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“Grow” your understanding about trading commodity derivatives…..

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What’s up !

Purpose Of The Futures Market

Participants Of The Futures Market

Value added & Risk Of Futures Market

Role Of Hedgers And Speculators

Derivatives Products Traded

Physically settled Products

Physical Settlement Process

Cash Settled Products

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Purpose of the futures market

A trading operation that provides market participants with a price determination mechanism and a price risk management facility through which they can manage their exposure to adverse price movements on the underlying physical market and where performance by both counterparties to the contract is guaranteed

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Who can participate in the futures market

Any individuals, foreign clients and corporate through any JSE registered member

Any individuals, foreign clients and corporate through any JSE registered member

Foreign Clients - participating in the physical delivery of products in the commodities futures market are subject to Value

added tax protocol as set up by the South African Revenue Service.

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VALUE ADDED & RISKS OF FUTURES MARKET

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Price Determination Mechanisms

Management of exposure to adverse price movements

Guarantees performance by counter parties

Small initial margin leads to high exposure and profit potential

Any given transaction can result in a loss

Losses may be greater than initial invested amount

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Role Of Hedgers And Speculators

Hedgers can be described as those market participants who use derivative contracts to manage price risk of a underlying commodity that is present in the physical market

• Typically a farmer producing the grains we trade, a miller who processes the grain, a trader involved in grains market who could export or import the product, banks involved in providing financing to the grain market

Speculators are those market participants who use derivative contracts, not to manage price risk, but with the purpose of benefiting from a directional move in the derivatives market

• Could be farmers who will not harvest the underlying crop as per their derivative position, traders, retail and institutional clients

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Derivatives Products Traded

Futures contracts:

• a standardised contract for a future date that will allow a market participant to hedge their underlying exposure in the physical market

• 100tons, of WM1 grade white maize for JULY 2010 basis Randfontein

Options contracts:

• Put Options provide the buyer the right but not the obligation to sell grain at a specific floor price. Sellers of put options are obligated to buy grain at the floor price

• Call Options provide the buyer the right but not the obligation to buy grain at a specific ceiling price. Sellers of call options are obligated to sell grain at the ceiling price

• Options expire 5 business days before moving into

the delivery month

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Future Contracts

Agricultural Products

White Maize - Standardised contract of WM1 100metric tons

Yellow Maize - Standardised contract of YM1 100metric tons

Wheat - Standardised contracts of B1, B2,B3 50metric tons

Soya Beans - Standadised contracts of class SB* 25metric tons

Sunflower Seed - Standadised contracts of FH South African Origin 50metric tons

Corn - Standadised contracts of the underlying derivatives

contracts as traded on the Chicago Board of Trade

(CBOT)

*as defined in the South African grading regulation of the Agricultural Products Standards Act of 1990

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Agricultural Products

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Sun Flower Seeds–50 tons

Soya beans–25 tons

White and Yellow Maize-100 tons Wheat- 50 tons

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Futures Contracts

Foreign Referenced Commodity Products

Gold - Standardise 10 troy ounce contract referencing the Gold

futures contract traded on NYMEX through its COMEX

division

Platinum - Standardise 10 troy ounce contract referencing the Platinum

futures contracts meeting all specification as listed and

traded on NYMEX, a subsidiary of the CME Group Inc

Crude Oil - Standardise 100US barrels(15898.73 liters) contracts

referencing a light sweet crude oil futures contract meeting all

specifications as listed and traded on NYMEX a subsidiary

of the CME Group Inc

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Physically Settled Products

All the agricultural products traded on the commodities platform are physically settled except for the cash settled Corn Contract

Since there's no transparent and a well regulated cash market physical delivery ensures the futures contracts closing prices reflect the true market conditions

Roughly 2% of all grain contracts traded on the JSE are physically delivered

Derivative market therefore most often used for price risk management

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Physical Settlement process

Is a two day settlement process, the short position holders (seller) give notice on day one for delivery the following business day, long position holders (buyer) are notified of the delivery on day one

• Grain is either randomly allocated to buyers

• Alternatively an exchange for physical (EFP) will allow a buyer and seller to negotiate the actual exchange of silo receipts

Notice day requires JSE receiving a silo receipt representing the product

The long position holder is invoiced by the JSE the same afternoon and is required to make full payment on delivery day

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Physical Settlement process

There is over 18 delivery points for the seller to choose from

The final cash settlement price is discounted for location differentials

Randfontein is used as the reference delivery point• this is done to ensure the buyer is not placed in a worse off position

A SAFEX receipt is a recognisable tradable instruments, it can be retendered on SAFEX a number of times when the futures expiry expires

When a silo receipt is returned to a silo owner for out loading of the physical product, it is finally cancelled

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Reference point

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Cash Settled Commodities

• Corn Contract

• 100 tons,

• with Mar, Jul, Sep and Dec expiries

• Crude Oil trading WTI or light sweet crude

• 100 US barrels per contract,

• with Feb, Jun, Aug and Dec expiries

• Gold

• 10 troy ounce contract,

• with Apr, Jun, Aug and Dec expiries

• Platinum

• 10 troy ounces,

• With Jan, Apr, Jul and Oct expiries

ALL THE ABOVE TRADED IN RANDS

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Final cash settlement price

Referencing NYMEX or COMEX market for FINAL futures price

Rely on a number of iterations from both underlying international market and the currency spot market to eliminate market abuse by dominate participants

Markets that we reference are deep and very liquid

WTI on NYMEX and COMEX Gold are the worlds most liquid derivative contracts

Use the dollar per ounce (or barrel) value X spot R$ exchange rate

For more information about the cash settlement process visit our website on http://www.safex.co.za/ap/ under products

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More Information on: Web address: http://www.jse.co.za/Markets/Commodity-Derivatives-Market.aspx

Email: commodities@jse.co.za

Tel: 011 5207535