Currency Derivatives Guide
What are Futures?
In finance, a futures contract (futures) is a standardised contract between two parties to buy or sell a
specified asset of standardised quantity and quality for a price agreed upon today (the futures price)
with delivery and payment occurring at a specified future date. The contracts are negotiated on a
futures exchange, which acts as an intermediary between the two parties.
What are Options?
In finance, an option is a contract which gives the buyer (the owner) the right, but not the obligation,
to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date.
The strike price (or exercise price) of an option is the fixed price at which the owner of the option can
buy (in the case of a call) or sell (in the case of a put) the underlying security or commodity). The
seller incurs a corresponding obligation to fulfil the transaction – that is to buy or sell – if the owner
elects to "exercise" the option prior to expiration. The buyer pays a premium to the seller for this right.
An option which conveys to the owner the right to buy something at a specific price, is a call; an option
which conveys the right of the owner to sell something at a specific price, is a put.
What are Currency Futures?
Currency Futures are derivative contracts that are traded on the JSE’s YieldX Exchange -they
allow the investor to trade an exchange rate at some specified date in the future.
An investor that buys a Dollar and sells a Rand at R9.00 is going long of the currency future he wants the Dollar to appreciate and therefore wants the Rand to go from R9.00 to R9.50.
An investor that sells a Dollar and buys a Rand at R9.00 is going short of the currency future,
wants the Dollar to depreciate, and therefore wants the rand to go from R9.00 to R8.50.
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Why trade Currency Futures?
Currency future contracts allow investors to hedge against foreign exchange risk or currency
risk.
Companies whose business processes entail receiving/settling transactions in a foreign currency
can use this instrument to lock in a specific rate.
Currency future contracts allow investors to speculate on the future movements of the
exchange rates.
What is the difference between spot, forward and futures rate?
Spot: Is today’s exchange rate for the physical exchange of currencies.
Forward: The forward rate is a fixed price based on a future date’s rate as stipulated in a private
agreement. These private agreements are not as rigid in their terms and conditions as exchange
traded contracts.
Futures: Fundamentally, forward and futures contracts have the same function: both types of
contracts allow people to buy or sell a specific type of asset at a specific time at a given price.
However, it is in the specific details that these contracts differ. First, futures contracts are exchangetraded and, therefore, are standardized contracts. Because forward contracts are private agreements,
there is always a chance that a party may default on its side of the agreement. Futures contracts have
clearing houses that guarantee the transactions.
Secondly, the specific details concerning settlement and delivery are quite distinct. For forward
contracts, settlement for forward contracts occurs at the end of the contract. Futures contracts are
mark-to-market daily, which means that daily changes are settled day by day until the end of the
contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward
contracts, on the other hand, only have one fixed settlement date.
Lastly, speculators who bet on the direction in which an asset’s price will move, frequently use futures
contracts. Usually futures contracts are closed out prior to maturity and delivery usually never occurs.
On the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility
of an asset's price, and delivery of the asset or cash settlement will usually take place.
There are four categories of participants in the currency derivatives market:
Hedgers use currency futures or options to protect against possible adverse currency
movements and foreign exchange risk. Hedgers therefore seek to reduce risk. Hedgers have a
real interest in the underlying currency and use futures or options as a way of preserving their
performance.
Arbitrageurs profit from price differentials of similar products in different markets, e.g. price
differentials between the spot exchange rate and futures or options price.
Investors use currency futures or options to enhance the long-term performance of a portfolio
of assets.
Speculators can be any person who uses currency futures or options, in the hope of making a
profit on short-term movements in prices. Speculators therefore seek to enhance risk with the
aim of making a profit. Speculators have no interest in the underlying currency other than
taking a view on the future direction of the currency’s price.
Currency Futures quotes
Yield-X quotes all currency futures prices in the same way as the underlying spot rate, quoted to four
decimal places. A currency quote is always against a base currency followed by the quoted currency.
The reason all currencies are quoted in pairs is that in every foreign exchange transaction, you are
simultaneously buying one currency and selling another.
Here is an example of a foreign exchange rate for the US dollar versus the South African rand.
Example: The quote in the sample shows the US Dollar as the base currency and the Rand as the
quoted currency. The terminology used is “the Rand is trading at R10.0534 against the US Dollar”. This
sample shows that you need R10.0534 Rand to purchase $1 US Dollar, and this is the exchange rate,
i.e. to exchange R10.0534 for $1US Dollar.
