safex introduction to commodity futures
TRANSCRIPT
Exchange Traded Agricultural Derivatives
JOHANNESBURG STOCK EXCHANGESAFEX Commodity Derivatives
Exchange Traded Agricultural Derivatives in South Africa
The growth in the market has resulted from an
increased number of participants, greater under-
standing of the market and the development of a
broader base of marketing strategies based on the
derivative products.
In 2010, the division reinvented itself by introducing
other commodity products and so rebranded to
become the Safex Commodity Derivatives Division.
Agricultural derivatives play an active role in price
determination and transparency in the local
agricultural market whilst providing an efficient price
risk management facility.
Producers and users of agricultural commodities
hedge their price risk, thereby limiting their exposure to
adverse price movements. This encourages increased
productivity in the agricultural sector as farmers and
users are able to concentrate their efforts on managing
production risks. These are the risks associated with
variables such as the weather, farm/production
management and seasonal conditions.
The futures market exists solely for the purpose of
allowing commercial users to hedge their transactions
or lock in favourable prices. Yet, the market could not
operate efficiently and effectively without speculators,
as they provide the necessary market liquidity which
allows commercial users to hedge. Speculators use
futures and options in an attempt to make profits on
short-term price movements.
Financial institutions lending to these sectors are also
ensured of reduced risk profiles when dealing with
clients who have hedged a portion of their price risk.
Such clients could typically access funds at cheaper
rates than would otherwise have been offered.
The agricultural derivatives market has developed to
such an extent that the cash market now largely relies
on its price transparency and discovery process to
function properly. Prices generated on the derivatives
market are now considered the industry standard and
reference point throughout Southern Africa.
What is the role of Agricultural Derivatives?
Introduction
Agricultural markets across the world have moved away
from government price intervention towards economic
based markets. This has been mainly due to the
pressure of a globalising world economy as well as
failure of costly agricultural subsidy regimes and state
controlled agricultural marketing boards. It is now
common for smaller commodity markets to form
exchanges, either cash or futures, which are playing an
integral role in facilitating marketing and ensuring price
transparency. Bulgaria, Poland, Romania and Hungary
are examples of countries experiencing the same
dynamic growth in their commodity markets as South
Africa. The demise of agricultural marketing control
boards in South Africa during the early 1990's and
extensive liberalisation was the background that
stimulated the formation of Safex's Agricultural Markets
Division to trade agricultural derivatives.
Development of Agricultural Markets Division (AMD)
of Safex
The Division Rebrands
The Agricultural Markets Division (AMD) was
established in January 1995 as a division of the South
African Futures Exchange (Safex). AMD quickly
established itself as the agricultural market leader with
respect to price transparency especially in the maize
market in Southern Africa.
Since deregulation the maize market has been exposed
to numerous market conditions affecting demand and
supply including changing weather patterns, currency
fluctuations and regional food shortages.
During the first half of 2001, members of Safex accepted
a buyout by the JSE Securities Exchange to become a
separate division within the JSE. As from August 2001,
the Agricultural Markets Division of Safex became the
Agricultural Products Division of the JSE Securities
Exchange South Africa and moved from its original
premises in Houghton to the JSE building in Sandton.
Currently, white maize is the most liquid contract
followed by wheat, yellow maize, sunflower seeds and
soya beans.
Please Note: Bold text in italicsrefers to Glossary of Terms
www.jse.co.za
Why Trade Agricultural Derivatives on an
Exchange?
How are Agricultural Derivatives traded?
1. Regulation
2. Margins
3.Financial Integrity
4. Transparency
– Safex Commodity Derivatives is a
division of the JSE managed by the JSE and
regulated by the Financial Services Board (FSB)
which oversees the exchange's reporting with
regards to the Security Services Act of 2004 (SSA)
which replaced the Financial Markets Control Act of
1989 and the Stock Exchange Control Act of 1985.
