Exchange Traded Agricultural Derivatives to... · Exchange Traded Agricultural Derivatives in South...

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Exchange Traded Agricultural Derivatives JOHANNESBURG STOCK EXCHANGE SAFEX Commodity Derivatives

Transcript of Exchange Traded Agricultural Derivatives to... · Exchange Traded Agricultural Derivatives in South...

Page 1: Exchange Traded Agricultural Derivatives to... · Exchange Traded Agricultural Derivatives in South Africa The growth in the market has resulted from an increased number of participants,

Exchange Traded Agricultural Derivatives

JOHANNESBURG STOCK EXCHANGESAFEX Commodity Derivatives

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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

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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

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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

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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.

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Notes

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Disclaimer: This document is intended to provide general information regarding the JSE Limited and its affiliates and subsidiaries (“JSE”) and its products and services, and is not intended to, nor does it, constitute investment or other professional advice. It is prudent to consult professional advisers before making any investment decision or taking any action which might affect your personal finances or business. All information as set out in this document is provided for information purposes only and no responsibility or liability of any kind or nature, howsoever arising (including in negligence), will be accepted by the JSE, its officers, employees and agents for any errors contained in, or for any loss arising from use of, or reliance on this document. All rights, including copyright, in this document shall vest in the JSE. “JSE” is a trade mark of the JSE. No part of this document may be reproduced or amended without the prior written consent of the JSE.

Compiled: November 2011.