Product Information

FX Spot & FEC

What is spot FX?

Spot foreign exchange (FX) is the term used to describe a foreign exchange transaction whereby one currency is exchanged for another, and is settled on a 2 business day (T+2) cycle.

The Spot FX market is an over the counter market where financial institutions trade directly with one another. Businesses and individuals execute FX with banks directly, and will often use brokers to help clients source the most competitive rates.

In South Africa, the South African Reserve Bank (SARB) requires that all FX transactions (including FECs) be reported to the SARB through a Balance of Payments (BOP) form.

What is a FEC?

Forward exchange contracts (FECs) are over-the-counter (OTC) contracts traded between banks and clients. OTC contracts are tailored to meet the needs of each customer. FECs are an agreement between a client and a bank whereby the client agrees to buy (or sell) a fixed amount of currency at a pre-determined rate at a set date in the future. Clients typically use FEC contracts to hedge against FX movements when expecting an order or invoice to be paid in the future.

In South Africa, the South African Reserve Bank (SARB) requires that all FX transactions (including FECs) be reported to the SARB through a Balance of Payments (BOP) form.

Why trade with Kaon Capital?

Kaon Capital provides clients with an online trading platform that allows easy, seamless management of FX trading and hedging with the following key features:

  • Competitive exchange rates from our partner bank
  • Direct access to a dedicated dealing room
  • Web based – accessible from anywhere
  • Pre-load suppliers & buyers
  • Automated BOP forms
  • Unique FX risk management tool
  • Manage CFC balances and set-off
  • Full history of all trades, payments & invoices
  • Wide range of business reports

Currency Futures

What are currency futures?

Currency Futures are exchange traded instruments that allow clients to maximise exposure to foreign currency movements with minimal capital, and without having to use any offshore allowance.

Currency futures contracts benefit from the movement in the currency exchange rate between the rand and several major international currencies.

The currency market is the largest and most liquid market in the world. Futures trading is an alternate form of investment suitable for experienced traders seeking greater diversification with their current portfolio. Futures offer the advantage of leveraged investment, in other words, they are a cost effective way to gear on exchange rates. Futures allow investors to profit in both a rising and falling market (long or short trades). Currency futures also allow individuals to trade outside their foreign investment allowance stipulated by the South African Reserve Bank.

There are no SARB limits on the value that individuals may transact in the currency futures market.

Currency futures provide geared exposure to currency markets, and as such should be used by individuals who are already familiar with the currency market and are comfortable with the concept of gearing and leverage. The geared nature of futures trading means that investors may lose more than their initial investment if markets move adversely.

Trading currency futures

The value of 1 currency futures contract on the JSE equals 1000 units of the underlying currency, at its futures rate (e.g. 1 USDZAR contract = $1000 exposure). Since futures are geared instruments, investors are not required to pay the full notional value of the futures position, and only need to pay enough money into their trading account to cover the initial margin, which is a fixed rand amount per contract (usually between 10% and 20% of the notional value of the futures position). Currently (as at 1 March 2016) initial margin for 1 x USDZAR 3 month contract ($1000 = R16140) is R1963.00.

Why trade currency futures?
  • Access to favourable currency futures rates, usually reserved for larger corporate clients.
  • Ability to take ‘long’ or ‘short’ positions in a currency
    • A ‘long’ position involves buying currency futures to sell at a later stage, if you think currency prices will rise.
    • A ‘short’ position involves selling currency futures to buy back at a later stage, if you think currency prices will fall.
  • If you buy and sell currency in pairs (e.g. buy dollar and sell rand), you can hold both ‘long’ and ‘short’ exposures and can make money when exchange rates move up or down.
  • Your initial margin is always kept separate and cannot be withdrawn from your currency futures trading account until you close out your position.
  • A daily mark-to-market process and daily statements let you track your profit or loss situation and adjust your portfolio accordingly.
  • Once the position has been closed out, settlement occurs in rand.

Equity Futures

What are single stock futures?

Single Stock Futures are derivatives instruments that give investors exposure to price movements on underlying shares. A futures contract is a legally binding agreement that gives the investor the ability to buy or sell an underlying listed share at a fixed price on a future date.