– When trading derivative products, the
exchange requires the payment of both initial
margins and variation margins. The initial
margins are determined by the clearing house and
vary depending on historical price volatility. The
variation margin is a daily flow of funds
(profits/losses) resulting from any open position
calculated through a methodology of Mark-to-
Market (M-t-M).
– When dealing with the
exchange the exchange's clearing house becomes
seller to every buyer and buyer to every seller.
Members are free to deal with each other without
any credit risk. This eliminates counter party risk
which is prevalent in the Over the counter markets
(OTC).
– Pricing is determined purely on the
basis of demand and supply. Prices for each
contract are negotiated between buyers and sellers
via an electronic order matching platform called
NUTRON. The presence of numerous buyers and
sellers ensures that prices are always competitive
and adjust efficiently to reflect changes in the
underlying market.
Registered agricultural derivative brokers input orders
into the system from remote locations (during trading
hours (09h00 – 12h00) which are automatically
matched on the basis of time and price priority. The
exchange guarantees performance by counterparties
in a futures contract.
Agricultural derivative prices are quoted at their Rand
value per ton, delivered on truck alongside silo basis
Randfontein. One futures contract comprises 100 tons
for white and yellow maize and 50 tons for wheat and
sunflower seeds. Soybean contracts are quoted at
their Rand value per ton, and comprise 25 tons per
contract. The soybean contract trades at the same
basis price in a number of registered silos with no
location differentials.
Daily price limits, limiting the daily movement of prices,
add security to the market. If the limit is reached on two
like contracts on two consecutive days the price limits
are increased to 150% of the original limit and the
extended limits will remain in place until the daily
movement on all like contracts is less then the original
limits. Extended price limits also result in increased
initial margin requirements for those periods when the
extended limits apply.
Futures are quoted on the trading system as: Month
of expiry, year of expiry, four letter code of commodity
JUL10 WMAZ – White maize contract
DEC10 YMAZ – Yellow maize contract
SEP10 WEAT – Wheat contract
MAR10 SUNS – Sunflower seeds contract
MAY10 SOYA – Soybean contract
The Mark-to-Market (m-t-m) for the day, also referred
to as the settlement price, is determined at random any
time in the last 5 minutes of trading at the discretion of
the exchange.
If the bid is better than the last traded price the bid will
be used as the m-t-m price. (In simple terms this can be
interpreted as buyers in the market prepared to pay
more than the last traded price).
Should the offer be lower than the last traded price then
the offer will be used as the m-t-m. (This means that
there are sellers in the market who are prepared to sell
lower than the last traded price).
A volume weighted average price (VWAP) is used to
calculate the m-t-m for all liquid contracts. A liquid
contract is defined as any expiry that trades 100 or
more contracts in the last half hour of trading. The
closing option volatility is calculated using the
methodology on page 3.
Mark to Market (M-t-M) calculation of futures
and options
2
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The exchange reserves the right to make the final
decision regarding the m-t-m volatility and may
exercise its discretion as need be.
This implied volatility is then used to value all option
positions.
What is Physical Delivery?
All products traded on the agricultural derivatives
market can be physically delivered at expiry in
fulfillment of a futures contract. This does not mean
that 100 tons of maize is delivered by truck to the
exchange to complete the delivery process. The
exchange makes use of a silo receipt, a transferable
but not negotiable document, representing a specific
quantity of stock in a registered Safex silo to effect
delivery. Paper and electronic silo receipts issued by
registered silo owners is accepted by the exchange.
The silo owner storing the product guarantees the
quality of stock as per detailed grading methodology
specified by the National Department of Agriculture
and to outload the specific product upon presentation
of the silo receipt.
Delivery can take place any business day on a
particular delivery month. (A futures position in the July
contract can only be delivered on during July). Physical
delivery takes place over a two-business day period,
the notice day followed by the delivery day (the next
business day).