If you want to buy (which means buy the base currency and sell the quote currency), you want the
base currency to increase. This is “going long” or taking a “long position”: Long = Buy
If you want to sell (which actually means sell the base currency and buy the quote currency), you want
the base currency to decrease. This is “going short” or taking a “short position”. Short = sell
}
“Am I long OR short?”
Bid / Ask
All forex quotes are quoted with two prices: the bid and ask.
Bid: is the price at which you are willing to buy the base currency in exchange for the quote currency.
This means the bid is the best available price at which you (the trader) will sell to the market.
Ask: is the price at which you are willing to sell the base currency in exchange for the quote currency.
*Another word for Ask is the offer price
Ask price: is the best available price at which you will buy from the market.
Spread: the difference between the bid and the ask price is known as the spread.
*As viewed on the Swordfish platform
On the September 2013 contract USD/ZAR quote above, the bid is at R9.7365 and ask is at R9.7397
Bid: If you want to sell rand (in other words you expect the rand to weaken against the dollar), then
you click “Bid” to go long at R9.7397.
Ask: If you want to buy rand (in other words you expect the rand to strengthen against the dollar),
then you click "Sell" to go short at R9.7365.
Example: The US Dollar / Rand was trading at R10.00 yesterday and today it is trading at R10.30 - this
means that the base currency which is the US Dollar (left in the equation), increased or strengthened
from R10.00 to R10.30 and the quoted currency which is the Rand (right in the equation), decreased
or weakened from R10.000 to R10.30. Therefore, in this example we can say that the Rand weakened
against the dollar, which is good news for exporters because they get more Rands for their goods,
while importers have to pay more.
In the reverse example the US Dollar / Rand was trading at R10.30 yesterday and today it is trading at
R10.00 - this means that the base currency which is the US Dollar (left in the equation), decreased or
weakened from R10.30 to R10.00 and the quoted currency which is the Rand (right in the equation),
increased or strengthened from R10.30 to R10.00. Therefore, in this example we can say that the Rand
strengthened against the Dollar, which is good news for importers because they pay less Rands for
their goods, while exporters get less money for their goods.
Expiry months and date
The currency futures and options contracts expire two business days before the third Wednesday of
each expiry month. In the months where this day is not a business day, the contract will expire the
first business day before the allocated day.
• March
• June
• September
• December
Settlement
The foreign currency futures contracts are cash settled in Rand. In other words, no physical delivery of
the underlying currency or base currency will ever take place.
Margins
Initial Margin is required when a Currency Future and options is opened i.e. when a contract is
purchased (long) or sold (short). The client will deposit cash into the (clearing) bank and they will then
deposit it with the JSE clearing house. The Initial Margin is on average 5% of the nominal value of the
contract opened. This margin amount earns a market related interest.
The Mark-to-Market (MTM) process entails calculating the price movement from the close of yesterday
to the close of today. The difference in the closing prices determines the profit or loss of the position. If
the difference is positive then the profit is paid to the investor. If the difference is negative then the
investor has to pay the JSE clearing house the amount owed.
Closing out or rolling over a Position
Currency Future contracts can be bought or sold, any time during the JSE YieldX Exchange hours:
09H00 - 17H00 during workdays, or left to expire on the date the contract ends or rolled over to the
next contract month.
Closing out a contract entails the investor taking an equal and opposite position to his existing position.
For example, if an investor has entered a long position i.e. buys 1 contract in the Currency Futures
contract he would need to sell 1 contract. The net of the two positions will be zero thus closing out the
initial contract position.
The futures contract can also be rolled over. This means that the investor can choose to keep the same
position past the expiry date of the contract, that is: he can roll the position over to the next expiry
date. The exchange offers a discounted fee for all positions that are rolled over. The investor benefits
from rolling his position over because the same hedge is preserved. Options contracts can’t be rolled
over and they expire at the end of their duration.
Alternatively, the investor can let the contract automatically expire on the date of expiry. Here, the
exchange closes out the position and charges a fee for doing so. On the expiry day the contract
position is Mark-to-Marketed for the last time and the initial margin is returned.
