Copyright© JSE Limited Magnus de Wet, James Boardman, Rudolf Oosthuizen 09 March 2011 Introduction to Single Stock Futures Educational Seminar 101

Agenda Introduction to Derivatives Futures Theory Risk Management for the exchange Risk Management for you Cash flows of a future Interest and the time value of money How to trade- Speculate, Hedge or Arbitrage Costs associated with trading Single Stock Futures compared to CFDs Questions & Contact Details

SSF: Introduction JSE Futures are based on following underlying assets: Equities Commodities Currency Bonds International Blue Chip Companies (IDX) This presentation focuses on Single Stock Futures but the concept is the same on any of the underlying assets traded on the JSE which are listed above.

SSF: Futures Explained An agreement between two parties to buy/sell an equity/share at a certain time in the future for a predetermined price In reality futures contracts can be seen as loan agreements where a financial institution lends you the money to buy a share today but only sells it to you on a future date. Misconception: Investor does not guess price. Investor guesses direction of the share or underlying asset Futures Price: Current Price plus Interest. Dividends play role but not covered in this presentation

SSF: Futures Terminology As with share trading, you need a buyer and seller before a trade can occur. Buy = Long Think the share price is going up Short = Sell Think the share price is going down

SSF: Futures Terminology Variation Margining (Zero Sum Game – For every winner there’s a loser) Removes big surprises at end of contract Limits risk of default Risk mitigated by way of Initial Margin: Covers exchange against default Worst possible loss in 1 days movement Returned with interest Approximately 10% - 20% of underlying exposure Gearing Exchange standardise agreements/contracts Contract sizes (nominal) standardised Contracts expire every 3 rd Thursday of March, June, September and December

Risk Management Stucture The Risk Management philosophy when trading Safex Derivatives is very simple - "You stand good for your client".

Physically settled Futures – On Futures Close Out (FCO) the buyer will buy the physical share from the seller at the closeout price (R120), reporting it to TradElect with trade type OX. Adding the R10 profit made he only paid R110 for the share as originally agreed SSF: Futures Example – Share Price increase DateEquity Price Derivative CP (MtM) 10% Initial Margin 15% Variation Margin Buyer Cash Flows Seller Cash Flows Trade Date Months Later Months Later Months Later Months Later – Close out Profit/Loss

SSF: Futures Example – Share Price decrease Date EQ Market CP Derivative CP (MtM) 10% Initial Margin 15% Variation Margin Buyer Cash Flows Seller Cash Flows Trade Date Months Later Months Later Months Later Months Later – Close out Profit/Loss Physically settled Futures – On FCO the buyer will buy the physical share from the seller at the closeout price (R80), reporting it to TradElect with trade type OX. Adding the R30 loss made he paid R110 for the share as originally agreed

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 14 Introduction to interest +(50% or 0.50) = +

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 15 Introduction to interest Initial ValueReturn %Extra ReturnTotal R % R R R100*50% = R50 R100 *(1.50) = R100*(1+50%) = R150 Initial ValueReturn %Extra ReturnTotal R % R R R150*(1+50%) = R225 (R100*(1+50%)) *(1+50%) = R225 R100*(1+50%)^2 = R225

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 16 Introduction to interest Initial ValueReturn %Extra ReturnTotal R % R R R150*(1+50%) = R225 (R100*(1+50%)) *(1+50%) = R225 R100*(1+50%)^3 = R Initial ValueReturn %Extra ReturnTotal R % R R ((R100*(1+50%)) *(1+50%)) *(1+50%)= R337.50

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 17 Introduction to interest Compounding returns What is Prime? 9% Compounding Monthly ? = 9%/12 = 0.75% per Month R100*(1+50%)^3 = R R100*(1+R)^t = ? R100*(1+9%)^12 = ? =R100*(1+0.75%)^12 Starting ValueRate %Compounding1Year Value R % 12 R R ?