Delivery can take place at any Safex approved silo and
each delivery point is subject to a location differential
(based on transport costs). Location differentials are
determined by the exchange and are available on the
Safex website, www.safex.co.za/commodities.
Notice day
The short position holder (seller of the commodity)
notifies his broker about his intention to give notice of
delivery to close-out a futures position. Notice must be
given before 12h45 on any business day during the
delivery month. The last notice day being the second
last business day of the delivery month.
Settlement Procedures of Agricultural
Derivatives
The following methodology is used when
determining the mtm volatility:
Options traded over the last hour of the trading
session will be considered for the mtm process.
Three strike prices (50 points) either side of the
option at the money will be considered eg if at
the money strike is 600, then 560, 580 and 620, 640
strikes will be considered in the process.
If 60 or more contracts have traded for the entire day,
the contract will be considered liquid.
The opposite applies to illiquid contracts, if less than
60 contracts have traded for the entire day then the
contract is classified illiquid.
If classified as liquid, then a volume weighted
average of 40 or more contracts will be required in the
last hour of trade as the mtm volatility, if this quantity
does not trade then the volatility will remain
unchanged.
If classified as illiquid, then a volume weighted
average of 20 or more contracts will be required in the
last hour of trade for the m-t-m volatility, if this
quantity does not trade then the volatility will remain
unchanged.
As an exception, where the future contracts trade
limit up or down for most of the option mtm period,
only options traded on the delta option window will be
considered for mtm volatility purposes.
No options traded on price through the naked option
window will be considered.
If the number of delta options traded do not meet the
liquid or illiquid criteria as described above, the bids
and offers on the delta window will be considered as a
last resort and at the exchanges discretion.
The exchange reserves the right to make the final
decision regarding the mtm volatility and may
exercise its discretion as need be.
As an exception, where the future contracts trade
limit up or down for most of the option m-t-m period,
only options traded on the delta option window will be
considered for m-t-m volatility purposes.
No options traded on price through the naked option
window will be considered.
If the number of delta options traded do not meet the
liquid or illiquid criteria as described above, the bids
and offers on the delta window will be considered as a
last resort and at the exchanges discretion.
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For example a short position holder could give notice
on the September futures contract on the 31 August for
delivery on the 1 September or his last notice day
would be the 29 September for delivery on the 30
September. (For all delivery dates see Agricultural
Markets – Contract specifications on the web page).
The deliveries are randomly allocated by computer
programme to existing long position holders. A long
position holder allocated stock will be notified through
the clearing member of the allocation (the detailed
allocation algorithm is available on the web page under
the physical delivery subsection).
Any long position holder (buyer of the commodity)
could be allocated product at any time during the
delivery month with one day's notice but is assured that
he will receive such stock by the last day of the delivery
month. Buyers are guaranteed that it will be at a
registered silo and free along side rail.
The best case scenario is being allocated maize in a
silo convenient to the buyer however the worse case
scenario is Randfontein. Therefore the location
differential will always ensure that the basis
Randfontein price is traded.
The closing price (Mark-to-Market) on the notice day is
the price at which contracts are closed. The location
differentials and any outstanding storage is deducted
from the amount payable by a long position holder (in
the case of wheat a grade discount is also applicable).
The exchange does not take any prepaid storage into
account and the seller forfeits any storage costs that
have been prepaid. Long position holders are charged
a standard daily storage rate fixed for each marketing
season and are responsible for storage from the
delivery day onwards.
Silo receipts have to be delivered to a broker who will in
turn ensure that they reach the exchange no later than
12h45 on the notice day. The receipt will then be used
to confirm the notice of delivery via the trading system.
The trading system has being enhanced and is used to
facilitate the entire delivery process onto the
exchange.
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Delivery day
Payments for products take place by 12h00 on the
delivery day. Long position holders are able to collect
silo receipts from the exchange from 14h00 onwards.
Positions can still be opened or closed during the
delivery month until the last trading day. The last
trading day is the eighth last business day of each
delivery month.
