SET50 Index Futures : What is it? How to invest? April 2006 by

SET50 Index Futures :
What is it? How to invest?
April 2006
by
Derivatives Department
Kim Eng Securities (Thailand) Plc.
1
Agenda
1.
1. Getting
Getting to
to know
know Derivatives
Derivatives
2.
2. What
What isis SET50
SET50 Index
Index Futures
Futures ??
3.
3. Investing
Investing in
in SET50
SET50 Index
Index Futures
Futures
4.
4. Margin
Margin and
and Mark-to-Market
Mark-to-Market
2
What is Derivatives?
Assets
Status of Holder
Risk and Returns
Holder is owner of
company
Liabilities of
holder is
limited only on
the invested
amount
High risk and
high returns
Holder is
company’s creditor
If the company
is bankrupted,
bond holder is
eligible to get
money back
before stocks
holder
Risk and
returns are
lower than
stocks
Contract party
has the rights to
take recourse
under the
agreed contract
and contract
has expiry date
Very high risk
and very high
return for most
of derivatives
because the
amount of
investment is
small
Stocks
Bonds
Derivatives
Rights and
Liabilities
A contract entered
by parties and a
return depends on
value of underlying
assets such as stock,
stock index, interest
rates
Company
Stock
Bonds
Various
variables
Derivatives
A contract between parties to buy or sell
underlying assets such as stock, bonds,
or various variables such as
interest rate, rice, rubber and oil
3
Derivatives’ Characteristics
‰
‰
‰
‰
Being a financial contracts that has the value depending
upon the underlying assets
Has a short lifetime and will expire at maturity date
Being recognized profit and loss every end of day from the
Mark-to-Market process
Has high risk and high return profile because of low initial
margin being put as collateral
4
Laws and Related Acts
Supervised by SEC
Types of Business Operated by Securities Company
Securities Act
Supervised by AFTC
Derivatives Act B.E. 2546
• Brokerage
• Securities trading
• Underwriting
• Investment Advisory
• Derivatives Agent (Brokerage)
• Derivatives Trader
Stock, Bond,
Warrants,
Derivatives Warrants,
Structured Products
• KEST is a derivatives agent for
listed derivatives.
• Underlying assets under the
Derivatives Act are stocks, bonds,
stock index, interest rate, oil and
gold, etc.
Unrelated to the Securities Company
Agricultural Futures Commodity Act
• Futures on Agricultural Produce
• Agricultural produce such as rice
and rubber
5
Thailand Futures Exchange (TFEX)
Derivatives traded in TFEX
Futures
Options
Call
Put
Underlying assets are
- Equity instruments such as stock, stock index
- Debt instruments such as interest rates, bonds,
government bonds
- Other variables such as gold, oil
6
Spot Market or Cash Market
T=0
(Current)
Agreed on price
Settlement
Delivery
Buyer
Seller
7
Futures Market
T=0 (Current)
Agreed on price
Enter Futures Contract
Long
Short
T=3 months (Contract’s maturity date)
Price settlement
Buy
Delivery
Sell
8
What is Futures ?
Futures is
ƒ
ƒ
ƒ
ƒ
ƒ
ƒ
A contract into which parties enter to either buy or to sell Underlying
assets in the future and the contract’s parties must adhere to the contract.
Party who agrees to buy underlying assets in the future is called Long
Futures or to have a Long Position
Party who agrees to sell underlying assets in the future is called Short
Futures or to have a Short Position
When entering into a contract, there will be a fixing of prices for buying
or for selling in order to make a delivery of underlying assets or to make
a cash settlement in the future.
Profit of one party will be equal to a loss of another party or we call
Zero sum Game.
On a date when parties enter into a contract, both parties will agree on
prices for buying and selling in the future but there will be no settlement
on that date. Delivery and settlement of price for underlying assets will
be done in the future when the contract’s maturity date arrives.
