g. 1000)

8
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Currency Futures Product Specifications
  • Initial Margin
  • Is deposited via the clearing member with the
  • exchange
  • Near /R contract is 6.45
  • Covers one days trading movement
  • Purpose is to eliminate any counterparty risk
  • Ensures that the JSE maintains its ability to
  • guarantee all trades for settlement

9
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Currency Futures Product Specifications
  • Mark-To-Market
  • Is the end of day valuation process for all
    contracts
  • and positions
  • Results in variation margin or profit/loss flows
  • Flow of variation margin depends on the
  • movement of the futures price and the
    investors
  • position (long or short)

10
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Currency Futures Product Specifications
  • Expiry
  • Expiration Valuation Method to determine expiry
    futures
  • price
  • Arithmetic average of the underlying, taken every
    minute for 100 iterations, between 12h01 and
    13h40
  • Expiration and Final Variation Margin Flow
  • If Currency Futures holders hold their contracts
    until expiry, they will receive/pay a final VM
    flow and no physical delivery will take place

11
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Currency Futures Product Specifications
  • Zero-sum game
  • For every buyer there is a seller
  • Long holders profit from an increase in currency
  • futures price
  • Short holders profit from an decrease in
    currency
  • futures price
  • Losses of the loser profits of the winner

12
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Currency Future Qualifying Clients
  • Only qualifying clients will be able to trade,
    including
  • Individuals and foreigners with no limits
    applicable
  • Pension funds and long term insurance companies
    subject to their
  • 15 foreign allocation allowance
  • Asset managers and registered collective
    investment schemes subject
  • to their 25 foreign allocation limits
  • All corporate entities and trust accounts are
    prohibited from trading
  • unless a valid exchange control approval (ECA)
    is granted from SARB
  • An authorised dealer can apply to be a market
    maker in currency
  • futures by way of a formal written application
    to SARB

13
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Membership and Proprietary Trading
  • A member who is not a Market Maker may trade in
    currency
  • derivatives with or on behalf of qualifying
    clients or as
  • proprietary, but may not hold positions at the
    end of day
  • Any positions held at end of day must be
    allocated to a
  • qualifying client
  • A member may not allocate at a different price
    to the price
  • originally traded at intra-day (this will be
    seen as holding a
  • position)
  • Exceptions are reported via Yield-X to SARB on a
    daily basis
  • Members will need to provide valid reasoning to
    SARB
  • detailing why positions were not allocated at
    the end of the
  • day

14
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Yield-X Target Market
  • The qualifying audience
  • Retail Market
  • The current SA Contract for Difference (CFD)
    market
  • Foreign offshore trading that exists on
    international markets
  • including the CME
  • Agriculture market
  • Hedgers of currency

15
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Trade Procedures
  • All trades have to go through a registered
    Yield-X member
  • All Yield-X members have to have a sponsoring
    Clearing Member
  • All dealers in currency futures need to be
    registered and approved
  • with the JSE
  • All clients need to be loaded onto the Yield-X
    system
  • All members to ensure clients are FICA compliant
  • Trades may only be made within pre-defined
    limits set by the
  • Clearing Member
  • Only the qualified audience with approved ECA
    will be allowed to
  • trade on the system

16
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Why Trade Currency Futures
  • Trade on regulated, efficient, transparent
    platform
  • Effective and transparent hedge against currency
    risk
  • Take a view on the currency movement
  • Can make or lose money
  • Represents a relaxation of exchange controls for
  • individuals
  • Allow individuals to trade in the currency
    market that is
  • generally reserved for institutions

17
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Trading ZAR Currency Futures

18
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • FX Trading
  • Traded on a 24 hour basis
  • Major trading zones London, New York, Tokyo
  • Daily FX market turnover exceeds 10Bi (SARB)
  • Most liquid of all asset classes
  • Growing popularity within the investment
    community
  • Bid and Offer prices
  • Spot, Forwards, Futures and Options

19
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Growing Asset Class

20
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Spot Trading
  • Spot transactions
  • Delivery T2 i.e. trade date plus two business
    days
  • Spot rates are quoted in Bid and Offer spreads
  • For example USD/ZAR pair is quoted as
    7.1000/7.1500
  • Market maker is willing to purchase USD against
    ZAR at
  • 7.1000 and sell USD against ZAR at 7.1500 for
    value date
  • spot
  • Price taker purchases USD at 7.1500 and sells
    USD at
  • 7.1000

21
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Pricing Futures Contract
  • F S1(rd-rf)T
  • F is the futures contract
  • S is spot rate in local currency units per
    foreign
  • currency
  • T is time to maturity
  • rd is domestic interest rates
  • rf is foreign currency interest rates

22
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Futures Price Sensitivity
  • F SS(rd-rf)T
  • Swap points S(rd-rf)T
  • (rd-rf) is the interest rate differential
  • F Spot swap points
  • Spot ? swap points ? futures price ?
  • rd ? swap points ? futures price ?
  • rf ? swap points ? futures price ?
  • Bid and Offer spread in interest rates determine
    swap
  • spread

23
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Pricing Example
  • Spot rate 7.1500
  • Swap points 450
  • Exchange Clearing Fees 23
  • Futures Price 7.1973
  • Initial Margin ZAR 46,422.59 (46 cents per USD)
  • Client would purchase 100 futures contracts
  • Equivalent of long 100,000 at 7.1973
  • 15.50 Gearing

24
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Pricing Example
  • Client purchases 100 futures contracts at 7.1973
  • Two hours later, news flash on Reuters about U.S
    investor
  • selling its shares in local entity
  • U.S investor will sell local stock in ZAR and
    convert ZAR
  • to USD (buying USD, selling ZAR)
  • Deal size is valued at ZAR 10bio about
    (1.43bio)
  • Given the magnitude of the trade, it should have
    the
  • impact in the spot market

25
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Pricing Example
  • As the result of the announcement, USD/ZAR spot
    trades
  • at 7.2000 with the futures price at 7.2427
  • Client sells the contract at 7.2427
  • Profit on the trade is 1001000(7.2427-7.1973)
  • ZAR 4,540
  • Return of 9.8 on 4.5 cent movement

26
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
Risk!!
27
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Factors that Contribute to Currency Market
    Volatility
  • Event Risk
  • Fundamentals
  • Interest Rates
  • Technical Analysis

28
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Event Risk
  • 9/11
  • Political Assassinations/Resignations
  • Unscheduled political and economic press
  • releases
  • This type of risk cannot be predicted

29
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Fundamentals
  • Economic statistics
  • CPI, Non-farm Payrolls, Trade Balance etc
  • Scheduled political and economic announcements
  • Monetary Policy Committee minutes, CB governor
    or
  • member press conferences, G7 Meetings
  • Central Bank intervention
  • Reserve adjustments, currency defence
  • Options
  • Barriers and strike levels

30
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Interest Rates
  • Carry Trade
  • High yield/Low yield
  • Market perception of next interest rate move
  • Are data releases at market consensus
  • Inflation Outlook

31
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
  • Technical Analysis
  • Charts / Technical's
  • Widely analyzed by FX markets, common support
    and
  • resistance areas, Moving averages etc
  • Stop losses and Take profits
  • Herd psychology - chasing levels

32
Yield-X CURRENCY FUTURES EDUCATION
SEMINAR
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