Once the contract has closed for trading any position
still open will have to be honored by payment or
delivery (short position holders have until the last
business day of the delivery month to make delivery).
Margin Requirements during the Delivery Month
Margin requirements used as a guarantee by the
exchange change during the delivery month. Current
margin requirements can be obtained from the
exchange.
On the first position day the daily price limits are
removed to allow the alignment of the futures value to
the value of the underlying product and initial margin is
increased to cover the increased risk. After the last
trading day initial margin is increased again.
In the same way, all long position holders have to take
delivery once they are assigned. All futures positions
are converted to “physical” positions which are not
“Marked-to-Market” on a daily basis.
Since the risk increases, the initial margin requirement
is increased accordingly in the same fashion as the
short position holder.
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How can you use Futures to Hedge Risk?
The Short (Selling) Hedge
Used by producers concerned that a downturn in the
spot market price will occur during the growing season,
resulting in a lower price for their produce than the
present level in the market. To hedge half of an
expected 2000 tons of maize, a producer would sell 10
futures contracts (1000 tons divided by contract size of
100 tons).
If the spot market had increased by R100/ton, rather
than decreased, a loss would have been incurred on
the futures transaction while the producer would
receive a higher price on the spot transaction.
While it is important to hedge, most producers only buy
a partial hedge by means of futures contracts so that
they have some exposure to possible favourable price
movements but have reasonable protection from
unfavourable changes in the market.
How is Risk Managed?
Delivery and settlement on any exchange traded
derivative contract is always one hundred percent
guaranteed. This is done through the novation process
whereby the clearing house assumes the position of
buyer to every seller and seller to every buyer. The
counter parties do not deal with each other directly as
the exchange matches all long and short positions.
To manage default risk, the exchange uses its three-tier
system, initial margin requirements as well as the daily
M-t-M process. Should a client default on a contract, his
broker assumes these positions. The broker could then
close them off and use the initial margin deposit held to
cover his losses. In the event that the broker is unable to
assume the client's positions, his clearing member
would stand in for him.
Currently the clearing members consists of South
Africa's largest financial institutions. This tier system
ensures that the client on the other side is always
guaranteed fulfillment of his position.
Physical Market Futures Market
November Producer is concerned that Maize will be sold in July Producer sells July Maize futures at prevailing at a low price. futures price of R1900/ton.
July (following year) Maize price falls. If the producers sells maize in the July Maize futures fall to R1700/ton in line with market he will realise R1700/ton. the spot market. The producer buys back the
future at R1700/ton, resulting in a R200/ton gainfrom the futures market.
Results The producer receives the discounted spot price The R200/ton gain only applies to the hedged (R1700/ton) for the whole crop. portion (1000 tons). The producer effectively
receives R1900/ton – the price at which thehedge was made (R1700/ton plus R200/tonfutures gain) for the 1000 tons hedged.
The Long (Buying) Hedge
This would be an appropriate strategy for a user of maize (e.g. miller). In August a miller decides to take advantage of
a historically low maize price by hedging his planned November purchases.
Physical Market Futures Market
August Miller needs to purchase Maize in November and Miller buys November Maize futures contract atwishes to be protected against rising prices. R600/ton.
November Maize price has risen by R100/ton. The miller buys November futures have risen in line with the spotmaize at R700/ton resulting in a R100 notional loss. market to R700/ton. The miller sells back the
futures contracts at the higher price.
Results The miller pays R700/ton for the physical stock in The R100/ton gain from the sale of the futuresNovember due to the price increase. position offsets the increased price of the
physical product and the miller effectively paysR600/t for the maize.
Please Note: All examples used are only meant to help you understand the fundamentals of futures and options trading. They are not meant as investment advice, and as you can see, there is risk of loss. Also, commissions and fees were left out for simplicity's sake. Furthermore, the option prices quoted in the above examples may or may not be executable at the levels cited depending on market conditions prevailing at the specific time of execution.