9
Trading Procedures for Futures
Trading procedures in TFEX
Seller
Buyer
Sending selling order
Sending buying order
TFEX
Agent
Agent
Confirm selling order
Confirm buying order
Send details
of transaction
Deliver and receive report
and margin
Thailand Clearing
House (TCH)
Calculate and call margin
Deliver and receive
and margin
Receive and pay margin
10
Organizations Relating to Derivatives Market
The Stock Exchange of Thailand (SET)
Subsidiary
99.99%
Subsidiary
99.99%
Thailand Futures Exchange (TFEX)
Thailand Securities Depository (TSD)
Subsidiary
99.99%
Thailand Clearing House (TCH)
‰
Unit under
TSD
Back Office Service Bureau (BSB)
In being a Derivatives Agent, KIM ENG Securities (Thailand) Plc., has become a member of
TFEX, TCH and uses BSB’s full service.
11
Duties of various Organizations: TFEX, TCH, BSB
Organization
Duties of Related Organizations
Thailand Futures
Exchange (TFEX)
Receive trading order from Broker that is a qualified
member and then match the orders by creating electronic
contract for matched orders (Numbers of contracts in the
market can be created increasingly)
Thailand Clearing
House (TCH)
Request for collateral from Clearing Broker member to rid of
risk for contract parties (counter-party credit-risk) who trade
in derivatives market in order to stabilize the market and to
create confidence among participants.
Back Office Service
Bureau (BSB)
Provide back office service for Brokers in term of an
issuance of report to show contract status, report
confirmation note to clients and report on outstanding
collateral (margin) to be paid to TCH
12
Agenda
1.
1. Getting
Getting to
to know
know derivatives
derivatives
2.
2. What
What isis SET50
SET50 Index
Index Futures
Futures ??
3.
3. Investing
Investing in
in SET50
SET50 Index
Index Futures
Futures
4.
4. Margin
Margin and
and Mark-to-Market
Mark-to-Market
13
What is SET50 index ?
SET50 index is an index of 50 securities. Stocks in SET50 index have
following qualification:
ƒ
Market cap of the company must be high.
ƒ
High liquidity stocks with regular high trading volume
ƒ
Listed in the market at least 6 months.
ƒ
The Stock Exchange will adjust names of stocks selected for calculation
every 6 month.
ƒ
In calculating SET50 Index, weight of each stock will depend on market cap
of that stock
ƒ
Between January 1, 2006 to June 30, 2006, the following stocks are in
SET50 Index:
ADVANC
CP7-11
KK
RATCH
TISCO
AOT
CPF
KTB
RCL
TMB
ATC
BANPU
DELTA EGCOMP
LH
MAKRO
SATTEL
SCB
TOP
TPC
BAY
GLOW
MCOT
SCC
TPIPL
BBL
HANA
NFS
SCCC
TRUE
BEC
ITD
PSL
SCIB
TTA
BECL
ITV
PTT
SHIN
TUF
BGH
KBANK
PTTCH
SSI
UBC
BH
KEST
PTTEP
THAI
UCOM
14
SET50 Index Futures :
‰
‰
‰
‰
Is a derivatives that has the underlying assets as SET50
Index
Has a limited lifetime, for example, the maturity date of
contracts could be at the end of Mar, Jun, Sep, Dec
Being recognized profit and loss every end of day through
Mark-to-Market
Has a high risk and high return profile
15
Benefits of SET50 Index Futures
‰
‰
‰
Diversification benefit through replicating the holdings of
50 stocks in the index that cover various sectors and the
stocks in the index have high liquidity.
Able to invest in directional bet when market is up and
market is down
Has leverage benefit through low initial margin
16
What is SET50 Index Futures ?
Derivatives contract =
•
•
•
Type of Contract +
Underlying Assets
SET50 Index Futures= Futures Contract + SET50 Index
Assumption that the current date is January 1, 2006
An example of SET50 Futures June 2006 which is a 6 month contract
What should be remembered SET50 Index (spot price) and price of SET50 Futures are
different figures and the values are not the same except on the expiry date of the contract that
the two figures will have the same value, this is called a convergence of spot and futures
prices.
Mr. Bull has Longed SET50 Index Futures at the price
of 510
Current
1 JAN 2006
Mr. Bear has Shorted SET50 Index Futures at the
price of 510
On an expiry date if the price of Futures (which
will equal SET50 Index) is at 530 points, Mr.
