An introduction to trading via Online Share Trading

Comment

I know you believe you understand what you think I said, but I am not sure you realise that what you heard is not what I meant.
Alan Greenspan former US Fed chief.

Agenda

What will we be covering tonight?

Introduction Features and benefits What is a currency future? Pricing a currency future Margin Quarterly close-out Practical example Detailed cash flows Risks The Online Share Trading website

Introduction
Standard Bank is a leader in Listed Retail Derivatives on the JSE By retail we mean: Derivatives for the private investor What is a listed derivative? A financial instrument, traded on an exchange, the price of which is directly dependent upon (i.e. "derived from") the value of one or more underlying securities. Examples of listed Retail Derivatives include 1. Warrants 2. Share Instalments 3. Single Stock Futures 4. CURRENCY FUTURES

Features & Benefits

Allows RSA Citizens to hedge exposures to fluctuations in exchange rates, such as foreign holidays and off-shore investments or simply to speculate. Take a view on the currency in either direction (long or short) Liquidity provided by market makers The ability to input your own bids and offers Traded on a regulated exchange - SAFEX Reduced capital to trade (Initial margin / deposit only) thus offers gearing of up to 10 times. Cost effective brokerage rates Only settles in rand, so no impact on your off-shore allowance of R2m Small contract size of only 1000 units of the underlying currency (eg $1,000)

Asset class risk profile

You are Here Warrants Share Instalments Small cap Stock Blue chip Stock Cash Risk

Futures
(SSFs & currency)

Return

What is a Currency Future?

CFs are agreements between two parties, where one commits to buy a set quantity of currency and another to sell a set quantity of currency on a specified future date.
Each CF is based on an underlying currency (eg US Dollars). Each contract is worth 1000 of the underlying currency (eg $1,000). As the underlying price goes up and down, so does the CF. Profits and losses on CFs are realised and settled on a daily basis. To trade in CFs you open a futures account and deposit funds -Margin The Margin deposited earns a rate of interest as set by SAFEX. Quoted in rands per foreign currency (eg R6.5254 for USD1) Expiries March, June, September and December Cash settled at expiry NB no delivery of foreign currency!

The FX Market
Largest Market in the World April 2007 BIS survey USD 3.2 trillion per day Hedge funds and web based electronic trading has greatly increased volume In SA +/- USD 10 billion a day, more than 10 times the JSE trading volumes Operates 24 hours a day
Locally Monday Friday 9am 5pm

Always involves 2 currencies If you buy one then have sold the other

Factors that influence FX Rates

Exchange rate determined by demand and supply

Demand and supply influenced by:

Economic Factors (eg Interest rates) Sentiment Technical Factors & Micro-structure

Base Currency vs Quoted Currency

Exchange rate, ratio of exchange between two currencies

USD 1 = ZAR 6.6345 Euro 1 = ZAR 9.6142 Pound 1 = ZAR 13.7839

Base currency

Quoted currency

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SSFs v Currency Futures

SSFs Market made Trade off-market (booked later) 100 shares Physically settled CFs Trade in open market * Trade on-market - YieldX 1000 of base currency Cash settled

* Standard Bank of South Africa commits to offer liquidity by always offering a fair bid / offer price

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Fair value of a currency future

An importer needs $1m in 3 months time to pay for imports Buy $ now, by raising funds in Rand and place it on deposit Current spot rate USD/ZAR 3m interest rates - US - RSA Number of days Today $1,000,000 R7,150,000 7.1500 = = = = 7.1500 5.25% 11.50% 91 3 months time $1,013,271* R7,354,999 7.2587

FV = PV + Int
* At 360 days

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The Basis
One of the differences in price between the CF and the underlying is called the Basis. The Basis reflects a number of factors, collectively called Carrying Costs (Interest). Narrows as we near the expiry.
CF prices v spot currency price s ne aring e xpiry
7.1500 7.1000 7.0500 7.0000 6.9500 6.9000 6.8500 6.8000 6.7500 6.7000 6.6500 91 84 77 70 63 56 49 42 35 28 21 14 7 0 Days to expiry Spot CF

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Margin
Every trade that takes place on SAFEX is guaranteed by SAFEX. By a process known as novation, SAFEX guarantees the performance on each trade and removes the risk of counterparties not meeting their obligations. In order to protect itself against any particular party failing to meet its obligations SAFEX employs a process of margining. There are 3 types of margin: Initial margin Variation margin Maintenance margin

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Initial Margin
To ensure that you meet the obligations of your trade, SAFEX requires that you
post (deposit) initial margin. Think of Initial margin as a good faith deposit. This money remains on deposit as long as the position is open. It earns a market related rate of interest. The initial margin is returned to the investor when the position is closed out, or the contract expires. Initial margin is about 10% of the underlying value of the position. It is meant to equal the highest loss that may occur in a two business day period. Brokers may require that clients deposit initial margin in excess of the minimum SAFEX requirements. Online Share Trading requires an extra 50%. This is referred to as maintenance margin and is discussed later.