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he purchased and there is a possibility that the price
may decrease in the future. When an option is
exercised, both the buyer and seller are assigned
opposite futures positions on a random basis.
Expiration: If the option is out-the-money the option
holder could let it expire worthless by simply doing
nothing.
Example: Buy 100 July 800 WM1 calls for 15 R/ton
(R1500 per contract or R150,000 total).
The seller of the July 800 call is obliged to sell July
White Maize futures at 800 R/ton at any time during the
life of the option no matter how high the price is actually
trading in the futures market. In return for this obligation
the seller of the option will receive a premium which he
keeps no matter what happens in the underlying
futures market.
One way that a producer can protect against an
adverse price movement is to purchase a put option.
A put option gives the option buyer the right, but not the
obligation to sell the underlying commodity at a fixed
price for a fixed period of time.
The price for this flexibility is the premium paid by the
put option buyer and received by the seller over the
course of the Mark-to-Market process. This premium
depends on market conditions such as market
volatility, time to option expiration, market direction and
the supply and demand for options in general.
Regardless of market fluctuations, the maximum loss
an option buyer can sustain is the premium paid for the
put option. Because of this limited and known risk,
buyers of options are never faced with additional
margin calls.
As discussed previously there are three ways to exit an
option position; offset, exercise and option expiration.
Example: Buy 100 July 760 WM1 put options for 40
R/ton (R4000 per contract or R400,000 total). This
gives the put option buyer the right, but not the
obligation, to sell 100 July WM1 futures contracts at
R760/ton until June 24, 1998. The cost for this is 40
R/ton.
Buying a Put Option
Basic Option Strategies
Buying a Call Option
One way that a user of a traded product can obtain
protection against adverse commodity price exposure
via the options market is to buy a call option. In our
example we will look at the purchase of a July White
Maize 800 call option.
In effect, a call option gives the buyer of the option the
right, but not the obligation, to buy the underlying
commodity at a pre-determined price, called the strike
price, for a fixed period of time. The cost of this right or
benefit is the premium, which is paid by the option
buyer to the option seller (writer). The premium is paid
and received over the life of the option through the daily
process of M-t-M discussed previously. This premium,
which is determined by the market on the ATS depends
on market conditions such as volatility of the market,
time to expiration, market direction, and the supply and
demand for options in general.
The cost of an option to the option buyer is limited to the
premium paid for the option. The option seller is
margined by the exchange to ensure that in the event of
the option being exercised, the option seller will indeed
be in a position to meet the obligations of the option and
sell the product to the option buyer at the strike price.
The APD trades American style options that can be
exercised at any time. Options that expire “in-the-
money” are automatically exercised by the exchange.
Options that expire “at-the-money” (where the closing
futures price is exactly at the level of the strike price) will
not be exercised by the exchange. Options that expire
“out-the-money”, in other words, which have no value,
will expire worthless.
There are three ways to exit an option position:
Offset: This is done by selling back the option that you
previously bought on the exchange. This may or may
not result in a profit, depending on the level of premium
paid for the option as against the level of premium for
which the option is sold.
Exercise: An option buyer decides whether to exercise
an option or hold it to maturity. He might find it optimal to
exercise the option before expiry if the futures market is
trading higher than the strike price of the call option that
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Maize Futures (White & Yellow Maize) Contract Specifications
Code WMAZ/YMAZ
Underlying commodity Maize” means white/yellow maize from any origin, of the grade “WM1” (“YM1”) as defined in the South
African Grading regulations, that meets all phyto-sanitary requirements and import regulations, but is not
subject to the containment conditions for the importation of genetically modified organisms.
Trading hours 09h00 –12h00
Contract size 100 Metric Tons
Contract months March, May, July, September, December
All other calendar months are introduced 20 business days preceding the new month. Once the month is
introduced it is traded in the same fashion as the 5 hedging months.
