Introduction to currency futures
The South African Rand is one of the most volatile currencies in the world; it can exhibit moves of greater
than 0.20c in a single day of trading versus the US dollar. This volatility allows investors to speculate by being in
the market for a relatively short period of time and offers excellent liquidity supported by market makers.
The EURO/ZAR, GBP/ZAR, EURO/USD, GBP/USD also offer excellent liquidity but they are slightly less
volatile when compared to the USDZAR offering moves ranging between 0.01c-0.10c in a single trading day.
The Rand is a “floating exchange rate” which simply means a currency is “free” to “float” to the relative levels
against other currencies as is determined by market forces of supply and demand with limited intervention
by monetary authorities.
There are a number of reasons for South African Rand volatility. The Rand’s traded value is closely linked to
changing market sentiment. The Rand is often described as a proxy for emerging markets and frequently
takes the brunt of economic developments in the United States and Europe.
Secondly, South Africa’s economy is commodity based. The South African Rand therefore shares behavioural
characteristics with other commodity based currencies such as the Canadian Dollar and the Australian Dollar.
Commodity prices of oil and copper, and especially those of precious metals such gold and palladium, are
priced in US Dollars which impacts commodity currencies and subsequently the Rand.
As an emerging market currency the ZAR is also influenced by market events that affect the emerging
markets and their currencies such as the Polish Zloty, Brazilian Peso, Russian Ruble, Turkish Lira and Hungarian
Forint. In addition, the traded value of the Rand is a gauge of market sentiment with respect to South
African domestic political and economic fundamentals.
An additional factor is that South Africa is geographically situated half way between Asia and the US markets, an
important factor considering that currency markets operate globally 24 hours a day. South Africa currency traders
therefore have access to 3 trading days/times zones (Asia/Europe/US) in a single South African trading day
between 09:00 and 17:00
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
Page 1 of 8
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What are currency futures?
The Johannesburg Stock Exchange (JSE) introduced currency future contracts during 2007 to allow local
traders the ability to gain exposure to foreign currency movements relative to the Rand without affecting their
offshore allowance.
Essentially, currency future contracts allow traders to benefit from the movement in the currency futures
rate between the Rand and several major international currencies. Currency traders can also buy and sell
currency pairs in order to obtain "long" or "short" exposure - in other words make money while the
currency exchange rates move up or down. This happens automatically when the investor decides to either buy
Dollar and sell Rand - or buy Rand and sell Dollar.
Currency traders do not have to deposit cash to match the whole value of the futures position as currency
future contracts are geared. Currency traders need only deposit enough cash to cover the initial margin, which
is a fixed rand amount per contract equal to between 10% and 20% per contract. (See below)
As one of the few full time dedicated currency futures brokers PSG Online possesses the expertise and skills to
allow clients to trade currencies with confidence. We offer world class risk systems and an expert team of
professional currency traders who will provide you with regular currency trading ideas to decipher market
movements.
What is the difference between currency futures and forex trading?
Those looking to profit from fluctuations in currency valuations have two currency trading forums, spot forex
trading and currency futures. In general, spot forex traders physically exchange the underlying currencies on
the settlement date, there is an actual exchange of the underlying assets. For example, when a person goes to a
bank to do a currency exchange, that person is participating in the forex trading.
The main difference between spot forex trading and currency futures is when the currency trading price is
determined and when the currency pair exchange takes place. The price of currency futures is determined
when the currency futures contract is signed and the currency pair is exchanged on the future delivery date.
The price of spot forex trading is also determined at the point of trade, but the currency pair exchange takes
place immediately or shortly thereafter.
It is important to note that currency traders in the futures currency futures markets are speculators who usually
close out their positions before the date of settlement, so most currency futures contracts do not last until the
delivery date. Currency futures are often used as hedging instruments by forex trader. Currency futures have
opened up the market to smaller currency futures traders to trade currencies effectively through gearing.
