1. Trading Equity Derivatives Tuesday, 9 April 2013 Presenter: Shaun van den Berg : Head of Client Education at PSG Online : Head of Client Education at PSG Online

2. Introduction to Equity Derivatives –Terminology –Examples of Long & Short trades Single Stock Futures (SSF) –Equity SSF –List of SSF contracts available –Index Futures (ALSI & ALMI) Contracts for Difference (CFD) What are CFDs? List of CFD available Summary ConclusionAgenda Presenter: Shaun van den Berg

3. Equity Derivative - Derives its value on underlying share e.g. ANG, BIL, SOL Top 100 JSE listed shares “Go Long” – Rising prices “Go Short” – Falling prices “Long Only” – No Scrip available for shorting Initial Margin – ± 15% deposit Variation Margin – Unrealised profits & losses –Processed daily (Mark-to-Market (M-t-M) –Cash account negative – Margin Call You must deposit variation margin / close out the contract. Gearing or Leverage – Borrowing funds –For each cent the share moves in your favour, you are multiplying the profits by up to 10 times. –Gearing magnifies your returns.Terminology

4. Open a position –Long position – Buying –Short position - Selling Close a position – Do the opposite trade –Sell if you hold a long position –Buy if you hold a short position Roll a position (SSF) –The automatic closing & re-opening –Next dated expiry contract –Same underlying instrument.Terminology

5. Investor / Trader Matrix Prudent High Reward / Low Risk Speculative Low Reward / High Risk Aggressive High Reward / High Risk Conservative Low Reward / Low Risk REWARDREWARD High LowHigh Low RISK

6. Example of a Long Trade Instrument: CFD & SSF Direction: Buy / Long Entry: 28620c Take Profit: 31000c Stop loss: 27700c Risk/ Reward: 1:2.58 Potential Profit: 2380c per share 8.31% (55.40%) *15.00% Initial Margin R100 000 Capital 2% Risk Capital = R2000 Stop loss = 920c = R2000/ 920c Position size = 217 shares 2 SSF contracts

7. Example of a Long Trade *15.00% Initial Margin Stoploss Triggered @ 27700cps 920 cps loss - 3.21% (-21%)*

8. Example of a Long Trade Instrument: CFD & SSF Direction: Buy / Long Entry: 38000c Take Profit: 39600c Stop loss: 37500c Potential Risk: 500c per share Potential Profit: 1600c per share Risk/ Reward: 1:3.2 4.21% (28.06%)* *15.00% Initial Margin R100 000 Capital 2% Risk Capital = R2000 Stop loss = 500c = R2000/ 500c Position size = 400 shares 4 SSF contracts

9. Example of a Long Trade

10. Example of a Short Trade Instrument: SSF only Direction: Sell / Short Entry: 19300c Take Profit: 17800c Stop loss: 19900c Risk/ Reward: 1:2.50 Potential Profit: 1500c per share 7.77% (92.59%)* *R1620 Initial Margin R100 000 Capital 2% Risk Capital = R2000 Stop loss = 600c = R2000/ 600c Position size = 333 shares 3 SSF contracts

11. Example of a Short Trade Revised TP Closed @ 18520c 780cps 4.04% (48.14%)* 2013/04/03 Low @ 18135c 1165c per share 6.03% (71.91%)* *R1620 Initial Margin

12. Example of a Short Trade Instrument: SSF only Direction: Sell / Short Entry: 49345c Take Profit: 47718c Stop loss: 49975c Potential Risk: 630c per share Potential Profit: 1627c per share Risk/ Reward: 1:2.58 3.29% (42.36%)* *R3840 Initial Margin R100 000 Capital 2% Risk Capital = R2000 Stop loss = 630c = R2000/ 600c Position size = 317.46 shares (CFD) 3 SSF contracts

