Currency Presentation

Comments

Transcription

Currency Presentation
Structure:
Johannesburg Stock
Exchange
Equity
Market
ALtX
Equity
Derivatives
Interest Rate Products
Commodity
Derivatives
Yield-X/
Nutron
Currency Derivatives
- Futures
- Options
- Index (RAIN)
What is a Currency:
• It is the Rate of Exchange between two currencies
• I.e. $/R6.86 or €/R9.80
– You will pay R6.86 for every one $ and R9.80 for every one € purchased
– Similar to paying R256 for 1 SAB Share
• The exchange rates quoted on the TV, radio and in newspapers say $/R6.86,
this
is a mid rate
– A mid rate is the average between the rates quoted between a willing buyer and
willing seller of that currency
• Rennies Travel will quote a retail exchange price to the public:
– As at 20th May 2011: Rennies will buy Dollars at 6.6200 and sell Dollars at 7.0419
– The difference of 0.4219 is known as the spread
What are Currency Futures:
• Contracts that allow investors to trade an exchange rate for some
time into the future
• Currency Future’s are agreements between two parties, but there is
no counterparty risk as the clearing house of SA (i.e. Safcom) takes
on the risk of each trade
• Buyers of Currency Futures (long), buy the Dollar’s and sell the
Rand’s, i.e. You want the Dollar to appreciate in value or the Rand
to depreciate in value, example: $/R to move from R7.00 to R7.50
(generally importers)
• Sellers of Currency Futures (short), sells the Dollar’s and buy the
Rand’s, i.e. You want the Dollar to depreciate in value or the Rand
to appreciate in value, example: $/R to move from R8.00 to R7.00
(generally exporters)
Currency contracts listed:
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•
•
•
•
•
•
•
Dollar/Rand
Euro/Rand
Pound/Rand
Australian Dollar/Rand
Japanese Yen/Rand
Canadian Dollar/Rand
Swiss Franc/Rand
Chinese Yuan/Rand
Botswana Pula/Rand
New Zealand Dollar/Rand
What are Currency Futures used for:
• Currency Future’s are used Primarily to:
• Hedge – Seek to reduce risk by protecting underlying portfolio/assets
or hedging import/export foreign assets. It removes the risk of existing
or expected currency exposure
• Speculate – Speculators enter into currency futures contracts in order
to take a view on the movement of the underlying exchange rate,
without having the need to buy the underlying currency
How are Currency Futures Priced:
• What makes up the price of a Currency Future (Forward)?
= Spot price + forward points
– Spot price e.g. $/R6.85 (bid) / $/R6.88 (offer)
– Forward points (interest rate differential between today and expiry date)
e.g. as at 08/11/2010
300 points bid / 350 points offer
• Future price is 6.8800 (bid) / 6.9150 (offer) [6.8500 + 0.0300]
• On the exchange we quote/trade the expiry date so the price will always
include the forward points
Profit or Loss per point move:
Initial
Price
New
Price
Price move
in points
Nominal
Value of
underlying
8.0000
8.0001
0.0001
1000
0.10
10
1.00
8.0000
8.0010
0.0010
1000
1.00
10
10.00
8.0000
8.0100
0.0100
1000
10.00
10
100.00
8.0000
8.1000
0.1000
1000
100.00
10
1000.00
Rand price
difference
Number of
contracts
Profit in
Rand’s
Margining:
• Each trade is matched daily by Yield-X, i.e. the exchange ensures that there
is a buyer and a seller to each contract traded
• The JSE’s clearinghouse Safcom becomes the counterparty to each trade
once each transaction has been matched and confirmed
• The clearinghouse therefore ensures settlement takes place on each trade
• To protect itself from non-performance, Safcom employs a process known
as margining. This mechanism is two-fold:
Initial Margin:
• When a position is opened (either long or short), the investor is required to pay
an initial margin in cash (known as a good faith deposit) with the broker who
subsequently deposits it with the clearinghouse
• This amount remains on deposit as long as the investor has an open position
• The initial margin attracts a market related interest rate which is refunded to
the investor once the position is closed out, or if the
contract expires
• The initial margin requirement varies between the different currency futures
offered
May 2012 Initial Margin Requirements:
Contract Code
Expiry Date
Fixed Initial Margin
Spread Margin
Series Spread Margin
Requirement
Requirement
Requirement
VSR
Dollar/Rand ($/R)
18 June 2012
R335.00
R20.00
R40.00
2.5
Dollar/Rand ($/R)
17 Sept 2012
R340.00
R20.00
R40.00
2.5
Dollar/Rand ($/R)
14 Dec 2012
R345.00
R20.00
R40.00
2.5
Dollar/Rand ($/R)
18 Mar 2013
R350.00
R20.00
R40.00
2.5
Dollar/Rand ($/R)
13 Dec 2013
R360.00
R20.00
R40.00
2.5
Dollar/Rand ($/R)
12 Dec 2014
R390.00
R20.00
R40.00
2.5
Dollar/Rand ($/R)
14 Dec 2015
R435.00
R20.00
R40.00
2.5
Variation Margin:
• Known as the daily settlement of profits and losses
• The Currency Future price is determined from the underlying markets spot
price to which forward points are added to deliver the final price used in the
daily MTM process
• The Exchange re-values each position daily at the close of each business day,
