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Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No. 42996 Introduction to Currency Futures Webinar.

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Presentation on theme: "Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No. 42996 Introduction to Currency Futures Webinar."— Presentation transcript:

1 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction to Currency Futures Webinar Shaun van den Berg Head of Client Education Wednesday, 10 th July h00 until 14h00

2 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Agenda Introduction What are Currency Futures? Where is this instrument traded? How to trade Currency Futures? Advantages Risks Tools for Trading Currency Futures Summary Conclusion

3 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction to Currency Futures

4 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction to Currency Futures Growing market: 2012 – Average R20-billion per month 2013 – Average R36-billion per month “Big Tickets” - $10-million at a time 35 Market Players Big four banks - Market Makers RMB, Standard Bank & ABSA Account for 70% of trade 5 Institutions & 26 Brokerages Account for 30% of trade

5 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No JSE introduced currency futures in 2007 Currency futures are standardised contracts that are traded on the JSE’s Currency Derivatives Trading Platform. Allowed local traders the exposure to foreign currency movements relative to the Rand without affecting their offshore allowance. Currency future contracts allow traders to benefit from the movement in the currency futures rate between the Rand & several major international currencies. Currency traders can also buy & sell currency pairs in order to obtain "long" or "short" exposure - make money while the currency exchange rates move up or down. Buy Dollar & Sell Rand Buy Rand & Sell Dollar Currency traders do not have to deposit cash to match the whole value of the futures position Geared product - Deposit enough cash to cover the initial margin Fixed Rand amount per contract equal to between 10% & 20% per contract. What are Currency Futures?

6 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Expiry = Third Monday of every quarter (March, June, September & December) Rollover = No rollover cost Brokerage = R18.00 per contract Margin = 2 x margin requirement that is quoted by JSE Contract size = 1 contract exposes you to of the foreign underlying currency – e.g. US$1000 or €1000 or ₤1000 Price Movement 1 c = R10 Profit or Loss per contract The trade needs to move 3c in order for you to break even Gearing/Leverage = 10 times Cash Settled on expiry in Rands. Contracts quoted in SA Rand to 4 decimal places Contract can be closed or rolled at the end of the contract expiry to the next contract period. Currency Future details

7 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Who trades Currency Futures? The fund manager looking at hedging his offshore exposure Choose to sell Dollar contracts to hedge against strengthening USDZAR. A farmer importing machinery from France Choose to buy Euro contracts to hedge against weakening EURZAR. An investor with ordinary shares in Sasol Choose to buy Dollar contracts to protect his Sasol holdings from Rand strength. A speculator who views the Pound as being overvalued relative to the Rand Decide to sell GBPZAR contracts - Benefit from currency exchange should this move take place.

8 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Dollar/Rand Euro/Rand Pound/Rand Aussie Dollar/Rand Yen/Rand Canadian Dollar/Rand Swiss Franc/Rand Currency pairs traded on the JSE

9 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Traders choose to either buy (long) or sell (short) a specific currency pair. – For example, if you think the US Dollar is going to strengthen relative to the South African Rand, you would go long/buy the USDZAR contract. – By doing this you are automatically buying Dollars & selling the Rand at the same time. Alternatively, you might think that the Euro is overvalued relative to the South African Rand (and therefore should weaken) in which case you would short/sell the EURZAR contract. By doing this you are automatically selling Euros & buying the Rand at the same time. Buying & Selling

10 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction to Currency Futures How Currency Futures work Where does the trading take place? What is the Order Book? Why is the Spot Price different to the Future price? How do I calculate the Future price? What is Fair Value and why do I care about it?

11 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No In order to open the futures position an investor must deposit the necessary initial margin with the JSE. – Initial margin is 2 times the JSE margin. 50% of this amount will go to initial margin & the other 50% will go to retained margin, used as a buffer for MTM movements. – Marked-to-Market (MTM) – The daily revaluation of each open position by the exchange at the close of each business day. – Variation margin – The daily process through which the unrealised profits & losses are processed into the client’s cash account by the exchange through the MTM process. Leverage (or “gearing”) simply means to trade with margin. The value of currencies transactions engaged is higher than the amount a trader or investor has on margin. – Leverage is a double-edged sword. Leveraged positions can lead to large gains if the exchange rate between two currencies moves as anticipated, but conversely will cause large losses if the exchange rate moves in the opposite direction. The concept of being “wiped out” is not just a theoretical possibility, but a real one. How Currency Futures work

12 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Currency futures trade on the JSE's Currency Derivatives Trading Platform. On the exchange, trading takes place publicly in a centralised location called the Order Book – Hours, trading practices & other matters are regulated by the JSE. 09:00- 17:00 – Margin payments, daily marking to market (MTM), & cash settlements through a central clearing house & guaranteed by the JSE. – Trades are M-T-M at the end of the day where the JSE takes an average price during the last 10-minutes of trading 16:50-17:00 Where does the trading take place?