Yield-X offers the following currency futures contracts:
Symbol
Country
Currency
ZAR
South Africa
Rand
EUR
Euro zone members
Euro
JPY
Japan
Yen
GBP
Great Britain
Pound (Sterling)
CHF
Swiss Franc
Franc
AUD
Australia
Dollar
CAD
Canada
Dolar
CNY
China
Yuan
Benefits of trading currency futures via the Yield-X exchange
Currency futures equalise the playing field for all investors
The product allows for individuals to access the currency market generally reserved for institutions
and allows for smaller corporate entities to access favourable rates generally reserved for the larger
corporates
The Johannesburg Securities Exchange regulates transactions
Allows for transparent pricing
Less administration - no reporting to SARB required and no firm and ascertainable commitment
required (i.e. no SARB documentation required to hedge: only a YieldX Client Agreement and FICA)
No penalties for adjusting your position excluding basic cost
Low brokerage
Low margin requirements
Daily summary and research
Low barriers to entry – online software platform available i.e. Swordfish
High liquidity - you can instantaneously buy and sell at will as there will usually be someone in the
market willing to take the other side of your trade
Leverage - a small deposit can control a much larger total contract value. Leverage gives the trader
the ability to make nice profits, and at the same time keep risk capital to a minimum.
Currency Futures Details
Contract size: 1 futures contract exposes you to 1000 of the foreign underlying currency or the base
currency: US$ 1000 or €1000 or £1000
Price movement: 1c = R10 Profit or Loss per contract
Contracts quoted to 4 decimal places – in the currency markets one unit is called a ‘tick’ or a ‘pip’ and
it refers to the minimum price movement, i.e. 0.0001 to 0.0002 = 1 tick or pip movement
Price movement from R9.0535 to R9.0536 = 1 tick = R0.10 per contract
Price movement from R9.0535 to R9.0635 =1c = R10 per contract (1c = 100 ticks)
Price movement from R9.05 to R9.06 = 1c = R10 per contract
Cash settlement in Rand
No physical delivery of foreign currency
Example: If you buy 1 US Dollar / Rand contract at R10.00 and you sell your 1 contract at R10.30 to
close-out the position (the base currency increases or strengthens while the quoted currency decreases
or weakens) then you have made a profit minus the brokerage and exchange fees.
R10.30 – R10.00 = 30c price movement. Therefore, 0.30*1000 (contract size)*1 contract = R300
profit. If you bought 2 contracts then the equation is, 0.30*1000*2 contracts = R600 profit.
This example only shows the gross profit.
The net profit equals gross profit minus brokerage and exchange fees:
Total costs (brokerage and exchange fees) are R12.50 per contract or 0.1250c price movement per
contract.
Therefore, the breakeven level would be at R10.0250 (costs charged on opening and closing of
position). The net profit is: R10.3000 – R10.0250 = 0.2750*1000 (contract size)*1contract = R275.
The net profit for 2 contracts is: 0.2750*1000*2 contracts = R550.
Examples: Hedging a transaction for importers
Currency Future example 1.
How to place an order:
John believes the Rand will weaken against the US Dollar, but is not sure how to benefit from this. John calls his
broker and explains his views. His broker advises John to buy (go long) a future on the US$/R contract (enabling John
to buy $ and sell Rand), or to buy a call option.
Importers risk is Rand weakness : R10.00 to R10.30 equal rand weakness. Hedge by buying the future
@ 10.00, therefore you buy the US$ and sell the Rand
R 1,000
Day 1
Day 2
Day 3
Day 20
Buy @ 10.0000
10.0000
Market to Market Price
10.2820
10.1000
10.1500
10.3000
Profit/Loss for the day
0.2820
-0.1820
0.0500
0.1500
Multiplier
1000
1000
1000
1000
Profit/Loss * Multiplier
282
-182
50
150
Initial margin per contract
R
400
0
0 R
400
Brokerage including JSE fees
R
12.50
0
0 R
12.50
Nett Cashflow for the day
R
-130.50
R
-182.00
R
50.00
R
537.50
Portfolio Value
R
1,269.50
R
1,087.50
R
1,137.50
R
1,275.00
Hedge or protection was entered at R10.00 and the hedge was closed at R10.30 which made R0.30 or
R275, which offsets the loss made in the spot market.
Currency Future example 2.