Bull who has Longed Futures will make a profit
= 530-510 = 20 points
Expiry of Contract
30 JUNE 2006
At the expiry date of the contract, if the price of
Futures (which will equal SET50 Index) is at 530
points, Mr. Bear who has Shorted Futures will
lose = 510-530 = -20 points
17
Return at Expiry Date
Long Futures Contract
30
Profit
Return of Long = Price of underlying
goods –Agreed futures price
20
10
Price of underlying goods
0
Loss
-10
490
500
520
530
540
Return of Short = Agreed futures
price - Price of underlying goods
-20
-30
Agreed futures
price = 510
Short Futures Contract
Price at Expiration
490
500
510
520
530
Gain/Loss Long
Futures
-20
-10
0
10
20
Gain/Loss Short
Futures
20
10
0
-10
-20
18
SET50 Index Futures : Long vs. Short
Expectation
Decision to
Invest
Results
Bullish
Expected that SET50
Index will rise
Bearish
Expected that SET50
Index will decline
Long SET50 Futures
Short SET50 Futures
Long SET50 Futures
Short SET50 Futures
If index rises
Profit
Loss
If index declines
Loss
Profit
19
Bullish : Long SET50 Index Futures
SET50 Index Futures
525.00
Profit
520.00
Time
20
Bearish : Short SET50 Index Futures
SET50 Index Futures
520.00
Profit
515.00
Time
21
Detail of the first Futures Contract to be
traded in TFEX
Underlying index
SET50 Index
Multiplier
1,000 Baht (using SET50 Index base at 1,000)
Minimum movement of index
Minimum moving price of offer and bid is 0.10
Level of price
Price can be change +-30% of the last settlement price
Trading hours
Morning pre-open
Morning session
Afternoon pre-open
Afternoon session
Expiry date of contract
There are 4 types of contract expiration – contract of March, June, September and December
Status limitation
No more than 10,000 contracts in each month or combine of all Months. Those who buy more than 10,000
contracts in order to really prevent risks and not to speculate may ask for exemption
Reporting status
At 500 contracts and report must be made daily as long as there are more than 500 contracts
Settlement
Cash settlement
Tax
No capital gain tax for SET50 Index Futures
Last trading day
One working day before the last working day of the expiry month
Last trading time on the last
16.30 p.m.
Final Settlement Price
The settlement price will come from SET50 index and decimal figures will be made into 2 digits and this
will come from average price of SET50 index. The average will be calculated from one minute period
between 4:00 pm – 4: 30 pm. The final closing price will also be calculated and the three highest and
lowest value will not be used to calculate.
9.15 am – 9.45 am
9.45 am – 12.30 pm
14.00 pm – 14.30 pm
14.30 pm – 16.55 pm
22
SET50 Futures - Contract Size
SET50 Index Futures Contract Size :
Contract Multiplier
= 1,000 Baht/contract
Contract Size
= Futures Price * Multiplier
Example
Assuming that the price of SET50 Futures = 500.0
Therefore Contract Size
= 500.0 * 1,000
= 500,000 Baht/contract
23
SET50 Futures - Contract Month
SET50 Futures offers 4 types of investment contracts depending on expiry dates:
January 1
H
M
U
Z
March 31
June 30
September 30
December 30
Expiry date
MAR Contract
Expiry date
JUN Contract
SEP Contract
DEC Contract
Expiry date
Expiry date
24
SET50 Futures – Tick Size
‰
‰
SET50 Future's tick size for price movement is at least one decimal point.