Expiration date and time 12h00 on the eighth last business day of the listed expiry month. Physical deliveries from the first business
day to the last business day of expiry month.
Settlement method Physical delivery of Safex silo receipts giving title to maize in bulk storage at approved silos at an agreed
storage rate.
Quotations Rands/ton
Minimum price movements Twenty cents per ton
Initial margin WM1 – R10 000/contract up to first notice day.
At extended price limits, requirements increased to R15 000/contract
R15 000/contract up to expiry day.
R30 000/contract up to last delivery day.
R3 000/contract for calendar spreads.
R3 500/contract for white / yellow / corn spreads.
YM1 – R10 000/contract up to first notice day.
At extended price limits, requirements increased to R15 000/contract
R15 000/contract up to expiry day.
R30 000/contract up to last delivery day.
R3 000/contract for calendar spreads.
R3 500/contract for yellow / white / corn spreads.
Expiry valuation method Closing futures price as determined by the clearing house.
Booking fees charges Futures: R12.00/contract (incl VAT).
Options: R6.00/contract (incl VAT).
Physical delivery: R200.00/contract (incl VAT).
Maximum daily price R80/ton (R120/ton at extended limits)
movement
Maximum position limits Position limits apply to White Maize as per Derivative Directives.
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Wheat Futures Contract Specifications
Code WEAT
Underlying commodity Bread milling wheat originating in South Africa, Argentina, USA Hard Red Spring (DNS & NSW), USA Hard
Red Winter, no 3 or better Canadian Red Western Spring wheat, Australian Hard wheat, Australian Prime
Hard, Australian Prime White, Australian Standard White wheat and German Type A or B wheat of sound, fair
and merchantable quality which is fit for human consumption and which complies with the listed criteria and
the requirements and methodology as contained in the SOUTH AFRICAN RULES FOF THE CLASSIFICATION
AND GRADING OF WHEAT. Discounts will apply to grades B2 and B3 with a varying origin discount defined
on an annual basis, for any foreign wheat from the above origins.
Trading hours 09h00 –12h00
Contract size 50 metric tons
Expiration date & time 12h00 on the eighth last business day of listed expiry month. Physical deliveries from the first business day
to the last business day of expiry month.
All other calendar months are introduced 20 business days preceding the new month. Once the month is
introduced it is traded in the same fashion as the 5 hedging months.
Settlement Method Physical delivery of Safex silo receipts giving title to wheat in bulk storage at approved silos at an agreed
storage rate.
Quotations Rands/ton
Minimum price movements Twenty cents per ton
Initial Margin R6 000/contract up to the first notice day.
At extended price limits, requirements increased to R9 000/contract
R9 000/contract up to the last expiry day.
R18 000/contract up to the last delivery day.
R2 000/contract for calendar spreads.
Expiry valuation method Closing futures price as determined by the Clearing House.
Booking fees charges Futures: R6.00/contract (incl VAT).
Options: R3.00/contract (incl VAT).
Physical delivery: R100.00/contract (incl VAT).
Maximum daily price R100/ton (extended limits = R150/ton)
movement
Origin discount The following origins acceptable for delivery at a ZERO origin discount:USA Hard Red Spring (Dark Northern Spring and Northern Spring wheat), No 3 or better Canadian RedWestern Spring wheat, Australian Hard, Australian Prime Hard, Australian Prime White and AustralianStandard White wheat, and Wheat from the following origins acceptable for delivery at a R100 per tondiscount :Argentina, USA Hard Red Winter wheat and German Type A or B wheat
Sunflower Seeds Futures Contract Specifications
Code SUNS
Underlying commodity FH South African Origin high oil content Sunflower seeds meeting specified criteria.
Trading hours 09h00 – 12h00
Contract size 50 Metric Tons
Expiration date and time 12h00 on the eighth last business day of listed expiry month. Physical deliveries from the first business
day to the last day of expiry month.