R 1,000
Buy @ 10.0000
Market to Market Price
Profit/Loss for the day
Multiplier
Profit/Loss * Multiplier
Initial margin per contract
Brokerage including JSE fees
Nett Cashflow for the day
Portfolio Value
R
R
R
R
Day 1
10.0000
10.2820
0.2820
1000
282
400
12.50
-130.50
1,269.50
Day 2
R
R
10.1000
-0.1820
1000
-182
0
0
-182.00
1,087.50
Day 3
R
R
Day 20
10.1500
0.0500
1000
50
0
0
50.00
1,137.50
R
R
R
R
9.8000
-0.3500
1000
-350
400
12.50
37.50
775.00
Hedge or protection was entered at R10.00 and the hedge was closed at R9.80 which lost R0.20 or
R225, which offsets the profit made in the spot market.
Currency Option example
Buy At The Money call strike @ 10.00
R 1,000
Day 1
Spot @
10.0000
Premium
0.1000
Market to Market Price
0.0950
Profit/Loss for the day
-0.0050
Multiplier
1000
Profit/Loss * Multiplier
-5
Initial margin per contract
R
100
Brokerage including JSE fees
R
12.50
Nett Cashflow
R
-117.50
Portfolio Value
R
982.50
Day 2
R
R
0.1100
0.0150
1000
15
0
0
15.00
997.50
Day 3
R
R
Day 90
0.0900
-0.0200
1000
-20
0
0
-20.00
977.50
R
R
R
R
0.2900
0.2000
1000
200
100
300.00
1,177.50
The call option was entered at strike R10.00 and the option expired at 10.30 in the money i.e made a
profit of R117.50.
Examples: Hedging a transaction for exporters
Currency Future example 1.
How to place an order:
John believes the Rand will strengthen against the US Dollar, but is not sure how to benefit from this. John calls his
broker and explains his views. His broker advises John to sell (go short) a future on the US$/R contract (enabling John
to sell $ and buy Rand), or to buy a put option.
Exporters risk is Rand strength : R10.30 to R10.00 equal rand strength. Hedge by selling the future @
10.30, therefore you sell the US$ and buy the Rand
R 1,000
Day 1
Day 2
Day 3
Day 20
Sell @ 10.3000
10.3000
Market to Market Price
10.2820
10.1000
10.1500
10.0000
Profit/Loss for the day
0.0180
0.1820
-0.0500
0.1500
Multiplier
1000
1000
1000
1000
Profit/Loss * Multiplier
18
182
-50
150
Initial margin per contract
R
400
0
0 R
400
Brokerage including JSE fees
R
12.50
0
0 R
12.50
Nett Cashflow for the day
R
-394.50
R
182.00
R
-50.00
R
537.50
Portfolio Value
R
1,005.50
R
1,187.50
R
1,137.50
R
1,275.00
Hedge or protection was entered at R10.30 and the hedge was closed at R10.00 which made R0.30,
which offsets the loss made in the spot market.
Currency Future example 2.
R 1,000
Sell @ 10.3000
Market to Market Price
Profit/Loss for the day
Multiplier
Profit/Loss * Multiplier
Initial margin per contract
Brokerage including JSE fees
Nett Cashflow for the day
Portfolio Value
R
R
R
R
Day 1
10.3000
10.2820
0.0180
1000
18
400
12.50
-394.50
1,005.50
Day 2
R
R
10.1000
0.1820
1000
182
0
0
182.00
1,187.50
Day 3
R
R
Day 20
10.1500
-0.0500
1000
-50
0
0
-50.00
1,137.50
R
R
R
R
10.5000
-0.3500
1000
-350
400
12.50
37.50
775.00
Hedge or protection was entered at R10.30 and the hedge was closed at R10.50 which lost R0.20,
which offsets the profit made in the spot market.
Currency Option example
Buy At The Money put strike @ 10.30
R 1,000
Day 1
Spot @
10.3000
Premium
0.1000
Market to Market Price
0.0950
Profit/Loss for the day
-0.0050
Multiplier
1000
Profit/Loss * Multiplier
-5
Initial margin per contract
R
100
Brokerage including JSE fees
R
12.50
Nett Cashflow
R
-117.50
Portfolio Value
R
982.50
Day 2
R
R
0.1100
0.0150
1000
15
0
0
15.00
997.50
Day 3
R
R
Day 90
0.0900
-0.0200
1000
-20
0
0
-20.00
977.50
R
R
R
R
0.0000
-0.0900
1000
-90
100
10.00
887.50
The put option was entered at strike R10.30 and the option expired at 10.50 which makes the option
worthless. The loss is the premium plus the brokerage and the margin is return.
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