Futures price can move from 500.1 point to 500.2, 500.3 point. It can not
move less than that, for example, from 500.1 to 500.16 point
Example of price movement of SET50 Index Futures:
trade
time
500.3
500.4
500.5
500.4
500.3
500.2
25
SET50 Futures – Trading Screen
S50 Index
S50 Mar06
S50 Jun06
S50 Sep06
S50 Dec06
498.50
Amount
1,500
758
652
400
250
230
180
100
55
60
11
-
Bid
Price
500.0
499.9
499.8
501.5
501.4
501.2
503.8
502.6
501.8
505.1
504.0
-
Offer
Price
500.1
500.2
500.3
501.7
501.8
501.9
504.0
504.2
506.0
508.0
510.0
Amount
1,335
890
890
380
224
157
97
42
30
15
12
Last
500.0
Change
-0.1
501.5
-0.2
-
505.1
-
-0. 2
Volume
200
Open
Interest
5,453
120
450
-
35
8
15
26
Open Interest Information
‰
Open interest (OI) is the amount of contracts (count
either long or short side) under the opened status or
called outstanding contracts in the market
Volume
OI
A
B
C
D
A long 2 & B short 2
2
2
Long 2
Short 2
-
-
A long 2 & C short 2
2
4
Long 4
Short 2 Short 2
-
D long 1 & A short 1
1
4
Long 3
Short 2 Short 2
Long 1
B,C long 1 & A short 2
2
2
Long 1
Short 1 Short 1
Long 1
27
SET50 Futures – Trading Time
Trading Hours
Pre-Open:
9:15 am. - 9:45 am.
Morning Session:
9:45 am. – 12:30 pm.
Pre-Open:
2:00 pm. – 2:30 pm.
Afternoon Session:
2:30 pm. – 4:55 pm.
Expiration day is the last working day of the
expiry month of the contract
Last Trading is one working date before the expiration day
June 2006
Wed
Thrs
Fri
28
29
30
Settlement price on expiration day comes from SET50 index with decimal figures in 2
digits. The price comes from average price of SET50 index averaging during 1
minute period between 4.00 pm –4.30 pm with an additional calculation of the last
closing price and the three highest and lowest value is not calculated.
28
Agenda
1.
1. Getting
Getting to
to know
know derivatives
derivatives
2.
2. What
What isis SET50
SET50 Index
Index Futures
Futures ??
3.
3. Investing
Investing in
in SET50
SET50 Index
Index Futures
Futures
4.
4. Margin
Margin and
and Mark-to-Market
Mark-to-Market
29
Decision to Long SET50 Index futures
‰
Assuming that investor Long SET50 Futures expecting market to rise
Current
Expiration Date
1 JAN 2006
30 JUNE 2006
1 JAN 06
30 JUN 06
SET50 Index
500
….
….
….
XXX
….
….
….
XXX
SET50 Futures
At what price
the investor
should Long
Futures
What should be remembered
SET50 index and price of Futures are different figures and
unequal value except on the expiration date when these two
figures will have equal value, this is called a convergence of Spot
and Futures prices.
30
Calculating SET50 Index Futures Price
Today (t=0)
In Between
Expiration (t=T)
Buying Stock
• Paying a spot
price
• Receive shares
immediately
• Entitle to receive
dividend
• Cost of paying cash
(interest)
• Already holding shares
with net cost S +
Interest
• Dividend
Buying
Futures
• Agree on price
for futures
• No rights to
dividend
• Payment on futures
• Receive shares
At the expiration date, we will have shares in our hand on both cases, buying on spot and
buying futures. Therefore, the cost of acquiring shares on both cases should be the same as
follows:
F=S + Interest – dividend
It can be seen that Futures price (F) is differed from spot price (S) on the value of paid
interest deducted by dividend which is the net cost of carrying this stock. Therefore, we call the
formula showing this relationship the Cost of Carry model or cost of carrying theory.
Example: spot price of share S = 500, interest = 30, dividend =20
Price of futures in theory =500+30-20 = 510
31
Calculating price of SET50 Index Futures
‰
Detail of contract needed to be considered
to set up price
SET50 Index
i.e. S=500
Multiplier =
1,000 Baht
Details
Details of
of Contract
Contract
• Assuming that the current
• Assuming that the current
SET50 index = 500 point
SET50 index = 500 point
• Multiplier = 1,000
• Multiplier = 1,000
• Therefore, as of now,
• Therefore, as of now,
1 contract of SET50 futures
1 contract of SET50 futures
will have an underlying
will have an underlying
assets value of 500,000
assets value of 500,000
baht.
baht.