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Margin requirements
CF $/R /R /R Initial Margin requirements * Dec 07 Mar 08 Jun 08 R630 R968 R1365 R780 R1185 R1673 R930 R1395 R1980

* Effective 12 November 2007 Includes the additional 50% requirement

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Other margins
Variation Margin At day end, SAFEX calculates a closing price (mark-to-market MTM) for each CF. The profit or loss for the day for each position is calculated based on the MTM of the current day less the MTM of the previous business day. The profit or loss is referred to as the variation margin and is settled the next business day into your trading account. Online Share Trading does this calculation on a real-time basis during the course of the business day to give clients a real-time view of the status of the portfolio. Maintenance Margin The minimum account balance you must maintain before your broker will force you to deposit more funds or close out your position. When this happens, it is known as a "margin call." First margin call when the available cash is exhausted simply a warning that positions are losing cash. Once the 50% extra initial margin is also exhausted the Auto Close-out occurs and the worst performing positions are closed out first to ensure that the available cash balance is once again a positive value.
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Quarterly close-out
CF contracts expire 2 business days before the third Wednesday of March, June, September and December.
Expire what does it mean? Any holder of a position at the close of business on each of these days that has not Rolledover will have their position Closed out. The position will be sold at the MTM price of the expiry day and the initial margin will be returned. No delivery of the base currency.

Roll-over The holder can request the broker to automatically convert the CF contract that is due for expiry into a CF contract that expires in the next period. E.g. close out the Dec-07 contract and enter into the Mar-08 contract. Usually 2 days before expiry. The holder thus maintains the exposure. Brokers usually offer this at a discounted costing.

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Practical Examples
CFs are used Primarily to: 1 - hedge (remove) the risk of existing or expected currency exposure. 2 - speculate when the belief is that currency rates will change. Hedging Family Planning an overseas trip,
Approximate Cost $10,000. Buy 10 Contracts at R6.5000 Deposit R6,300 only as the initial margin Before they fly out sell the contracts at R7.0000 Initial margin of R6,300 is returned Profit on Hedge 10,000 x (R6.50 - R7.00)=R5,000 Buy Travellers Cheques at R7.00 cost R70,000 Net Cost R65,000

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Practical Examples cont.

Speculating
Speculator expects rand to weaken.
Buy 10 Contracts at R6.5000 an exposure of R65,000 Deposit R6,300 only for the initial margin Sell contracts at R6.7500 Profit 10,000 x (R6.75 R6.50) = R2,500 Initial margin of R6,300 is returned The R6,300 initial capital outlay has returned R2,500 A return of 40% during a period in which the rand only weakened by 3.8%.

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Daily cash flows speculative example

Day 1 (trade day)
Initial margin per contract CF price MTM price Profit / (Loss) for the day Net cash flow for the day
Summary of cash flows Initial Margin Variation margin R0 R2,500 (-6300 + 6300) (+500 + 700 200 + 1500)

Day 2
R0 R0 R6.62 R700 (6.626.55x10x1000)

Day 3
R0 R0 R6.60 (R200) (6.606.62x10x1000)

Day 4 (trade)
R6,300 R6.75 Irrelevant R1,500 (6.756.60x10x1000)

(R6,300) R6.50 R6.55 R500 (6.556.50x10x1000)

(R5,800)
(-6300+500)

R700

(R200)

R7,800
(6300+1500)

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Auto close out

10 $/R DEC-07: Initial margin requirement R630 * 10 contracts = R6,300 (R4,200 + R2,100)
Day 1 (trade)
MTM price at begin of day Buy 10 $/R Dec-07 R6.50 MTM price at eod Live price Cash at beginning of day Loss for the day Available cash Available before auto close

Day 2 09:30 R6.45

Day 2 12:00 Day 2 14:00 R6.45 R6.45

Day 2 - after close out R6.45 Sell 4 $/R Dec07 @ R6.21

R6.45 R6.39 R7,000 (R500) R200

500) (6.456.50x10x1000) (7000-6300-

R6.23 R200 (R2,200) (R2000) R100 (2000+(6300/3)) (6.236.45*10*1000)

R6.21 R200 (R2,400)

(6.216.45*10*1000)

R6.21 R2720 (200+2520) (R2,400) R320

(6.216.45*10*1000) (2720-2400)

R200 (R600) (R400) R1700

(6.396.45*10*1000) (200-600) (-400+(6300/3))

(200-2200)(R2200) (2002400)

R2,300
(200+(6300/3))

(R100)

(2200+(6300/3))

R1580
(320+(3780/3))

