JSE launches oil, metal quanto futures

2 August 2012

The Johannesburg Stock Exchange (JSE) has further expanded its foreign-referenced commodities product range with the introduction of quanto futures, which enable investors to gain exposure to price fluctuations in foreign commodities while shielding them from movements in the rand-dollar exchange rate.

The exchange said in a statement last week that it had partnered with Rand Merchant Bank (RMB), as the initial market maker, with Brent crude, gold and copper being the initial commodities to be referenced as part of the JSE’s existing licensing agreement with the CME Group.

Quanto futures opened for trading on the JSE on 25 July.

A quanto future is a rand-denominated commodity investment product that delivers the same payoff as a pure dollar-denominated commodity investment, allowing investors immunity from exchange rate fluctuations between the rand and US dollar.

“Currently, South African investors often don’t receive the full benefit of commodity price movements due to the influence of the exchange rate on the dollar-denominated product,” the JSE said

“It is possible through the use currency futures to remove this influence; however, with the introduction of quanto futures, things are made simpler for the investor since through a single trade the payoff, although still in rand, will track the international commodity market.”

Chris Sturgess, director of the commodities division at the JSE, said the JSE was excited to offer derivative market participants this additional choice of energy and metal products in the form of quanto futures, “yet another innovative product offered by the JSE making it that much simpler for local investors to gain access to the international commodities markets.”

According to the JSE, a quanto product can be understood as follows: if the price of a commodity, say Brent crude, increases by 20% in dollar terms, then the value of the investor’s rand position in Brent crude (via the quanto product) will also increase by 20%. The movement of the rand relative to the dollar plays no part in determining the investor’s return.

Ettienne van Wyk, head of metals and energy Trading at RMB’s Global Markets Division, said the introduction of quanto futures as an asset class on the JSE “represents an invaluable addition to the commodity investors’ arsenal. RMB is proud to have played a pioneering role in bringing this ground-breaking product to the market.”

The JSE, South Africa’s only full-service securities exchange, connects buyers and sellers in four different financial markets, namely equities, equity derivatives, commodities derivatives and interest rate instruments.

Ranked among the top 20 largest equities exchanges in the world in terms of market capitalisation, the JSE offers investors “a first-world trading environment, with world-class technology, surveillance and settlement, in an emerging market context”.

SAinfo reporter