F = Futures price
S = level of SET50 index
R = Interest rate
Q = Dividend yield rate
T = Remaining period before expiration
Value of underlying assets
i.e. 500,000 Baht
Cost of Carry formula to calculate Futures price in theory
F = S + Interest - dividend
F = S + S*R*T-S*Q*T
i.e. Futures (F) is 510 when SET50 (S) is 500 point
Price of SET50 Futures traded in the market will also depend
on demand & supply of investors. Market price of Futures
can be differed from price in theory at a certain level.
32
Example of theoretical price setting of SET50 Futures
Assuming that
the current SET50 index is at 500 points (S=500)
Dividend payment rate = 4 % (Q=0.04)
Interest rate = 6% (R=0.06)
What Futures price, one year term (t=T) should be (F=?)
F = S + interest – dividend
F=S+S*R*T–S*Q*T
= 500 + 500 * 0.06 * 1 – 500 * 0.04 * 1
= 500 + 30-20
= 510
= Theoretical price of one-year term SET50 Futures
33
Example of theoretical price setting of SET50 Futures
Futures price (F) can be higher or lower than the current price (S)
F
= S + Interest-dividend
= S+S*R*T -S*Q*T
= S + S * (R-Q) * T
If interest rate (R) > dividend rate (Q), then F>S
If interest rate (R)< dividend rate (Q), then F<S
34
Factors that affect market price of SET50 Futures
Investors’ risk
preference
Company’s
fundamental
Macro
views
Demand & Supply
for stock
Factors
the market
price of
ปจจัยaffecting
ที่มีผลกระทบต
อราคาของ
SET50
Index Futures
SET
50Index
Futures
Market price of stocks in SET50 index
When calculating all
50 stocks
into SET50 index
SET50 Index
Risk Free
Interest Rate
Expected dividend
yield on SET50 stocks
Cost of Carry Model
Time to
maturity
Investors’ risk
preference
Demand & Supply
Towards SET 50 Index
Futures
ราคาตลาดของ
Market price
of SET
50
IndexFutures
Futures
SET
50Index
35
Trading Derivatives through Derivatives Agent
Account Opening
Placing collateral
(margin)
สงคําสั่ง
ซื้อขาย
Sending trading order
Invest
or
Confirming order
Receiving &
sending margin
Derivatives
Agent Services
provided by
Marketing
Officers
36
Investment activities in SET50 Index Futures
Period
Period of
of investment
investment
•• Assuming
Assumingthat
thatthe
the
time
is
now
January
time is now January
1,2006
1,2006
•• Example
Exampleby
byusing
using
SET50
Futures
SET50 FuturesJune
June
2006
which
is
a
62006 which is a 6month
monthcontract
contract
Current
Expiration date
1 JAN 2006
30 JUNE 2006
Activities of today
• Placing initial margin : retails
must place margin before sending
trading order, institutional clients
can place margin within 1 hour
before market close on T+1
• Investors agree to enter either
Long or Short contract
• As of today, contract parties agree
on price to enter into contract
through derivatives market
• The agreed price is the price on
the future value of assets in the
next 6 month.
• Long or Short orders may be
matched or unmatched, depending
on market price of Futures
Activities to be done on the
expiration date
• Contract’s status is closed
automatically due to its
expiration
• A Long person will deem to
act as selling out at closing
price
• A Short person will deem to
act as buying back at closing
price
• Settlement of profit and loss
• Receive back remaining margin
after profit/loss calculation
37
Order Types : SET50 Futures
Limit Order (Specify exact price)
The most common order type is the limit order.
Limit orders can only be traded when the trading
price is better or equal to the limit price of the order.
Market Order
The most simple order type is the market order. A
market order is an order to buy or sell a quantity (a
certain number of contracts) at the best price. In
other words, a market order is traded immediately as
long as there is an order to match. Market orders are
not allowed to stay in the Orderbook.
Stop Order
Condition order. If the input condition is met, then
the sent order will begin to match in the market.
Combination Orders
Standard (2 series, time spread combo) is the
Calendar spread order that can get long position in
one series and short position in other series.
Fill and Store (FaS, Day)
The Fill and Store (FaS) order must have a limit
price. As much of the order as possible is traded,
and the rest is stored it in the Order book.
Fill and Kill (FaK)
The Fill and Kill (FaK) order is traded as far as
possible until its quantity is filled, or until there are
no more matching orders. In either case, the rest
quantity of the order is rejected (killed) and Fill and
Kill orders are therefore not stored in the Order
book.
