1. Copyright© JSE Limited 2008 www.jse.co.za Magnus de Wet, James Boardman, Rudolf Oosthuizen 10 March 2011 Single Stock Futures Educational Seminar

2. www.jse.co.za Agenda 201 Introduction New market- new ways of trading – why then and why now? What is an Exchange for? Central order book Pricing and trading futures- Rudolf Futures vs CFD’s CFD’s worked examples vs Futures on interest costs How to trade on the market Costs associated with trading Questions & Contact Details

3. www.jse.co.za Agenda

4. www.jse.co.za

6. Markets in the US have evolved From this

7. www.jse.co.za Where people would behave like this

8. www.jse.co.za To this- a lot quieter and calmer and more efficient

9. www.jse.co.za A level playing field

10. www.jse.co.za SSF: Introduction JSE’s 5 Markets Equity Market Equity Derivative Market Commodity Derivative Market Currency Derivatives Interest Rate Derivative and Spot Derivative A financial instrument that derives its value from the value or return of another asset. 2 Most popular derivatives at the JSE: Futures Options

11. www.jse.co.za SSF: Derivatives within the JSE (2009 Financials)

12. www.jse.co.za SSF: Parties involved with Derivative Trading JSE Central Counterparty Client A Buying Member A Clearing Member A Data Vendors Client B Selling Member B Clearing Member B Cash Flows Data Trading Cash Flows

13. www.jse.co.za SSF: Guarantee Hierarchy

14. www.jse.co.za SSF: Futures Theory An agreement between two parties to buy/sell an asset at a certain time in the future for a predetermined price Exchange standardise agreements/contracts Contract sizes (nominal) standardised Contracts expire every 3 rd Thursday of March, June, September and December Daily Margining (Zero Sum Game – For every winner there’s a loser) Risk mitigated by way of Initial Margin: Covers exchange against default Worst possible loss in 1 days movement Returned with interest Approximately 10% - 20% of underlying exposure Gearing How does it really work? Futures price different from spot price…

15. www.jse.co.za He is very good at saying NO

16. www.jse.co.za In a central order book The bank managers COMPETE on rates. Hoping for you to say YES!

17. www.jse.co.za Physically settled Futures – On Futures Close Out (FCO) the buyer will buy the physical share from the seller at the closeout price (R120), reporting it to TradElect with trade type OX. Adding the R10 profit made he only paid R110 for the share as originally agreed SSF: Futures Example – Share Price increase DateEquity Price Derivative CP (MtM) 10% Initial Margin 15% Variation Margin Buyer Cash Flows Seller Cash Flows Trade Date100110150-15 3 Months Later110119099-9 6 Months Later10511108-88 9 Months Later115118077-7 12 Months Later – Close out120 1521713 Profit/Loss20 10-10

18. www.jse.co.za SSF: Futures – Share Price decrease Date EQ Market CP Derivative CP (MtM) 10% Initial Margin 15% Variation Margin Buyer Cash Flows Seller Cash Flows Trade Date100110150-15 3 Months Later9097013-1313 6 Months Later95100033-3 9 Months Later8588012-1212 12 Months Later – Close out80 158723 Profit/Loss-20 -3030 Physically settled Futures – On FCO the buyer will buy the physical share from the seller at the closeout price (R80), reporting it to TradElect with trade type OX. Adding the R30 loss made he paid R110 for the share as originally agreed

19. www.jse.co.za Now Rudolf is going to walk you through some useful calculations on the Time value of Money.

20. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 20 Introduction to interest +(50% or 0.50) = +

21. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 21 Introduction to interest Initial ValueReturn %Extra ReturnTotal R 100.0050% R 50.00 R 150.00 R100*(1+50%) = R150 Initial ValueReturn %Extra ReturnTotal R 150.0050% R 75.00 R 225.00 R100*(1+50%)^2 = R225 R100*(1+50%)^3 = R337.50 Initial ValueReturn %Extra ReturnTotal R 225.0050% R 112.50 R 337.50

22. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 22 Introduction to interest Compounding returns What is Prime? 9% 9%/12 = 0.75% per Month R100*(1+R)^t = ? R100*(1+0.75%)^12 R100*(1+0.09/12)^12 = R109.38

23. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 23 Starting ValueRate %Compounding1Year Value R 100.009% 1 R 109.00 Starting ValueRate %Compounding1Year Value R 100.009% 2 R 109.20 Starting ValueRate %Compounding1Year Value R 100.009% 12 R 109.38 Starting ValueRate %Compounding1Year Value R 100.009% 365 R 109.42 Starting ValueRate %1Year Value R 100.009% R 109.42 R 109.4162 R 109.4174 Compounding

24. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 24 Credit Risk Repo = 6.5%Prime = 9% 3.5%

25. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 25 ( ) Interest formulas Formula for Interest = Can work out returns R N ) ( 1 (T*N) = CV FV ) ( 1 ( ) EXP * ( R ) = FV CV ( ) T * LN * *

26. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 26 Deriving future prices 2 Mar 2011

27. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 27 Current dateExpiry DateCompoundingDate Diff Years 2011/03/022011/06/16 12 0.2904 Spot BidFuture BidDifference% Interest Year R 366.50 R 371.31 R 4.814.50% Spot OfferFuture OfferDifference% Interest Year R 367.00 R 372.99 R 5.995.59% Spot SpreadFuture SpreadSpot Spread %Future Spread % R 0.50 R 1.680.14%0.45% Deriving future prices 16 Jun 2011 Expiry % Interest 1.31%

28. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 28 Spread Cost Offer – Bid = Spread Spot Spread = R367.00 – R366.50 = R0.50 Cost of getting in and out In percentage of exposure = R0.50/((R367.00+R366.50)/2) = 0.14% BID OFFER BID OFFER ( ( ) ) 2* = Spread%

29. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 29 Spread Cost Future Spread = R371.31 – R372.99 = R1.68 In percentage of exposure = R1.68 /((R371.31+R372.99 )/2) = 0.45%

30. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 30 Current dateExpiry DateCompoundingDate Diff Years 2011/03/022011/06/16 12 0.2904 Spot BidFuture BidDifference% Interest Year R 366.50 R 371.31 R 4.814.50% Spot OfferFuture OfferDifference% Interest Year R 367.00 R 372.99 R 5.995.59% Spot SpreadFuture SpreadSpot Spread %Future Spread % R 0.50 R 1.680.14%0.45% Deriving future prices 16 Jun 2011 Expiry 1 Market maker

31. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 31 Deriving future prices

32. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 32 Deriving future prices 17 Mar 2011 Expiry 10 Market maker Current dateExpiry DateCompoundingDate Diff Years 2011/03/022011/03/17 12 0.0411 Spot BidFuture BidDifference% Interest Year R 366.50 R 367.33 R 0.835.52% Spot OfferFuture OfferDifference% Interest Year R 367.00 R 368.05 R 1.056.97% Spot SpreadFuture SpreadSpot Spread %Future Spread % R 0.50 R 0.720.14%0.20%

33. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 33 Market maker Double R100R99R101 R1.5 R1

34. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 34 Deriving future prices 2 Mar 2011

35. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 35 Practice 10 Mar 2011

36. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 36 Deriving future prices 17 Mar 2011 Expiry Current dateExpiry DateCompoundingDate Diff Years 2011/03/102011/03/17 12 0.0192 Spot BidFuture BidDifference% Interest Year R 352.61 R 352.68 R 0.071.04% Spot OfferFuture OfferDifference% Interest Year R 353.15 R 353.00 R -0.15-2.21% Spot SpreadFutureSpot Spread %Future Spread % R 0.54 R 0.320.15%0.09%

37. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 37 Dividend Neutral Contracts Fair Value = Spot + Cost – Benefit = Spot + Interest – Div N-Contract = Spot + Interest Dividends? AGL div assumed = 2.88 for the June Expiry

38. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 38 Dividend Neutral Contracts N- Contracts 2 Contracts Interest agreed up front Adjusts contract for dividend received in Spot

39. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 39 Stock Dividend AGL AGL Dividend R 1,000,000 AGL + R 900,000 R 100,000 = R 1,000,000

40. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 40 Price Flow TIME Value R1M R1,1M R0.9M R1.05M R 0.1M Dividend R0.1M*(1+10%*0.5) = R 0.105M T =0.5 T =1 T =0 R1.05M-0.945M = 0.105M R0.9M*(1+10%*0.5) = R 0.945M Adjustment down to compensate for Long holder not receiving dividend

41. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 41 Spot Price and CFD Cost

42. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 42 Spot and SSF Price

43. www.jse.co.za Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level www.jse.co.za 43 Cost Comparison

44. www.jse.co.za SSF: SSFs vs. CFDs SSFs Regulated by JSE/FSB Exchanged traded product Expiry Date= Rollover costs Set principle amount Interest agreed upfront Wholesale interest rates Best execution Free markets Transparent Guaranteed by SAFCOM No dividend paid/received Fungible financial instrument Can take physical delivery CFDs Unregulated Trades OTC No Expiry Date Principle amount could change daily Interest fluctuates daily Retail interest rates No best execution obligation Captive markets Opaque Not guaranteed by SAFCOM Manufactured dividends Not fungible Never physical delivered

45. www.jse.co.za SSF: Benefits and Risks associated with Futures Benefits Opportunity to protect/hedge your share portfolio by trading SSFs in the same underlying share. SSFs incur lower brokerage costs than actually trading in the underlying shares. Your initial margin earns interest for the duration of your contract. SSFs are characteristically liquid and easily traded. Gearing – significant returns… JSE independently calculates and values positions Wholesale Interest Rates Guaranteed Risks Gearing – significant losses…

46. www.jse.co.za SSF: Future Educational Seminars 9 March 2011 – Single Stock Futures 101 10 March 2011 – Single Stock Futures 201 11 April 2011 – Commodity Futures 24 May 2011 – Currency Futures and Options 21 June 2011 – Introduction to Safex Style Options 19 July 2011 – Safex Style Options in Depth 23 August 2011 – Broker Showcase 20 September 2011 – Inside Options Guest Speaker 25 October 2011 – TBC 23 November 2011 – TBC 07 December 2011 – TBC

47. www.jse.co.za SSF: Useful websites/tools Equity Derivatives Market: www.safex.co.za/ed Equity Derivatives Products: www.safex.co.za/equityindexfutures www.safex.co.za/options www.safex.co.za/idx www.safex.co.za/ssf www.safex.co.za/cando www.safex.co.za/dividendfutures Equity Derivatives calculators: www.safex.co.za/margincalculator www.safex.co.za/bookingfeescalculator Equity Derivatives Data Files: www.safex.co.za/contractdata www.safex.co.za/mtm www.safex.co.za/marginrequirements www.safex.co.za/EDMstats www.safex.co.za/minimums Members www.safex.co.za/members

48. www.jse.co.za SSF: Questions & Contact Details Parking tickets! Magnus de Wet James Boardman Rudolf Oosthuizen DerivativesTrading@JSE.co.za Options@JSE.co.za +27 11 520 7051