Single stock futures offer investors the opportunity to enhance the performance of their equity portfolios, protect their investments against adverse price movements and cheaply diversify risk. Speculators hoping to make a profit on short term movements in the futures contract price, asset managers, hedge fund managers, arbitrageurs and retail investors seeking portfolio diversification and hedging opportunities in particular should consider this product. Market participants can go long or short as they see fit.

Why trade single stock futures?

Single stock futures (SSFs) are a cost-effective alternative to direct share investment with a number of significant benefits, such as:

  • Traders can invest in any market movement up or down – by going long (buying when you believe a specific share price will increase) or short (selling when you believe a specific share price will fall).
  • SSFs help investors save money, since trading costs are significantly lower.
  • SSFs can be used to leverage or gear funds.
  • Investors can use SSFs to reduce the risk within their existing share portfolio.
  • Investors can engage in pairs trading when the belief is that the one share will outperform another.

SSFs fit the profile of a high risk/high reward investor, who is looking to outperform the broad market. Stop-loss techniques are an integral part of SSF trading and investors are urged to study these before trading as they can assist in limiting losses in volatile market conditions.

Trading single stock futures
  • Margin requirements are based on the value of the underlying exposure. For example, if margin is approximately 15% of the exposure value, in order to gain exposure to R100 000 worth of underlying shares in the single stock futures, you will need R15 000 available for initial margin.
  • An investor buys Single Stock Futures (to sell at a future date), when he believes share prices will rise, and sells Single Stock Futures (to buy at a future date) when he believes share prices will fall.
  • Each JSE Single Stock Future contract is equal to the value of 100 underlying shares.
  • The initial margin will always be kept separate and can only be withdrawn when the position is closed.
  • Single Stock futures can be traded on any share listed on the Top40 Index.
Trade using full equity market liquidity
  • Kaon Capital’s unique trading platform allows clients to access the full depth and liquidity of the equity market, with all the benefits of trading a future.
  • Clients can trade seamlessly in the underlying equity market, and will be delivered a near-dated future automatically.

Bond Futures

What is a bond?

A bond is simply a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).

What are bond futures?

A Bond Future is a contractual obligation for the contract holder to buy or sell a Bond on a specified date at a predetermined price. The buyer (long position) of a Bond Future is obliged to buy the underlying Bond at the agreed price on expiry of the future. The seller (short position) of a Bond Future is obliged to deliver the underlying bond at the agreed price on expiry of the Future. Bond Futures Contracts are available on the underlying government and corporate bonds.

Trading bond futures
  • 1 contract = R100 000 nominal of the underlying bond.
  • The JSE Derivatives Market quotes all bond futures in the same way as the underlying spot bond market, namely on a yield-to-maturity (YTM) basis. The price is determined from the yield using the standard bond pricing formula.
  • Price action is therefore opposite to shares and currency – the buyer of a bond will make money if/when the YTM drops, and the seller will make money when the YTM rises, i.e. The YTM inversely related to the price of a bond.
  • The difference between a security’s Cash (‘Spot’) and Futures price is known as the cash-futures basis. The basis narrows as the Bond Futures contract nears expiry (referred to as basis convergence). While futures trading can eliminate price level risk (when traded as a hedge), it cannot eliminate the risk that the basis will change unfavourably and unpredictably during the lifetime of the futures contract. It can be influenced by general market factors or changes in interest rates.
  • Note that investing in Bond Futures can be risky as a result of the leveraged nature of futures trading. A comprehensive understanding of trading on margin and leverage/gearing is required.

Kaon Capital does not allow clients to physically settle any future contracts – you will be required to close out or roll over your underlying futures position prior to expiry/close-out.

Why trade bond futures?
  • Gain similar exposure to interest rates as you would with Spot Bonds, but at a fraction of the cost. You do not pay the principal or hold the physical Bond unless the future is held to expiry.
  • Can be used to protect an existing portfolio from adverse interest rate movements or enhance the performance of a portfolio over time.
  • Are standardised contracts traded on a regulated exchange that reduce the credit risk for both parties and increase the liquidity in the secondary trading market, making Bond Futures easy to buy and sell.
  • Investors to gain exposure to price movements in spot bond markets.