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
Page 2 of 8
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Reasons for trading currency futures
Currency futures are standardised currency exchange contracts that are traded on the JSE's currency exchange,
YieldX, an exchange with a centralised order book. This means that buy and sell prices are posted in realtime onto the central market by the relevant market makers. This allows for transparent pricing of the currency
exchange.
Being a listed product has numerous
benefits:
1. Futures are geared products, which mean currency traders do not have to deposit cash to cover the
full value of the position.
2. Futures allow individual investors to take a view on the movement of the currency futures rate
and provide them with access to favourable rates usually reserved for larger corporate clients.
3. Tight spreads and low currency trading costs allow clients currency futures traders to enter and
exit positions in the knowledge that profits are not being paid away each time there is a trade on the
account.
4. Importers and exporters can dynamically hedge their currency risk far more efficiently using futures
due to the ease of entering and exiting futures positions and the low cost per trade.
5. The presence of dedicated market makers ensures market liquidity and ensures that currency traders
can open and close currency exchange contracts with multiple counterparties.
6. The daily mark-to-market process allows clients the ability to track their profit or loss situation and
to adjust their portfolio accordingly.
7. Once the position has been closed out all settlement occurs in Rand.
What currency futures contracts are available?
Futures offer traders looking for a hedge a variety of advantages as a means to manage their currency risk and
speculators a low cost option to express their currency view. The currency pairs currently available to
trade against the Rand on the JSE's YIELDX exchange are.
1. US Dollar
2. Euro
3. British Pound
4. Aussie Dollar
5. Japanese Yen
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
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6. Canadian Dollar
7. Swiss Franc
One can also trade synthetic crosses for example, EUR/USD, GBP/USD and GBP/EUR. Synthetic trades are
becoming increasingly popular amongst investors as the margin requirements are considerably less than Rand
bases crosses.
How
does
a
currency
future
work?
Futures trade in standard contracts, with quarterly expiry dates in the second week of March, June, September
and December. Most speculators will trade the near dated contract as this is the most liquid contract or most
tradable contract. One contract exposes the investor to 1000.00 of the underlying foreign currency. (i.e. USD
1,000.00). This gives investors a gearing ratio of 1:11.
In order to open the futures position; the investor must deposit the necessary cash equal to the margin with
the JSE. This amount is calculated by multiplying the number of contracts by the margin per contract.
Margin is a good faith deposit and is returned at the end of the trade, less losses or plus profits.
Margin is calculated as follows [number of contracts x (margin amount x 2)]. Margin amount for example
on September 12 USDZAR contract is R470.00 per contract; however investors must deposit double margin per
contract. For example if you bought 5 USD/ZAR March 12 contracts, the margin required would be 5 x
(R470.00x2) = R3500.00. Remember margin/collateral is a deposit and not a fee.
Brokerage is R18.00 per contract. For example if you bought 5 contracts, brokerage requires would be 5 x
R18.00
= R90.00 (Brokerage is paid to open and close the position). The future is cash settled, there is no physical
delivery of foreign currency.
Risks
of
trading
currency
futures
Trading carries risks and derivative trading is no exception. Currency futures are geared instruments. One
contract exposes you to 1000.00 in the foreign underlying currency. One contract requires R750.00 in
margin. With this leverage/gearing you are able to make large profits from small initial layouts of capital.
However the 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.
The most important thing to remember is that not every trade will be a successful trade resulting in profits. The
secret to trading currencies is to input tight stop losses and not to allow losses to run away. This way you limit
losses and manage your risk.
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
Page 4 of 8
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With every trade you should also have a target in price in mind. Be strict and diligent. Don’t trade on emotion;
trade on fundamentals, a strategy, logic with some common sense. Once your target price is reached,
execute and get out of the trade. Re-enter the market with a new trade and trading strategy. It is very
tempting to ride a trade into profit and stay in the trade looking for larger gains. This can go wrong and you
may well ride the trade all the way back into losses before closing your position.
Some of the advantages of trading currency futures include.
