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BAF3009 Financial Institutions & Markets

TUTORIAL 9: Question 1

SINGAPORE EXCHANGE – DERIVATIVES TRADING & SICOM

(a) Explain the meaning of one tick on a SGX-DT futures contract. One tick is the minimum price fluctuation allowed for each type of SGX-DT contract (with exception of some where they are allowed changes of ½ or ¼ ticks) (b) Calculate the value of one tick for each of the following type of contract: (1) SGX 3-month Euroyen Libor Futures Contract Size ¥100,000,000 per contract Price Quoted 99.385 (e.g.) One Tick 0.01% ½ Tick (Minimum) 0.005%

0.01/100 x ¥100,000,000 x 90/360 = ¥2,500 Minimum fluctuation is ½ tick = ¥2,500 x 0.5 = ¥1,250 (2) SGX Nikkei 225 Index Futures Contract Size ¥500 x Nikkei 225 stock index futures price Price Quoted 15,745 (e.g.) One Tick 5 index points

5 points x ¥500 = ¥2,500 (3) SGX MSCI Singapore Index (SGX SiMSCI) Futures Contract Size S$200 x SGX MSCI Singapore index futures price Price Quoted 263.2 (e.g.) One Tick 0.1 index point

0.1 point x $200 = S$20 (c) Based on the value of one tick computed in (a), determine the profit or loss (realised or unrealised) on the following contracts: (1) Buy 5 Euroyen - 3-month deposit contracts at 98.50 and square off at 98.86 Gain (98.86 – 98.50) = 36 ticks 36 x ¥2500 x 5 = ¥450000 (2) Long on 10 Nikkei 225 contracts at 20,350 and mark-to-market at 20,365 Gain 15 Indices (20365 – 20350) Looking at the first question, 5 index point = 1 tick, therefore: 3 x ¥2500 x 10 = ¥75000 (3) Short on 5 MSCI Singapore stock index contracts at 268.5 and square off at 268.7

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BAF3009 Financial Institutions & Markets

Loss = (268.7 – 268.5) = 0.2 = 2 ticks per contract i.e. 5 x 2ticks x S$20 = S$200 (realized) Question 2 (a) In your own words, explain the “SGX SiMSCI” September contract. SiMSCI is a stock index which represents the price movements of 35 share counters listed in the SGX. September contract means an investor can buy or sell this index in August and must ‘settle’ the contract on the last trading day of September i.e. if he had bought the contract in August, he may choose to sell it anytime before the ‘maturity’ date. On settlement date, he must ‘square’ the position to either pay/ receive the difference. (b) On 24 Aug, Peter longed one SGX SiMSCI Futures contract @ the price of 200.0. The Initial Margin was S$5,000 and the Maintenance Margin was S$4,000. (i) Using the mark-to-market system, decide whether there was any margin call from 24 Aug to 31 Aug and the amount to top up. Trade (Buy / Sell) Buy Traded or daily settlement price 200.0 202.4 201.0 195.2 188.8 190.0 185.2 Profit/ Loss Deposit Margin Balanc Call e 5000 24x20 = 5480 N 480 (280) 5200 N (1160) 4040 N (1280) 2760 Y(2240) 240 5240 N (960) 4280 -

Date 24-Aug 24-Aug 25-Aug 26-Aug 27-Aug 28-Aug 31-Aug

Sell

(ii) Calculate the realised profit/loss when the position was square off on 31 Aug @ 185.2. (2960) (c) Explain the justification for requiring only a small fraction of the purchase price (i.e. margin) for futures trading. The margins required should be sufficient to cover possible losses from price movements. Marking-to-market on a daily basis and making margin calls, when necessary limits the possibility of losses exceeding the margins placed on deposit. Moreover, in most cases, there is a counterparty willing to trade the contract, and this allows losses to be limited to a level in line with the margin deposited.
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BAF3009 Financial Institutions & Markets

(d) Discuss the advantages of trading in this index as compared to trading in the shares in the stock market. A flat fee per contract for a round trip (i.e. transaction costs are not proportional to the contract value unlike for shares trading where commission is based on the contract value) The futures contract allows an investor to take a ‘position’ in the 35 shares included in the index instead of having to take a position in the 35 different shares.

Question 3 Refer to article: “Jim Rogers sees S’pore as commodity hub” – Business Times dated 12 April 2008 A renowned commodities investor, Jim Rogers values Singapore very highly. What are his rationale for such an opinion? Jim’s rationale for such high valuation are based on: • There are no commodities centers in Asia, yet Asia is the main producer and consumer of commodities in the world. • Singapore is an independent country which has a sound currency and an independent regulatory board like the SGX. Singapore is friendly towards international investors and the commodities trade. • It will be unlikely for other Asian locations, such as Hong Kong, Japan, India or China, to emerge as commodities hubs. Hong Kong’s currency is suspect and may disappear. It is tied to the US dollar. China will act in the interests of China, not Hong Kong. - End -

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