All other calendar months are introduced 20 business days preceding the new month. Once the month is
introduced it is traded in the same fashion as the 5 hedging months.
Settlement method Physical delivery of Safex silo receipts giving title to sunflower seed in bulk storage at approved silos at an
agreed storage rate.
Quotations Rands/ton
Minimum price movements One Rand per ton.
Initial margin R9 500/contract up to the first notice day
At extended price limits, requirements increased to R12 500/contract
R12 500/contract up to expiry day.
R25 000/contract up to the last delivery day.
R2 850/contract for calendar spreads.
Expiry valuation method Closing futures price as determined by the Clearing House.
Booking fees charges Futures: R6.00/contract (incl VAT).
Options: R3.00/contract (incl VAT).
Physical delivery: R100.00/contract (incl VAT)
Maximum daily price R90/ton. (extended limits = R135/ton)
movement
Maximum position limits 1700 contracts within 10 days of the 1st delivery day of the month except during the harvest period from
March to May where the maximum limit allowed for will be 2500 contracts for all position holders.
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Soybean Futures Contract Specifications
Code SOYA
Underlying commodity Soybeans of Class SB as defined in the South African grading regulations of the Agricultural Products
Standards Act of 1990. Soybeans of any origin will be deliverable as long as the product conforms to the
above SB grade.
Trading hours 09h00 – 12h00
Contract size 25 metric tons
Expiration date & time 12h00 on the eight last business day of the listed expiry month. Physical deliveries from first business day
to last business day of expiry month.
Settlement method Physical delivery of Safex silo receipts giving title to soybeans in bulk storage at approved silos at an agreed
storage rate.
Quotations Rand/ton
Minimum price Twenty cents per ton
movement
Initial margin R3750/contract up to first notice day.
At extended price limits, requirements increased to R5 000/contract
R5000/contract up to expiry day.
R10 000/contract up to last delivery day.
R1 200/contract for calendar spreads.
Expiry valuation method Closing futures price as determined by the Clearing House.
Booking fees charges Futures: R3.00/contract (incl VAT).
Options: R1.50/contract (incl VAT).
Physical delivery: R50.00/contract (incl VAT)
Maximum position limits 1600 contracts within 10 days of the 1st delivery day of the month except during the harvest period from
March to May where the maximum limit allowed for will be 2400 contracts for all position holders.
SAFEX Options available American style option contracts are available on all the above futures contracts for trading months March,
May, July, September and December.
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Glossary of terms
Arbitrage – Trading strategies designed to profit from
price differences for the same or similar goods in
different markets.
Ask price (see Offer price)
At-the-money – An option is at-the-money if the
strike price of the option is equal to the market price
of the underlying asset.
Bid price – The quoted price at which a particular
market dealer is willing to buy.
Call Option – An option contract that gives the
holder the right, but not the obligation, to buy the
underlying asset at a specified price (strike price) for
a certain fixed period of time. The seller of a call
option is obliged to deliver the underlying asset at the
strike price.
Clearing – The settlement of a transaction, often
involving exchange of payments and/or
documentation.
Clearing House – An organisation, legally separate
from the Exchange, which clears transactions and
guarantees all trades (see “novation”).
Delta – A measure of how much an option premium
changes given a unit change in the price of the
underlying.
Derivative – A financial security whose value
is determined, in part, from the value and
characteristics of an underlying asset e.g. futures,
options (both exchange traded and OTC).
Exercise – Implementation of the right under which
the holder of an option is entitled to buy (in the case
of a call) or sell (in the case of a put) the underlying
asset.
Exercise price (see Strike price)
Expiry, expiration date, maturity date – Date and
time upon which an option or future, and the right to
exercise them, ceases to exist. Most commonly used
to describe when the buyer / holder of an option
ceases to have any rights under the contract, or
when a futures contract month ceases trading.