13 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Order book is the place where all the orders are lumped together. Order are arranged in a price-time priority The bids are all the buyers The offers are all the sellers Buyer prepared to pay the most will be at the top of the bid side Seller looking to sell the lowest price will be at the top of the offer side. If you want to buy - either enter a specific price that you would like to buy at or you buy right where the market is trading. If you are buying at market - Your bid will execute against the price of the best offer If you are selling at market, you offer will execute against the price of the best bid What is the Order Book?

14 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No All the buyers in the market Large market maker in the market, normally a bank PSG Currency client looking to buy 8 contracts at Order will only execute when the Offer becomes 8.40 All the sellers in the market What is the Order Book?

15 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Difference between spot price & futures price is as a result of “The forward points.” Forward points are a function of the interest rate differential between the two domestic countries. Forward points should offset / neutralise interest rate differential between the two currencies Prevent any risk-free arbitrage opportunities. Why is the Spot Price different to the Future price?

16 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No At the start of the futures contract the forward points are normally around 13 cents As the futures contract moves from the start date to the expiry date, the forward points slowly erode away & move towards zero At contract expiry, the forward points are zero & thus the spot price = the futures price Graph 2: Showing how the spot price and futures price converge at expiry Why is the Spot Price different to the Future price?

17 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No To calculate the forward points, the following elements play a role: – The Deal Date – The Maturity (or Settlement) date – The overnight interest rates of the applicable countries (currencies) How do I calculate the Future price?

18 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Maturity date is 82-days forward (27 June 2012 to 17 Sep 2012). The spot exchange rate USDZAR: 8.20 South African JIBAR = 5.595% (0.5595) US 3-month Treasury = 0.1% (0.0100) Points are added when the interest rate of the base currency (USD) is the lower one (0.1% vs %), since the base currency should trade at a forward premium. The future rate would thus be = Calculating the Future price

19 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No What is Fair Value and why do I care about it? The spot price & futures price should always trade in tandem to each other For very short times frames in the day, market conditions can change & currency markets become more or less volatile, market makers may widen their spreads. When this happens the futures prices moves further away from spot price by more than the forwards points Fair value is calculated by adding the forward points to the current spot price. – This calculates where the future should be trading theoretically. Use fair value as a guide to decide if the market makers are pricing fairly or ripping you off.

20 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No The Rand is trading at to the US Dollar – Forward points for the day are Fair value should be around ( ) Now look at the futures order book below: – Best Bid is – Best Offer is The future is thus well priced What is Fair Value and why do I care about it?

21 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction to Currency Futures Example of a Speculative Trade Example of a Hedge Trade What are the Benefits of Currency Futures? What are the Risks to trading Currency Futures?

22 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Normal future trade – Dollar Bear Client A feels that in the current economic environment there is a lot of positive sentiment & he feels that we will start seeing a more risk-on* environment coming our way Client A feels that US Dollar is overvalued & should depreciate in the near future. On day 1 the spot rate is trading at The future is trading at Client A sells 100 Sep 12 USDZAR Margin per contract is R per contract. Remember margin must be multiplied by 2 (R340 x 2 = R680). Brokerage is R18.00 per contract Brokerage is paid to open the position & again when the position is closed). Client A pays to PSG R (R R 1 800) Initial margin earns interest on deposit at SAFEX rates. Example of a Speculative Trade *A risk on environment causes investors to shy away from safe haven assets like the USD, JPY and CHF. Money flow should then favour risky assets. The Rand is a regarded as a risk asset being an emerging market currency.

23 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No On day 4 the spot rate is trading at 8.00 The future is trading at Client A buys the 100 Sep USDZAR contracts back at Gross Profit = R Total Brokerage = R3 600 (R1 800 X 2) Net Profit = R The initial capital outlay of R has returned a profit of R A return of 29.41% during the period in which the Rand only weakened by 2.4% If this was day trade (i.e. opened & closed on the same day), brokerage would only have been paid on the one leg. Total brokerage would then been R Example of a Speculative Trade

24 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Example of Speculative Trading - Cash Flow Table Trade Date Day 1 Day 2 Day 3 Day 4 Initial Margin R R 0.00 R Brokerage R Trade Price R R R R MTM Price R R R R (CLOSED AT) Profit/(Loss) for the day x R10.00/pip x x number of contracts (100) R R R R Net Cash flow for the day R R R R 8 860

25 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Client B would like to send money abroad as part of his R4-million offshore allowance. – He has decided to use half & only send R2-million abroad. – With this money he intends to invest in equities & property. Client B has taken a look at the current spot price of & feels that this is an level is okay & wishes to do the spot conversion. Problem: He is concerned that the Rand will weaken from its current levels, & he will get less foreign currency for his Rand as a result by the time he does the actual conversion in a month’s time. – = US$ – = US$ Solution: Hedge the currency with the use of a future & lock in a rate. Example of a Hedge Trade