1. A known currency rate can be traded and locked in.
2. The spot market price and currency future price move in union with each other. The future price trades
at a premium to the spot as has incorporated the interest rate differential between the two chosen
currencies from present to the contract expiry date.
3.
There is no need to hold the futures contract till expiry, the contract can be closed or traded out at
any time.
4.
Due to the fact that the contracts trade on the South African Futures Exchange (SAFEX), investors
enjoy a liquid market with dedicated market makers making competitive prices with tight spreads.
5. The currency contracts can be rolled every three months.
Why trade with PSG when there are other brokers?
PSG is a well-known and respected financial services provider in South Africa. PSG is regulated by the financial
services board of South Africa as well as a member of the Johannesburg Stock Exchange.
PSG traders are competent traders who are approved by the JSE and authorised to trade on the JSE.PSG is able
offer a competitive trading brokerage of R18.00 per contract, this includes the JSE clearing and settle fee.
The spreads/prices that you receive are the same spreads/prices that are trading on the JSE; PSG does not add
to or adjust the spreads/prices. There is no monthly account fee. You only pay when you trade and payment is
per contract.
As a PSG client, you are giving free access to our PSG online trading platform which will allow you to trade in
your own time and in the comfort of your home or office. In addition you may also e-mail or phone an order
through to the trade desk at no extra charge.
You will receive daily market research, market commentary, trader’s views, trading ranges and trade ideas to
help you make informed and educated investment decisions. You are welcome to call the trade floor and talk
directly to the trader and ask any questions or advise with regards to trading of currencies.
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
Page 5 of 8
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How can you start trading currencies futures?
You are welcome to contact our skilled currency futures team at 0860 774 774 or via [email protected].
They will arrange the opening of the account and ensure that all your trades are executed at the best
available price. You will also receive daily statements showing your margin and cash movement. The PSG
Online trading platform is efficient and well-resourced; we have the systems and support to help you. If you
wish to start trading using the
PSG Online platform, you will have the use of a number of free services.
You can register online to start trading currencies at the following
address
https://www.psgonline.co.za/CDNW/Pages/Registrations/ValidateIDNO.aspx?reg=true&Channel=trade&Product
=
SSFYX
Glossary
American style option: An option that can be exercised at any time between the purchase of the option
and expiry.
Arbitrage: Taking advantage of price discrepancies in two related markets, to lock in a profit.
Base currency: The currency in an exchange rate quotation expressed in terms of the number of units of the
other currency in the quotation (the variable currency). (Also home currency)
Bearish: Expecting a fall in financial instrument / market prices. In foreign exchange: a fall in the price of the
base
currency.
Bid: The price at which the dealer quoting a price or rate is prepared to buy.
Bullish: Expecting rising financial instrument / market prices. In foreign exchange: a rise in the price of the
base currency.
Call option: An option, without the obligation, to buy an agreed amount of a particular financial instrument
or commodity, at an agreed rate, on or before an agreed date.
Cash Market: (Also spot market) The market for trading a financial instrument, where settlement takes place
on the normal delivery date. As opposed to futures, options or forwards (where delivery is for a later date than
normal).
Cross-rate: An exchange rate between any two currencies, neither of which is the US dollar.
Currency option: An option which gives the owner the right to buy or sell the indicated amount of
foreign currency at a specified price on or before a specific date.
Currency risk: The risk that a fluctuation in exchange rates may adversely impact on the value of an
investment denominated in a foreign currency.
Currency swap: An exchange of a series of cash flows in one currency for a series of cash flows in
another
currency, at agreed intervals over an agreed period, used to change the currency exposure of the investment.
Derivative: Any financial instrument whose value is derived from another, such as a forward foreign
exchange rate, a futures contract, an option, an interest rate swap etc.
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
Page 6 of 8
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Double: A quote of a buy and sell price for a currency.
ECB: European Central Bank.
European style option: An option that may be exercised only at expiry
Exercise (an option): To require the seller of an option to fulfil his obligation in terms of the option.
Expiry date: The final date on which an option can be exercised.