13. Example of a Short Trade 2013/04/09 Low @ 48577c 768c per share 1.55% (10.33%)

14. Watch List (Top 100 shares) / Fundamentals –Top 40 shares / Mid cap shares –Mining & Resources / Financials / Industrials Technical Analysis –Price charts (Candlesticks) / 50 & 200-day Moving Average –Trend lines / Support & Resistance / Fibonacci retracement levels –Chart Patterns –Stochastic & RSI indicators Trading platform –Mobility (Trade anywhere) / Place orders after hours –Direct Market Access (DMA) / Price Alerts & Stop Orders Risk & Money Management –Stoploss –Position Size Trading Tools

15. Single Stock Futures (SSFs) Presenter: Shaun van den Berg

16. Regulated by the JSE A standardised contract –Standard quantity (100 shares) Expiry Date –Expires on the third Thursday of every quarter March, June, September & December. Initial Margin – ± 15% deposit Gearing ± 6 times Variation Margin – Adverse price movement Equity SSF Presenter: Shaun van den Berg

17. SSF Contracts Available

18. Brokerage - Charged at 0.4% (ex VAT) - Value of the transaction. Market Makers Fee – Charged at 0.1% (excluding VAT). –The total brokerage charge is 0.57% (including VAT). Booking Fee - R60 is charged per SSF contract –You pay only for the opening leg of all transactions –Only once per day per SSF contract. –If you buy a Sasol SSF10 times on one day; you only pay R60 once. Rollover Cost – 0.25% of Exposure Interest Payable –Interest paid on the SSF cost value –Determined daily by the market maker –Ruling SAFEX rates. Interest Received –Initial Margin – SAFEX less 2% –Cash balances - Rate linked to the JSE Trustees rate Trading Costs Presenter: Shaun van den Berg

19. Comparable to Equities INVESTOR A (Share Trader) INVESTOR B (SSFs Trader) Confident that Sasol shares will increase. She has R35 000 which she can invest. Sasol’s share price is R350, therefore she buys 100 shares. 3 months later the price has increased by 10% so she sells her shares to make a R3 500 profit. Her return on her investment is 10%. The initial margin set by the broker is R6 000 which is paid by the buyer. Sasol’s share price is R350, therefore she buys 1 contract. After 3 months the price has increased by 10% & the investor closes out his position & sells out of the Sasol SSF contract. His profit is R3 500 but his return on his investment is 58%.

20. Events initiated by a listed company - Affects share price. Typically agreed upon by board & authorised by the shareholders. Processed onto SSF contracts by the JSE (SAFEX) Owners of SSF positions will not be prejudiced by movements in the underlying instruments. Examples include: –Name changes - No direct financial impact on shareholders. –Rights Issues –Unbundling or Spin-offs –Mergers & Acquisitions –Consolidations = R1 share consolidated 1: 10 = R10 –Share splits – Indirect impact - Increased liquidity - Price rises. R100 share split 10:1 = R10 –Dividends – Have direct financial impact on the shareholders. Corporate Actions Presenter: Shaun van den Berg

21. Dividends Expected in any quarter –Priced into SSFs –Includes expected interest to be received on dividend payment. Traders do not receive dividends as a cash payment even though they do benefit from them. Dividend Neutral Contracts Long Trades –N-contract = R100 –Q-contract = R95 plus interest –Plus F-Contract = R5 Short Trades –N-contract = R100 –Q-contract = R95 plus interest –Less F-Contract = R5 DividendR5 SSF Price R95

22. SSF Trading Platform

23. New Order (Margin) Step 1: Click New Order Step 2: Enter Code & Go

24. New Order (SSF) Step 4: Select Side Step 5: Enter Contracts Step 6: Enter Price in cents Step 3: Select Order Step 7: ClickSubmit

25. Price Watch & Stop Order Step 1: Click New Order Step 2: Select Price Watch Step 3: Above or Below Step 4: Enter Price Step 5: SelectClose Step 6: Enter Contracts Step 7: Enter Price Step 8: ClickSubmit