26 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No How does a Hedge Trade work? Client B buys the USDZAR future contract This gives him the right to buy USD & sell Rand Specified rate Specified date. One day 1 - Client B buys 244 Sep 12 USDZAR at Margin is R340 per contract x 2 x 244 = R In 1 month when the client does the spot conversion to convert Rands into Dollars at his local bank to send abroad, the Rand as expected, has weakened. He has lost R0.30c by the Rand moving from to On his future hedge he has made R0.30c USDZAR contract was bought at on the future & the future is now at This has translated into a net profit on the hedge of R , which has offset the loss on the spot transaction effectively locking in the original spot rate of

27 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Example of Hedge Trading - Cash Flow Table 1 Trade Date Day 1 Day 2 Day 3 Day 4 Initial Margin R R 0.00 R Brokerage R Trade Price R R R R MTM Price R R R R (CLOSED AT) Profit/(Loss) for the day x R10.00/pip x x number of contracts (244) R R R R Net Cash flow for the day R R R R

28 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Tight spreads & low currency trading costs - Allow traders to enter & exit positions, knowing that profits are not paid away each time there is a trade on the account. Cheap - Trading Currency Futures costs R18.00 (including VAT) per contract. Transparent Pricing - Buy & sell prices are posted in real-time onto the central market by the relevant market makers. Geared product - Do not have to deposit cash to cover the full value of the position. Favourable Rates – Currency Futures allow individual investors to take a view on the movement of the currency futures rate & provide them with access to favourable rates usually reserved for larger corporate clients. Hedging - Importers & exporters can dynamically hedge their currency risk far more efficiently using futures due to the ease of entering & exiting futures positions & the low cost per trade. Market liquidity - Dedicated market makers ensure market liquidity & ensures that currency traders can open & close currency exchange contracts with multiple counterparties. M-T-M - Daily mark-to-market process allows clients ability to track profits or loss Adjust portfolio accordingly. Settlement - Once the position has been closed out settlement occurs in Rand. Daily Statements - Receive daily statements showing your margin & cash movement What are the Benefits of Currency Futures?

29 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Currency futures are geared instruments. – With this leverage/gearing you are able to make large profits from small initial layouts of capital. – Opposite is also true - Should the trade move against you, you could incur large losses as a result of the leverage/gearing. – There is a risk that you may lose more money than you initially invested. Trading Currency Futures require: A high appetite for risk Time to watch the markets Expert knowledge of the currency markets & associated trading process. Not for everyone - You should carefully consider whether such trading is suitable for you in light of your circumstances & financial resources. What are the Risks to trading Currency Futures?

30 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Each currency future trade is unique & comes with its own associated risks: Volatility Exchange rate risk Credit risk Monetary risk Interest rate risk The possibility of government intervention in the financial markets. Experienced traders learn to evaluate these variables. The most important thing to remember is that not every trade will be a successful trade resulting in profits. With every trade you should also have a target price/profit target in mind. Be strict and diligent. Do not trade on emotion; trade on fundamentals A strategy & logic with some common sense. It is very tempting to ride a trade into profit & stay in the trade for larger gains. This can go wrong & you may well ride the trade all the way back into losses. What are the Risks to trading Currency Futures?

31 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Introduction to Currency Futures

32 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No PSG is well-known, independent & respected financial services provider. Voted stockbroker of the year for 2011 & 2012 (As voted for by Business Day Investors Monthly) Regulated by the financial services board (FSB), as well as being a member of the Johannesburg Stock Exchange (JSE). PSG traders are highly skilled & approved by the JSE to trade on SAFEX. Offer a competitive trading brokerage of R18 per contract – Includes the JSE clearing & settlement fee. – There is no monthly account fee. Spreads / prices that you receive are the same as those that are trading on the JSE. – PSG does not add to or adjust the contract spreads / prices. Advantages of PSG

33 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Tools for Trading Currency Futures – Technical Analysis Rand Weakness 200-day MA 50-day MA Support Resistance Overbought Undervalued/ Weak Oversold Overvalued/ Strong

34 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Currency Futures Watch List Here you can see live, streaming prices of 8 currency pairs It shows the Bids (Buyers) & Offers (Sellers) It provides the Last Price, Movement, Percentage %, Action - Link to New Order). Trading Platform (New Order) Here you can select 10 currency pairs to trade. It provides today’s statistics (Last price, Difference, Difference %, High & Low). It shows the Bids (Buyers) & Offers (Sellers) – Price in Rands & Volume (Contracts) It shows account info – How much cash is available & Initial Margin Required Portfolio / Holdings This shows all your current open positions (Holdings) in the numerous currencies. It displays the Currency Future Code, Currency, Open, Bought, Sold, Position, Closing MTM, Cost, Current Price Value, Initial Margin, Return (R) & Return % Rand Report Receive daily market research, market commentary, trader’s views, trading ranges & trade ideas It helps you to make informed & educated investment decisions. Tools for Trading Currency Futures