Fill or Kill (FoK)
The most complex order type is the Fill or Kill
(FoK) order. When the Marketplace receives a FoK
order, it tries to match the entire quantity. If the
order can be fully filled, the trade is done.
Otherwise no trade will take place, and the entire
order is rejected. In other words either the whole
quantity is traded, or nothing at all. The Fill or Kill
order cannot be stored in the Order book.
38
Agenda
1.
1. Getting
Getting to
to know
know derivatives
derivatives
2.
2. What
What isis SET50
SET50 Index
Index Futures
Futures ??
3.
3. Investing
Investing in
in SET50
SET50 Index
Index Futures
Futures
4.
4. Margin
Margin and
and Mark-to-Market
Mark-to-Market
39
Placing Margin
‰
Margin is client’s one lump sum of cash but is observed into
levels of initial margin and maintenance margin “Margin
money is equate to Green-tea refill. If green tea is reduced to
one certain level – called maintenance level, it will be
refilled back to a full glass again”.
Placing margin by clients :
Margin
Margin
• Level of initial margin (Initial
• Level of initial margin (Initial
margin = IM) = 50,000 Baht / 1
margin = IM) = 50,000 Baht / 1
contract
contract
• Level of Maintenance margin
• Level of Maintenance margin
(Maintenance margin = MM) =
(Maintenance margin = MM) =
35,000 Baht / 1 contract
35,000 Baht / 1 contract
Example 1 : Margin Calll
When margin amount declines to
32,000 Baht, there will be a call
(call margin) to increase margin
by 18,000 Baht
50,000 Baht
35,000 Baht
Example 2 : Excess Margin
Margin = 60,000 will equal to
having excess margin of
10,000 Baht which can be
withdrawn.
Initial
Margin
Maintenance
Margin
40
Mark-to-market of SET50 Index Futures
‰
‰
‰
‰
‰
Mark-to-market is a recording of profit/loss
according to market price of Futures
Investment money in SET50 Index Futures
is money placed as margin only and the
amount is far less than value of underlying
assets.
If investors make profit, mark-to-market
will cause margin to increase
Start
Initial
Margin
Maintenance
Margin
if
profit,
Margin
rise
if loss,
Margin
decline
If investors make loss, mark-to-market will cause margin to reduce and if
margin’s level is reduced to maintenance margin, investors will be required
(call margin) to add margin money until it reaches level of initial margin
(the amount that needed to fill in is called Variation margin).
Mark-to-market will be carried out at least once at the end of the trading
day.
41
Long: SET50 Index Futures
‰
Mr. Bull expects SET50 index to go up Æ So he Long Futures
SET50 index and
Futures price have
different values but
will move following
each others
When
calculating
profit/loss,
we use
“Futures
Price” at
all times,
not SET50
index
MarktoMarket
every
day
Current
Expiration Date
10:20 am.
1 JAN 06
Market
close
1 JAN 06
Market
close
2 JAN 06
Market
close
3 JAN 06
….
30 JUN 06
SET50 Index
500
505
495
535
….
560
SET50 Futures
510
515
505
550
….
560
1 Contract
1 Contract
1 Contract
1 Contract
….
Expired
Profit/Loss
of that day
0
5,000
-10,000
45,000
….
….
Profit/Loss
accumulated
0
5,000
-5,000
40,000
….
50,000
50,000
55,000
45,000
90,000
….
100,000
Long Futures
Margin
The
conver
gence
of
SET50
index
and
price
of
Future
s at
expirat
ion
date
42
Longing SET50 Index Futures and close
before expiration date
‰
Mr. Bull expects SET50 index to climb up, Æ So he Longs Futures
Current
Expiration Date
10:20 am.
1 JAN 06
Market
close
1 JAN 06
15:03 pm
2 JAN 06
….
SET50 Index
500
505
495
….
SET50 Futures
510
515
505
….