1 - At 14:00 account is in auto close out R2200 needs to be recovered 2 - Margin balance = R6,300 (10*R630) thus 4 contracts will be sold to return R2,520 (4*R630) into the cash balance 3 Available cash balance now at R320

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Risks
Gearing means we can lose significant amounts, if not more than the margin There are moments of illiquidity under stress conditions Bid offer spreads widen Market gaps Stop loss orders not fixed price guarantee

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Risks Trading hours

Global currency markets open Monday at 5am in Sydney closing at 5pm on Friday in New York Local market only open Mon-Fri 9am-5pm Market could move against you while local market is closed and you will have to wait until the next days local opening to trade out

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Who may trade Currency Futures

Qualifying Clients A Resident who is a natural person (no limits applicable) Non-resident clients (no limits applicable) Pension funds and long term insurance companies; subject to their 15% foreign allocation allowance Asset managers and registered collective investment schemes subject to their 25% foreign allocation limits All corporate entities and trust accounts are prohibited from trading unless a valid exchange control approval (ECA) is granted by the South African Reserve Bank All authorized dealers, subject to the approval granted by the Exchange Control Department of the South African Reserve Bank, to act as market makers in the trading of currency derivatives

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Client procedure to get started

A Client registration New clients
All non-existing OST clients to register as OST client first securities.standardbank.co.za > Open an Account (see slide) Once registered and FICAd, apply for Futures trading account (see slide)

Existing Clients
Apply for Futures trading account (see slide)

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The Website
How to register for an OST account

Go to: securities.standardbank.co.za Click on Open an account Complete the registration as an INDIVIDUAL only. No CF trading for non-individuals

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The Website
How to register for CF trading account

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The Website
How to find a currency future

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The Website
Currency Futures > Quote Page

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The Website
Currency Futures > Trade Page

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The Website
Futures > Portoflio
A B C D E F G H I J K

M N

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The Website cont.

Futures > Portoflio
A Contract name: eg $/R Dec-07 means the underlying currency is USD and the contract will expire on the 3rd Monday in December 2007. B Contracts held: 3 contracts long i.e. exposed to USD3,000 . Will profit if the rand weakens. C Cost Price: Initial CF price at which the 3 $/R Dec-07 traded. D Futures Exposure: B x C. The value of the exposure of this position when initially traded. E MTM price: The previous days official $/R Dec-07 closing price as calculated & published by the JSE. F Current live SSF Bid or Offer price. The Bid price is shown for a long position as its the price at which a long position holder will sell at to close a position. Visa versa for a short position. G Futures Exposure: B x F. Current exposure based on the live bid or offer CF prices.

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The Website cont.

Futures > Portoflio
H Daily P&L: The daily profit or loss on this position B x (F C) if transacted today. B x (F E) for positions brought forward I Total P&L: G C. The total profit or loss on this position since purchase. J Initial Margin: Amount withdrawn from your cash and deposited with the JSE as a Good Faith deposit. K On expiry: Default is roll over, but you can select to expire. L Daily P&L: The amount used in the cash calculation is similar to the amount as calculated in the portfolio. M Available trading funds: Amount that can currently be used to trade (equity or SSFs or CFs). When this reaches NIL, you will be informed via SMS & e-mail. N value available before auto close out: M + (R2827 / 3). If the portfolio reduces by this value, all SSF positions will be closed out.

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OST information and trading & website costs

Get more information Help and education section of the site Subscribe to the rand futures daily publication. See Special announcement section to subscribe Or go to Buy and Sell ideas > Latest research reports Trading and monthly costs Monthly subscription fee Equity trade costs CF trade costs Single stock futures costs

R47.50* 0.70%* R20/contract* 0.4%

(min R70*) (min R70*) (extra R70*)

* Excl VAT

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OST contacts

Website: securities.standardbank.co.za 0860 121 161 E-mail: securities@standardbank.co.za

Kurt Pagel Ridwaan Moolla Raoul Carelse

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Wealth warning
Trading currency futures can offer significant returns BUT also subject you to significant losses if the market moves against your position. You may, in a relatively short time, sustain more than a total loss of the funds placed by way of initial margin. You may be required to deposit a substantial additional sum, at short notice, to maintain your margin balance. If you do not maintain your margin balance your position may be closed out at a loss and you will be liable for any resulting deficit.

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Questions

?
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Disclaimer
The information and opinions stated in this document are of a general nature, have been prepared solely for information purposes and do not constitute any advice or recommendation to conclude any transaction or enter into any agreement. It is strongly recommended that every recipient seek appropriate professional advice before acting on any information contained herein. Whilst every care has been taken in preparing this document, no representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or representations. All information contained herein is subject to change after publication at any time without notice. The past performance of any investment product is not an indication of future performance. Online Share Trading is operated by Standard Financial Markets Proprietary Limited Reg. No. 1972/008305/07, a subsidiary of the Standard Bank Group Limited and authorised user of the JSE Limited.

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