35 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Currency Futures Watch List

36 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Trading Platform (New Order) 0.013c Difference

37 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Portfolio / Holdings

38 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Home Page/ Resources Step 1 Click Resources

39 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Resources Page / News Step 2 Select News

40 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No News – Categories / Rand Reports Step 3 Select Rand Reports Step 4 Select Report

41 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Rand Reports (3 Sections)

42 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Rand Reports – News of the Day

43 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Rand Reports – Economic Calendar

44 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Rand Reports – View of the Day

45 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Rand Reports – View of the Day / Chart

46 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Visit the Currency Futures page on the PSG Online website – click hereclick here Call PSG Online on Our Currency Futures team will arrange for the opening of your account. You can register online – click hereclick here How do I start?

47 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Once your Currency Futures account is opened & you have sent your FICA, you will be issued with a Currency Account Number e.g. ABC456 Next you need to deposit your margin into the clearers bank account FIRST NATIONAL BANK Account Name: ONLINE SECURITIES LIMITED Account Number: Branch Number: Kindly quote your currency account number as reference with all deposits made Once the money has cleared it will be allocated to your currency account and you can start trading! Where do I deposit margin?

48 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Remember the benefits: Tight spreads & low currency trading costs Cheap Transparent Pricing Favourable Rates Speculate Hedge Market liquidity M-T-M Daily Statements Settlement Geared product Summary

49 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Upcoming Webinars** Technical Analysis: Elliot Wave, Cycle Analysis, etc. Date: Wednesday, 24 July 2013 Time: 13: :00 Trading Introduction to Exchange Traded Products Date: Wednesday, 7 August 2013 Time: 13: :00 Trading Currency Futures (Part 2) Date: Wednesday, 28 August 2013 Time: 13: :00 Introduction to the Share Market Date: Wednesday, 11 September 2013 Time: 13: :00 Conquering Technical Analysis Date: Wednesday, 25 September 2013 Time: 13: :00 **Please note: limited to 100 people Trading Equity Derivatives Date: Wednesday, 2 October 2013 Time: 13: :00 Understanding Fundamental Analysis Date: Wednesday, 30 October 2013 Time: 13: :00 Introduction to Japanese Candlesticks Date: Wednesday, 13 November 2013 Time: 13: :00 Investment Strategies: Value, Growth & Dividends Date: Wednesday, 27 November 2013 Time: 13: :00 Introduction to Point & Figure Charts Date: Wednesday, 11 December 2013 Time: 13: :00

50 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Upcoming Traders Forum meetings Traders Forum meeting (JHB) Date: Tuesday, 30 July 2013 Time: 18:00 until 20:00 Traders Forum meeting (CPT) Date: Wednesday, 21 August 2013 Time: 18:00 until 20:00 Traders Forum meeting (DBN) Date: Monday, 30 September 2013 Time: 18:00 until 20:00 Traders Forum meeting (PTA) Date: Tuesday, 29 October 2013 Time: 18:00 until 20:00 Traders Forum meeting (JHB) Date: Tuesday, 26 November 2013 Time: 18:00 until 20:00 Traders Forum meeting (CPT) Date: Tuesday, 10 December 2013 Time: 18:00 until 20:00

51 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Review the information of the PSG Online website Review this PowerPoint presentation Listen to the Webinar Recording any questions Book for the upcoming Webinars / Traders Forum Open a SSF/ Currency Futures account today! Good Luck & Happy Trading! Conclusion

52 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Contact Us Thank You Shaun van den Berg (011)

53 Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No Disclaimer This publication has been issued by PSG Online. It is confidential and issued for the information of clients only. It shall not be reproduced in whole or in part without our permission. The information contained herein has been obtained from sources which and persons whom we believe to be reliable but is not guaranteed for accuracy, completeness or otherwise. Opinions and estimates constitute our judgement as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This report is provided for informational purposes only. No information contained herein, no opinion expressed and no recommendation made constitutes a representation by us or a solicitation for the purchase of any of the securities mentioned herein and we have no responsibility whatsoever arising here from or in consequence hereof. Securities, financial instruments or strategies mention herein may not be suitable for all investors and investors must make their own investment decisions using their own independent advisers as they believe necessary and based upon their specific financial situations and investment objectives. The employees of PSG Online may from time to time own securities mentioned herein. Analyst Certification The research analyst who prepared this report certifies that the view expressed herein accurately reflect the research analyst’s personal views about the subject security and issuer and that no part of his compensation was, is or will be directly or indirectly related to specific recommendations or views contained in this report.


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