1 Contract
1 Contract
1 Contract
Profit/Loss
of that day
0
5,000
-10,000
Profit/Loss
accumulated
0
5,000
-5,000
50,000
55,000
45,000
Investor who longed
can close out
Futures position
before expiration
date :
• By entering into
short contract to
cancel out old
contract
• This is call Close
position or Offset
position
Long Futures
Margin
30 JUN 06
43
Short: SET50 Index Futures
‰
Current
SET50 index and
Futures price have
different values but
will move following
each others
In
calculating
profit/loss,
we use
“Futures
price” at
all times,
not SET50
index
MarktoMarket
every
day
Mr. Bear expects SET50 index to go down Æ So he Short Futures
Expiration Date
10:20 am.
1 JAN 06
Market close
1 JAN 06
Market close
2 JAN 06
Market
close
3 JAN 06
….
30 JUN 06
SET50 Index
500
505
495
535
….
560
SET50 Futures
510
515
505
550
….
560
Short Futures
1 Contract
1 Contract
1 Contract
1 Contract
….
Expired
Profit/Loss
of that day
0
-5,000
10,000
-45,000
….
….
Profit/Loss
accumulated
0
-5,000
5,000
-40,000
….
-50,000
50,000
45,000
55,000
10,000 ->
Call
Margin
40,000
….
(50,00010,000)=
40,000
Margin
A
converge
nce of
SET50
index and
price of
Futures at
expiration
date
44
Shorting SET50 Index Futures and close
before expiration date of contract
‰
Mr. Bear expects SET50 index to decline Æ So, he Shorts Futures
Current
Expiration date
10:20 am.
1 JAN 06
Market
close
1 JAN 06
15:03 pm
2 JAN 06
…..
SET50 Index
500
505
495
…..
SET50 Futures
510
515
505
…..
1 Contract
1 Contract
1
Contract
Profit/Loss
of that day
0
-5,000
10,000
Profit/Loss
accumulated
0
-5,000
5,000
50,000
45,000
55,000
Investor who
Shorted Futures
can close out
before expiration
date
• By entering into
Long contract to
offset original
contract
• This is called
Close position or
Offset position
Short Futures
Margin
30 JUN 06
45
Items
1.1.Getting
Gettingto
toknow
knowderivatives
derivatives
2.2.What
WhatisisSET50
SET50Index
IndexFutures
Futures
3.3. Investing
Investingin
inSET50
SET50Index
IndexFutures
Futures
4.4.Margin
Marginand
andMark-to-Market
Mark-to-Market
5.5.Returns
Returnsand
andrisk
riskfrom
fromSET50
SET50Futures
Futures
46
Risks and Returns of SET50 Futures
Current
Expiration date
10:20 am.
1 JAN 06
Market
close
1 JAN 06
Market
close
2 JAN 06
SET50 Index
500
495
510
SET50 Futures
510
505
520
Profit/Loss
accumulated
0
-5,000
10,000
Long :- Margin
50,000
45,000
60,000
Profit/Loss
accumulated
0
5,000
-10,000
Short :- Margin
50,000
55,000
40,000
Investing directly in the basket of stocks will
render returns = 10/500 = 2%
It can be seen that
investing in Futures
renders higher returns
and also higher risks
than investing directly in
stock
‰ Futures is an
investment with high
risk and high return
‰ Futures has leverage
that is to use small
amount of money for
investment but returns is
large (both
positive/negative)
‰
Longing SET50 Futures
will render returns =
10,000/50,000 = 20%
Shorting SET50 Futures
will render returns =
-10,000/50,000 = -20%
47
Summary of Important Issues
‰
‰
‰
‰
‰
‰
Longing or Shorting SET50 Futures is an agreement to buy or sell SET50
index in advance by agreeing on price at the contract entering date.
Price of SET50 Futures depends on Cost of Carry Model and Demand and
Supply of the market
Price of SET50 Futures (F) is a different figure from SET50 Index (S) and
they have different values but the convergence of F and S will cause the
two figures to be equal on the futures expiration date.
Client’s margin money will be one lump sum but will be observed into
levels of initial margin and maintenance margin.
Mark-to-market is to record profit/loss every day by using settlement price
of SET50 futures for mark-to-market purpose but not using SET50 index
level.
If the market rises, Long SET50 Futures will make profit while Short
SET50 Futures will suffer loss.