Hedge – A conservative strategy used to limit price
losses by effecting a transaction that protects an
existing position. Dealing in such a manner as to
reduce risk by taking a position that offsets an
existing or anticipated exposure to a change in
market prices.
In-the-money – A call option is in-the-money if the
strike price is less than the market price of the
underlying asset.
A put option is in-the-money if the strike price is
greater than the market price of the underlying asset.
Initial margin – A good faith deposit which both
buyer and seller must lodge with the clearinghouse
as security.
Intrinsic value – The amount by which an option is
in-the-money (see above definition).
Location Differential – This is the indicative cost of
transporting stock from any “Safex” registered silo to
Randfontein. The traded price is always referred to
as a Randfontein price while the price the buyer pays
will be reduced by the cost differential to Randfontein
of the silo he was allocated.
Long position – An investor has a long position
when contracts are purchased.
Margin (or Variation Margin) – The cash payment
that is required to maintain an initial margin position.
This is determined daily by the Exchange via a
process of Mark-to-Market.
Margin requirement (for options) – The amount an
uncovered option writer (seller) is required to deposit
and maintain to cover a position. The margin
requirement is calculated daily.
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Mark-to-Market (M-t-M) – The revaluation of a
futures or options position at its current market
price. All positions are marked-to-market by the
clearinghouse, once a day. The profit/loss that is
revealed by the re-valuation is received by or paid to
the clearinghouse (known as variation margin).
Novation – The guaranteeing responsibility of a
clearing house upon successful matching of a trade.
The clearinghouse is substituted as the seller to
every buyer and buyer to every seller on a principal
to principal basis.
Offer price (or Ask price) – The quoted price at
which a particular market trader is willing to sell.
Out-of-the-money – A call option is out-of-the-
money if the strike price is greater than the market
price of the underlying asset.
A put option is out-of-the-money if the strike price is
less than the market price of the underlying asset.
Over the counter (OTC) – Term used to describe
trading in financial instruments off organised
exchanges with the risk that performance by the
counter parties is not guaranteed by an exchange.
Physical (spot/cash) market – The current market
in the underlying asset for immediate delivery.
Premium – The fair value of an option contract,
determined in the competitive marketplace, which
the buyer of the option pays to the option writer for
the rights conveyed by the option contract.
Put option – An option contract that gives the holder
the right, but not the obligation, to sell the underlying
asset at a specified price for a certain fixed period of
time. The seller of a put option is obliged to take
delivery of the underlying security at the put strike
price.
Physical delivery – Safex makes use of a Safex silo
receipt for physical delivery in completion of a futures
contract. The silo receipt represents the specific
quantity of stock in a registered Safex silo. The silo
owner who stores the product guarantees the quality
and quantity of the stock.
Risk management – The science of assessing and
controlling risks with the aim of keeping them within
acceptable bounds.
Short position – Selling a derivative when one does
not own the physical security but intends supplying
the physical security upon expiry of the contract.
Silo receipt – A transferable, but not negotiable
document that represents title to a specific quantity,
of a specified quality free alongside rail at a
registered Safex silo.
Spot market (See physical market )
Strike price – The agreed price per share for which
the underlying security may be purchased (in the
case of a call) or sold (in the case of a put) by the
option holder upon exercise of the option contract.
Tick – The smallest change in price movement of a
contract permitted by the Exchange. (See contract
specifications for each contracts tick).
Time value – The portion of the option premium that
is attributable to the amount of time remaining until
the expiration of the option contract. Time value is
whatever value the option is worth in addition to its
intrinsic value.
Type – The classification of an option contract as
either a put or a call.
Underlying asset – The physical asset upon which
a derivative contract is based (see also Physical).
Variation Margin (See marking-to-market)
Volatility – A measure of the fluctuation in the
market price of the underlying security. Mathematic-
ally, volatility is the annualised standard deviation of
returns.
Writer – The seller of an option contract.
Notes
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Compiled: November 2011.