Indices

What are indices?

An index refers to the average performance of a selected group of securities. The price movements of the largest securities within that group set the bar for the market so those are the ones that will be included in that index. The S&P Global 100, FTSE 100, Nikkei 225 and ALSI are examples of such. Indices provide vital information to financial traders because they provide a benchmark of trends in the market.

What are index futures?

Index Futures are suited to both professional and private investors who want to gain exposure to basket of listed companies without purchasing individual shares or Single Stock Futures. When trading in Index Futures, market participants can either buy (long) or sell (short). The products are traded by speculators hoping to make a profit on short-term movements and investors seeking to hedge or diversify their portfolios. Gearing provides a capital efficient way to gain exposure to basket of securities. Note that the gearing effect creates greater portfolio volatility which amplifies gains and losses.

Why trade index futures?
  • Lower brokerage fees than trading in the underlying shares.
  • Allows investors to take advantage of price movements of the basket of shares constituting the index.
  • Liquid and easily traded.
  • Allows for portfolio diversification.
  • Provides short selling opportunities to benefit from downward price movements.
  • In the case of derivatives, you have no voting rights or any other ownership rights that would traditionally fall to a holder of the underlying equity.
  • Cash settled at maturity (no need to “close-out” a position before expiry).
Equity index futures
ALSI & ALMI

ALSI and ALMI futures are a futures contract based on the Top 40 index.

  • The ALSI contract is R10 multiplied by the index value, therefore if the index is priced at 43 214 the value of 1 ALSI contract is R432 140.
  • Margin is calculated at between 5%-10% of the underlying value of the contract. Currently (as at 1 March 2016) initial margin for 1 x ALSI Futures contract is R36,450 for exposure of R445 000.
  • When trading ALSI futures, every index point is worth R10, so a 100 point move in the index would result in a R1,000 profit or loss (depending on the direction of the move).
  • When one transacts in the ALSI futures you trade at the index price and pay a margin as set by the JSE Derivatives Market. Your profit or loss will then depend on the price you exit the trade or market closes for the day, based on the R10 per point value.
  • Investors sell (short) the index future to make money when they believe that the index will trade at a lower price in the future, and buy (long) the index future when they believe the index will trade at a higher price in the future.
  • The ALMI future is the mini version of the ALSI future, it is valued at 10% of the ALSI future. It therefore trades with every index point worth only R1 and the margin required also being a tenth of the ALSI futures margin. The ALMI index will approximately track the ALSI futures.
DTOP Shareholder Weighted Top 40 index

The DTOP index future, bases pricing off the Shareholder Weighted Top 40 index (DTOP). The construction of this index assumes the same rules as for the TOP 40 index, however it reflects locally held free float and eliminates foreign shareholding allowing for a more diversified index.

Bond index futures
ALBI and GOVI

Bond Index Futures are derivatives instruments that track the JSE’s Bond Indices and give investors exposure to an underlying basket of bonds listed on the JSE.

Bond Index Futures are used by both international and South African institutional investors seeking portfolio diversification and exposure to the South African Bond Market through a basket of Bonds. Investors can go long or go short the index as they see fit.

ALBI

The Index tracks the performance of the South African Bond market, only conventional listed vanilla bonds, with a fixed, semi-annual coupon. Bonds with a term less than one year are excluded.

  • The nominal size of one index future is R10 000 multiplied by the index level, therefore if the index level is 495.68 the contract will be worth R4 956 800.
  • Margin is calculated at between 5%-10% of the underlying value of the contract. Currently margin is R370 000 for R4 956 800 exposure.
GOVI

The GOVI Index will contain all Bonds issued by the Republic of South Africa that fall into the top 10 positions of the ALBI Composite Index according to the dual ranking scheme.

  • The nominal size of the future is the index level multiplied by R10 000, therefore if the index level is 485 the futures contract will be worth R4 850 000.
  • Margin is between 5%-10% (volatility dependant) of the underlying value of the contract, currently margin is approximately R330 000 for R4 850 000 exposure.
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