48
Credit Risk Management and Margin call
Example of Call Margin
‰
If SET50 index is expected to rise, investors will Long Futures but the market turns out to be going down:
10 JAN 06 (TC)
Margin
12 JAN 06 (TC+2)
After market close and
Mark-to-Market
9:45am3:55pm
3:55 pm4:55pm
(1 hour before
market closes)
482
480
470
460
Assuming
that call
margin is
paid on time
32,000 Baht
Æ call margin asking
client to put in additional
18,000 Baht
Put in
additional
18,000 Baht
on time before
15.55 pm
Assuming
that call
margin is not
paid on time
32,000 Baht
Æ call margin asking
client to put in additional
18,000 baht
no additional
required
margin is put
on time before
15.55 pm
Broker has the
rights to Force
close
Broker must
complete force
close
SET50 Futures
Margin
11 JAN 06 (TC+1)
Time to Force Close
Time to Call Margin
9:45am3:55pm
3:55 pm4:55pm
(1 hour before
market closes)
465
Account is locked
to prevent
additional positions
49
Example of a failure to meet up with call margin
n time and a Force Close
‰
Mr. Bull expects SET50 index to rise. So, he Long Futures
Current
Expiration Date
10:20 am.
1 JAN 06
Market
close
1 JAN 06
Market
close
2 JAN 06
3:55 pm
3 JAN 06
Market
close
3 JAN 06
Market
close
4 JAN 06
SET50 Index
500
490
480
465
455
450
SET50 Futures
510
500
490
480
470
465
Long Futures
10
Contracts
10
Contracts
10
Contracts
10
Contracts
2
Contracts
2
Contracts
Profit/Loss of that day
0
-100,000
-100,000
-100,000
-100,000
-10,000
Accumulated Profit/Loss
0
-100,000
-200,000
-300,000
-400,000
-410,000
500,000
400,000
300,000
Æ Call
Margin
200,000
Don’t pay Call
margin on
time 1 hour
before market
close.
100,000
Force
Close on 8
contracts
90,000
Margin
50
Credit Risk Management and Margin Call
1.
Trading agent must prepare for client to completely place margin within the following time frame:
1.1. In a case of initial margin placement
1.1.1. Clients who are not institutional clients must place margin before trading of futures contract. If
margin is not placed, the system will not be activated for trading.
1.1.2. For institutional clients, margin must be placed at least one hour before the closing hour of the
following day after the trading day.
1.2. In a case of additional placement of margin, additional margin must be placed at least one hour before
the closing hour of the following day after the day the agent asks investor to place additional margin.
2.
In an event that any client can not place margin within required period as stated in 1.1.2 or 1.2, an agent must
follow the following guidelines:
2.1. Stop trading on futures contract resulting in a new position for the said client.
2.2. Close position on Futures trading of such client at least one hour before the closing hour of the following
working day. The agent must close position for Futures trading of such client to the point that rate or value
of margin of that client is not lower than the rate or value of the client’s initial margin for the remaining
position.
3.
Credit and Risk Management Department has a duty to ask client to place assets as initial margin and to set
up maintenance margin at the rate or value not lower than that required by SEC or as announced by
Thailand’s Clearing House
4.
When rate or value of margin of that client is lower than the rate or value of maintenance margin as required
by the company (the company’s rate is not lower than that of Thailand’s Clearing House), the client will be
asked to place additional margin at an amount that will make rate or value of the margin to be not lower than
the rate and value of initial margin. The type of assets that agent asks client to place as margin must be the
same type of assets required by Thailand’s Clearing House for its member to place as margin. Currently,
Thailand’s Clearing House accepts only cash as margin.
51
Those who gain benefit from SET50 Futures
1. Speculators
‰ Making directional bet
‰ Using small amount of investment but gain high
returns rate (leverage)
2. Hedgers
‰ To use it for risk management
3. Arbitrageurs
‰ To find a chance to make profit from mis-pricing
of futures price
52
Trading Quantity in the derivatives markets
* Data from Futures Industry Magazine
‰
Asia has larger volume of derivatives trading
than America and Europe.
53
Q&A Session
Questions & Answers
54