and this process is known as Mark-to-Market (MTM)
• Any difference from the previous day’s MTM price is either paid to the
investors, or paid by the investors to the clearinghouse, in cash and Rand
denominated
• This payment is called variation margin and is simply the profit or loss on each
position
Speculating Example:
• If you wish to take a view that the $/R exchange rate is going to move i.e. the
Rand or Dollar to either strengthen or weaken, this is known as speculating
• Remember you can make a lot of money, but you can also lose a lot of money
by speculating with exchange rates!
• Factors causing the exchange rates to move:
– Purchasing Power Parity
– Change in interest rates
– Trade imbalances
– Government Intervention
– Political instability
– Speculators
– Terrorist attacks
– Purchase of local company by foreign companies (e.g. Walmart buying Massmart)
Speculating Example:
• Speculator expects Rand to weaken (Dollar strengthen)
–
–
–
–
Buy 10 Contracts at R8.35 – an exposure of R83,500 (10 x 8.35 x1000)
Deposit R3,350 only for the initial margin (10 x R335)
Sell contracts at R8.50 – an exposure of R85,000 (10 x 8.50 x 1000)
Profit = R1,500 (R85,000 – R83,500)
[10 x $1,000 x (R8.50 – R8.35) = R1,500
– Initial margin of R3,350 is returned
– A return of R1,500 (44%) during a period in which the Rand only
weakened by 1.8%
Hedging Example:
• Company ABC importing goods to the value of $100 000, has to buy
$100 000 @ 8.3550 = R835,500
• Importer wants to know their landed cost, and eliminate any currency
risk
• Therefore need to buy 100 Currency Futures contracts
Hedging Example:
Day 1
(Trade Day close)
Day 2
Month 3
Month 4
Day of expiry
Day
(18/06/2012)
Currency
future trade
price
R8.3550
R0
R0
R0
R8.5500
Initial Margin
per contract
(R33 500)
(R335 x 100)
R0
R0
R0
R33 500
MTM price
(closing price)
R8.4000
R8.4500
R8.4300
R8.4500
n/a
Profit/Loss for
the day
R4 500
(8.4000 –
8.3550 x 100 x
1000)
R5 000
(8.4500 –
8.4000 x 100 x
1000)
(R2 000)
(8.4300 –
8.4500 x 100 x
1000)
R2 000
(8.4500 –
8.4300 x 100 x
1000)
R10 000
(8.5500 –
8.4500 x 100 x
1000)
Net cash
in/(out) for the
day
(R 29 000)
(-33 500 + 4
500)
R5 000
(R2 000)
R2 000
R43 500 (33
500 + 10 000)
Hedging Example:
• Summary of cash flow:
Variation Margin: R19 500 Profit
(+R4 500 + R5 000 – R2 000 + R2 000 + R10 000)
• Use the profit to off-set the increase in the Dollar exchange rate
• Spot moved from 8.30 to 8.55 (expiry date) Loss of R25 000
• Future moved from 8.3550 to 8.55 (expiry date) Profit of R19 500
• Net difference between spot and future is R5 500 (the 550 forward points)
and this is the interest rate differential that was bought at day 1 (i.e. 8.3550
compared to 8.30)
• Importer will buy the physical $100 000 from the bank at an effective rate of
8.3550 – R835 500 compared to R850 000
Hedging Example:
• Summary of cash flow:
Initial Margin: R0 (-R33 500 + R33 500)
•
•
•
•
Always returned to the investor
Money on deposit earns overnight deposit rate @ 5.339%
24 times gearing (R335 deposit per R8 355)
If the dollar had weakened against the rand (i.e. moved from R8.30
downwards to R8.00) then the importer would merely pay R800 000
• But the loss on the futures would have been offset by the profit in the better
spot price
Benefits to trading Currency Futures:
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•
•
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Effective and transparent hedge against currency risk (for all importers and exporters)
Hedge foreign portfolios
Diversify Internationally from South Africa
Take a view on the underlying currency movement/speculation
Deep liquidity in the foreign underlying instrument
Gearing
Protect the value of your Currency
No credit lines required from Banks
Cost effective
Wholesale corporate rates
Trade on a regulated and efficient platform/ No counterparty risk
Equalize the playing fields for investors
Advantages over FEC:
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Flexible Dynamic Hedge
Cost is known and deductable
Margin Lower than Collateral
Transparent and Regulated Trade
Can Exit Position with best Priced Counterparty
No Obligation to Deliver Forex
No SARB Approval Required
Can be used for Quotes and Tenders – No underlying contact needed
Differences between Currency Futures & Forward
Currency Futures
Currency Forwards
Contracts:
Hedging Instrument
Yes
Yes
Derivative Instrument
Yes
Yes
Credit Risk
No
Yes
Physical Delivery
No
Yes
Wholesale Exchange Rate
Yes
No
Active deep & liquid market
Yes
No
Standardised Product
Yes
No
Any day expiry (non-standardised)
Yes
Yes
Cost Effective
Yes
Depends on credit??
Gearing
Yes
No
Require credit lines from the bank
No
Yes
Speculation
Yes
No
Live currency pricing on Diro:
• 3 Market
Makers quoting
live prices:
• Best bid/offer
market spread
0.0033 cents,
Risks:
•
Gearing
– Post small amount but valued on full nominal value
Turnover:
• Average monthly value traded
− Futures
− Options
− Total
=
=
=
Example of a Zero0sum game: For every winner there is an equal
loser