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 18 Starting ValueRate %Compounding1Year Value R % 1 R Starting ValueRate %Compounding1Year Value R % 2 R Starting ValueRate %Compounding1Year Value R % 12 R Starting ValueRate %Compounding1Year Value R % 365 R Starting ValueRate %1Year Value R % R R R Compounding S

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 19 Credit Risk Repo = 6.5%Prime = 9% 3.5%

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 20 Interest formulas Formula for Interest = Can work out returns R100 capital turns into R in 6 months Starting ValueEnding ValueCompoundingNumber of Years% Return R R % R N ) ( 1 (T*N) = CV FV ) ( 1 ( ) *

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 21 Deriving future prices 2 Mar 2011

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 22 Current dateExpiry DateCompoundingDate Diff Years 2011/03/022011/06/ Spot BidFuture BidDifference% Interest Year R R R % Spot OfferFuture OfferDifference% Interest Year R R R % Spot SpreadFuture Spot Sread %Future Sread % R 0.50 R %0.45% Deriving future prices 16 Jun 2011 % Interest 1.31%

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 23 Spread Cost Offer – Bid = Spread Spot Spread = R – R = R0.50 Cost of getting in and out In percentage of exposure = (Offer – Bid)/((Bid + Offer)/2) = Spread% R0.50/((R R366.50)/2) = 0.14%

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 24 Spread Cost Future Spread = R – R = R1.68 In percentage of exposure = R1.68 /((R R )/2) = 0.45%

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 25 Current dateExpiry DateCompoundingDate Diff Years 2011/03/022011/06/ Spot BidFuture BidDifference% Interest Year R R R % Spot OfferFuture OfferDifference% Interest Year R R R % Spot SpreadFuture Spot Sread %Future Sread % R 0.50 R %0.45% Deriving future prices 1 Market maker 16 Jun 2011

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 26 Deriving future prices

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 27 Deriving future prices 17 Mar Market maker Current dateExpiry DateCompoundingDate Diff Years 2011/03/022011/03/ Spot BidFuture BidDifference% Interest Year R R R % Spot OfferFuture OfferDifference% Interest Year R R R % Spot SpreadFuture Spot Sread %Future Sread % R 0.50 R %0.20%

Click to edit Master title style Click to edit Master text styles Second level Third level »Fourth level »Fifth level 28 Market maker Double R100R99R101 R1.5 R1

SSF: When do you use Futures? Hedging / Risk Mitigation Own something (shares, agricultural commodities, interest rate instruments, currency) and want to limit your risk Planning something (project, holiday) in the future Speculating Think the price is going up Think the price is going down Arbitraging locking in a riskless profit by simultaneously entering into two or more transactions. Difference in spot and future price Difference between expiries

SSF: SSFs vs. CFDs SSFs Exchanged traded product Expiry Date Interest agreed upfront Regulated by the JSE and FSB Guaranteed by SAFCOM Fungible financial instrument Free markets CFDs Trades OTC No Expiry Date Interest fluctuates daily Unregulated Not guaranteed by SAFCOM Not fungible Captive markets CFDs are not JSE products and are therefore not traded, regulated or guaranteed by the JSE.

SSF: Benefits and Risks associated with Futures Benefits Regulated by JSE and FSB Guaranteed by SAFCOM Opportunity to protect/hedge your share portfolio by trading SSFs in the same underlying share. SSFs incur lower brokerage costs than actually trading in the underlying shares. Your initial margin earns interest for the duration of your contract. SSFs are characteristically liquid and easily traded. Gearing – significant returns… JSE independently calculates and values positions Wholesale Interest Rates Risks Gearing – significant losses…

So what have you learnt? Derivatives are risk management tools Futures are essentially loans The time value of money How futures daily cash flows work The risk management hierarchy of the exchange The risks and rewards of gearing The benefits of on exchange trading The economics of information asymmetry Futures can be very useful trading tools and a tremendous amount of fun!

To the Future Chef’s and Rally Drivers of derivatives trading Trading is hard work there is no free lunch Trading successfully is a skilled profession. You don’t expect to become a rally driver or a gourmet chef immediately. It takes dedication, discipline and planning to succeed Good luck with your trading! There will be further presentations on topics in derivatives throughout the year Go to to registerhttp://

SSF: Future Educational Seminars 9 March 2011 – Single Stock Futures March 2011 – Single Stock Futures April 2011 – Commodity Futures 24 May 2011 – Currency Futures and Options 21 June 2011 – Introduction to Safex Style Options 19 July 2011 – Safex Style Options in Depth 23 August 2011 – Broker Showcase 20 September 2011 – Inside Options Guest Speaker 25 October 2011 – Dividend Neutral Futures 23 November 2011 – International Derivatives (IDX) 06 December – Single Stock Futures December – Single Stock Futures 201

SSF: Useful websites/tools Equity Derivatives Market: Equity Derivatives Products: Equity Derivatives calculators: Equity Derivatives Data Files: Members

SSF: Questions & Contact Details Parking tickets! Magnus de Wet James Boardman Rudolf Oosthuizen