26. Note: SSF Price Watch & Stop Order The Price Watch AND the Stop Order have to be used together to execute a trade. –Otherwise, a Price Alert just sends an email or SMS to you. The order will reflect in your order book (on the web) but only enter the trading order book (JSE) when the trigger price is reached. Presenter: Shaun van den Berg

27. Hedging using SSF Equity Position + 500 NPN Equity Position + 500 NPN SSF Position -5 NPN contracts SSF Position -5 NPN contracts Share Price: -R50 -R50 -R50 -R50 Loss: 500 x R50 = -R25 000 Loss: 500 x R50 = -R25 000 Profit: 500 x R50 = +R25 000 Profit: 500 x R50 = +R25 000

28. Capital Efficient Low trading costs Hedge your current portfolio Trading Platform –DMA –After hours –Stops Pro’s & Con’s of Trading SSFs AdvantagesDisadvantages Interest Payable Quarterly Rolling Fee Dividend Neutral Gearing & Risk No voting rights Presenter: Shaun van den Berg

29. Trading Index Futures (ALSI & ALMI) Presenter: Shaun van den Berg

30. ALSI futures are a futures contract based on the Top 40 index Go Long - Buy the index & Sell later (Make money as prices rise). Go Short - Sell the index & Buy back later (Falling prices). High liquidity – Very popular Cheap – R25 (including VAT) per ALSI index futures contract traded. –No booking fee. Tight spreads – The difference between bids & offers are narrow. Every index point is worth R10 (100 point move = R1 000 profit or loss) Initial Margin –Trade at the index price –Pay an initial margin as set per SAFEX plus the PSG Online variation margin (currently R29 250). Profits or Losses - Depends on where you exit the trade based on the R10 per point value. Expiry Date – No rollover (Closeout) ALSI Index Future

31. ±200 Points

32. Mini version of the ALSI futures (10%) Liquidity – Improving Spreads - Improving Market Maker - As there is a market maker this index will track the ALSI futures. Every index point is worth R1 Initial Margin required is a tenth of the ALSI futures margin or R2 925. R5 (including VAT) is charged per ALMI contract traded. No booking fee Expiry Date – No rollover (Closeout) ALMI Index Future Presenter: Shaun van den Berg

33. Trading SSFs offers a new dimension –Long & Short trades –Hedge & Speculate Gearing – Attractive to small trader –Equity SSF - Swing trader - Top 100 shares - Minimum outlay & cost –ALSI Index futures - Serious day trader Regulated by the JSE –Counter party risk Summary: SSF Presenter: Shaun van den Berg

34. Contracts for Difference (CFD) Presenter: Shaun van den Berg

35. Contracts for difference (CFDs) are contracts … –Two parties (i.e. client & PSG Online) –Settled at the close of the contract –Difference between opening & closing price. Derivative - It derives its value on an underlying share e.g. ANG, BIL, SOL “Go Long & Short” – Up or down “Long Only” – No Scrip available for shorting Top 100 JSE listed shares Initial Margin –15% on Top 40 –17.5% on next 60 Variation Margin – “Top-up” - Adverse price movement What are CFDs? Presenter: Shaun van den Berg

36. You do not have to pay the full price of the underlying shares. You only pay enough money to cover the initial margin or deposit into your account. You may only need R15 000 to purchase CFDs up to a value of R100 000. If your position rises to R115 000 (15% rise), you will in fact make a 100% return on your trade, as you only deposited R15 000 initially. Geared Product

37. CFD versus Equities (Margin) CFD Trade Equity Trade Details Instrument Exposure Price (Cents) Initial Margin 15% 500 ABC shares 6000c 6000c R30 000 R4 500 R5 250 Initial Margin 17.5% R30 000 Presenter: Shaun van den Berg

38. Minimum Cost Value - Each new CFD position opened needs to have a minimum cost value of R25 000 –R3 750 (15%) initial margin on a Top 40 shares –R4375 (17.5%) initial margin for Top 41-100 shares. Brokerage – Commission is 0.4% (excluding VAT). –Open to negotiate brokerage rates for active traders. Interest – Interest is charged on the total value of the open position at SAFEX +2%. –This is usually equal to around Prime -2%. Scrip Lending Fee –A fee of 1.5% per annum is charged for short positions –Charged per day on open positions –Minimum of R250 per position. Financing at competitive rates (CFD) –Current borrowing rate 7.00% (± Prime –2%) Trading Costs

