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 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: Market cap of the company must be high. High liquidity stocks with regular high trading volume Listed in the market at least 6 months. The Stock Exchange will adjust names of stocks selected for calculation every 6 month. In calculating SET50 Index, weight of each stock will depend on market cap of that stock 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 ปจจัยaffecting 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) สงคําสั่ง 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
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