EXTRA VALUE - JSE MAGAZINE

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The JSE expanded its Quanto derivatives range recently to include a currency contract based on the euro/dollar exchange

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There has been an increased amount of interest from market participants in SA to trade the euro/dollar and this product now allows the JSE to offer a competitive product in the country,’ says  Warren Geers, General Manager of Bonds and Financial Derivatives at the JSE.

‘The product offers the local financial market an instrument that exposes it to one of the world’s most popular currency derivatives pairs.’

The new currency contract is specifically aimed at the retail market and hedge fund industry where investors hope to make a profit on the euro/dollar exchange rate.

Geers says that the JSE’s currency futures market could top the R500 billion mark in 2014 if it gets permission from the South African Reserve Bank to launch a number of new initiatives in the short term. It reached an annual traded value of R250 billion within three years after its introduction in 2007, yet in excess of R300 billion in 2013 alone.

Quanto derivatives are futures where the underlying product traded follows the movements of a foreign asset, but the instrument itself is settled in another currency. Quanto derivatives traded on the JSE will be settled in rand even though they will track the movements of the prices of the euro, quoted in dollars.

Quanto Futures mirror the underlying movement on a one-for-one basis. If the price of the euro/dollar increases by 20% in dollar terms, then the value of the investor’s rand position in euro/dollar will also increase by 20%.

The ability to offer a Quanto contract on the JSE currency derivatives platform brings the SA financial market even further in line with international standards. The JSE first introduced Quanto derivatives in the commodity derivatives market, not the currency derivatives market, where the offering includes Quanto Futures on a variety of hard and soft commodities including gold, silver, platinum, copper, Brent crude oil, heating oil, gasoline, natural gas, palladium, sugar, cotton, cocoa, coffee and corn.

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‘If an investor trades one Euro/Dollar Quanto Futures contract, the nominal exposure will be R10 000’

WARREN GEERS, GENERAL MANAGER OF BONDS AND FINANCIAL DERIVATIVES, JSE

 The latest product, Quanto currency futures, started trading in the JSE’s interest rate and currencies market in November and is accessible through normal broker services and online share trading platforms. Rand Merchant Bank was the first to provide live prices on screen in a market with very tight pricing.

The recent launch of the euro/dollar currency future allows investors to trade this currency pair without using their foreign offshore allowance. ‘The Quanto replicates the movements of the euro/dollar, except the funds stay in SA. The profit or loss is calculated in SA rand. There is no exchange risk, therefore investors need not use their offshore allowance.’

‘Currently SA retail investors may take R1 million offshore without a tax clearance certificate. To take a larger amount offshore, a person would need a tax clearance certificate and the amount is capped at R4 million. If an investor trades one euro/dollar Quanto Futures contract, the nominal exposure will be R10 000.

‘If the contract moves from 1.33 to 1.35 the movement is R0.02. The profit of R200 would thus be the same as for an investor who bought exposure of 10 000 euro/dollars. This has the same monetary value effect, but the investor would not have to use his offshore allowance and not be subjected to currency exchange fluctuations to the rand,’ Geers says.

The JSE would also be able to implement other currency pairs such as euro/sterling or dollar/yen and so on, as a Quanto if there is an explicit and expressed need from the market. ‘Unless we can secure an active bank to act as a market maker who is prepared to make live prices on screen, the JSE will not go ahead with such listings.’

By Louise Brougham-Cook
Image: Fredrik Broden/reneerhyner.com