Fed: Federal Reserve Bank of New York.
Forward (agreement): A deal for settlement later than the normal settlement date for that particular
financial instrument.
Forward foreign exchange: All foreign exchange transactions to be settled more than two business days in
the future.
Forward outright: (Outright forward) An outright currency in exchange for another currency for delivery on
a
fixed future date beyond the normal (spot) settlement
date.
Forward swap: The purchase of one currency against another for settlement on one date, with a
simultaneous sale to reverse the transaction on a subsequent settlement date.
Futures contract: A deal, traded on a recognised exchange, to buy or sell some financial instrument or
commodity for settlement on a future date.
Hedge: Protect against the risks arising from potential movements in exchange rates, interest rates or
other
variabl
es.
Initial margin: Collateral placed with a clearing house at the time of a deal, against the possibility that the
market price will move against the trader, thereby leaving the counter party with a credit risk.
Interest rate differential: The differences in interest rates between two
countries.
Intervention (intervene): A government, or central bank taking action to influence the value of its
currency.
In-the-money: An option whose strike price is more advantageous to the option holder than the current
market rate.
Leverage: Means the usage of a relatively small foreign currency margin deposit to control a much larger
foreign currency amount. Also known as “gearing”. The leverage employed is usually expressed as a ratio –
being the ratio of the margin deposit to the total value of levered foreign currency.
LIBOR: London Interbank offered rate, the rate at which banks are willing to lend to other
banks.
Liquid: An investment easy to sell or a position easy to close
out.
Long: Owning or buying a given currency or
asset
Margin: A specified amount of money required by a dealer to insure against risk of losses from
outstanding positions.
Mark to market: Revalue a position at current market
rates.
Market maker: A dealer in foreign exchange who will risk his own capital by offering both buy and sell quotes
in a currency. Market makers add liquidity to the market.
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
Page 7 of 8
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Offer: The offer price of a foreign exchange quotation is the rate at which a dealer will sell the base currency
and
buy the terms currency. The offer price is therefore the price the client will
buy
Option: The right, without any obligation, to undertake a particular
deal.
Out-of-the-money: An option whose strike is less advantageous to the option holder than the current
market rate.
Over-the-counter: (OTC) A transaction dealt privately between any two parties, rather than dealt on an
exchange. Outright forward: (Forward outright) An outright purchase or sale of one currency in exchange for
another currency for delivery on a fixed date in the future other than the spot settlement date.
Par: In foreign exchange, when the forward outright and spot exchange rates are equal, the forward swap is
zero or par.
Pip: The smallest incremental value by which an exchange rate move is measured in the foreign exchange
market.
Points: The last two decimal places in an exchange
rate.
Premium: The amount by which one currency is more expensive, in terms of another currency for
forward delivery than for spot.
Put option: An option, without the obligation, to sell an agreed amount of a particular financial instrument
or commodity, at an agreed rate, on or before an agreed date.
Short: Not owning or a selling of a given currency or asset.
Speculation: A deal undertaken because the dealer expects prices to move in his favour.
Spot (spot rate; spot market): A deal to be settled on the customary settlement date for that particular
market. In the foreign exchange market, this is for value in two working days’ time.
Spread: The difference between the bid and offer prices in a quotation.
Strike price/rate: The price or rate at which a holder of an option can insist on the underlying transaction
being fulfilled.
Volatility: A measure of how much the price of a financial instrument fluctuates within a specific time period.
Writer: The Seller of an option.
Yield: The interest rate that can be earned on an investment.
1st Floor, Roland Garros Building, The Campus, 57 Sloane Street, Bryanston, 2191 | PO Box 1899, Witkoppen, 2068
Tel: +27 (11) 996 5200 | Fax: +27 (11) 996 5499 | www.psgonline.co.za
PSG Securities Ltd. Reg No 1996/000509/06. A Member of the JSE Limited and an Authorised Financial Services Provider. FSP 42996
Directors: CA de Bruyn, JT McCann, WV Waldeck
Page 8 of 8
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