39. CFD versus Equities (Costs) CFD Trade Equity Trade Details Instrument Exposure Brokerage Cost STT & STRATE Price (Cents) % of Exposure Total Costs 14% VAT 500 ABC shares 6000c 6000c R30 000 None R120.00 R85.92 R37.45 R16.80 R136.80R390.87 0.46%1.30% R267.50 Presenter: Shaun van den Berg

40. Regulated by JSE/FSB Exchanged traded product Expiry Date= Rollover costs Set principle amount Interest agreed upfront Wholesale interest rates Best execution Free markets Transparent Guaranteed by SAFCOM No dividend paid/received Can take physical delivery Comparison between SSFs &CFDs SSFCFD Unregulated Trades OTC No Expiry Date Principle amount could change Interest fluctuates daily Retail interest rates No best execution obligation Captive markets Opaque Not guaranteed by SAFCOM Manufactured dividends Never physical delivered Source: www.jse.co.zawww.jse.co.za Presenter: Shaun van den Berg

41. CFD Trading Platform

42. CFD Available

43. New Order (Margin) Step 1: Click New Order Step 2: Enter Code & Go

44. New Order Step 4: Select Side Step 5: Enter Quantity Step 6: Enter Price in cents Step 3: Select Order Step 7: ClickSubmit

45. Buy 300 AVI shares @ 5529c Exposure = R16 587.00 Initial Margin Required = –17.5% x R 16 587 = R2 902.72 Gearing = 5.71 times –R16 587 / R2 902.72 Brokerage = R16 587 x 0.4% = R66.34 –Equity trade = 0.9% = R149.28 (Minimum R98) 14% VAT = R9.28 = Total R75.62 Interest on Cost: SAFEX rate 4.73% +2% = 6.73% –R16 587 x 6.73% = R1116.30 /365= R3.05 per day Interest on Initial Margin: SAFEX 4.73%-2% = 2.73% –R2902.72 x 2.73% p.a. = R79.24 / 365 = 0.21 cents per day. Trading CFD

46. Price Watch & Stop Order Step 1: Click New Order Step 2: Select Price Watch Step 3: Above or Below Step 4: Enter Price Step 5: SelectClose Step 6: Enter Contracts Step 7: Enter Price Step 8: ClickSubmit

47. Note: CFD Price Watch & Stop Order The Price Watch AND the Stop Order have to be used together to execute a trade. –Otherwise, a Price Alert just sends an email or SMS to you. The order will reflect in your order book (on the web) but only enter the trading order book (JSE) when the trigger price is reached. Presenter: Shaun van den Berg

48. Capital Efficient –No fixed quantities (R25 000) Low trading costs No expiry date –No rollover costs –Save the annual 1% expense –Ideal for the Position Trader. Hedge your current portfolio? All the benefits –Capital growth & Dividend income Trading Platform –After hours –Stops Pro’s & Con’s of Trading CFDs AdvantagesDisadvantages High minimum trade values Scrip lending fees Gearing & Risk No voting rights Presenter: Shaun van den Berg

49. Review the PowerPoint presentation Read info available on PSG Online website Geared positions - Capital Efficient / More affordable Open SSF & CFD account (R1-Million) Getting Started: Trading Equity Derivatives –Do your homework (Product knowledge) –Paper trade –Start small – Gain confidence Remember: Risk & Money management –Control emotions… Summary & Conclusion Presenter: Shaun van den Berg

50. Finally …. Source: http://business-fundas.com/2010/how-do-stock-markets-work/http://business-fundas.com/2010/how-do-stock-markets-work/

51. Thank You shaunvdb@psg.co.za (011) 996 5254 Contact Us