Currency options trading made easy

12 August 2009

Trading in currency options is set to become easier and more accessible with the introduction of South Africa’s first currency options market maker, Absa Capital, which the JSE believes will increase participation in its well-established currency derivatives market.

Though currency options were launched in South Africa in September 2008, options traders had to find their own market maker to execute the trade.

“We anticipate that the introduction of Absa Capital as a new market maker and the on-screen pricing functionality will make trading currency options more attractive to the market,” Yield-X general manager Warren Geers said in a statement this week.

Dollar/rand options

To begin with, market making will be on the dollar/rand currency options, with the minimum size per trade being 10 contracts.

Like currency futures, currency options allow investors to hedge their currency exposure, but differ in that they come with a “built-in insurance policy”, where the investor is able to resign a contract at any point in the contract term.

“The flexibility that options offer investors is especially relevant during volatile financial times,” explained Geers.

Exceeded growth expectations

Despite global economic conditions, the JSE’s Yield-X market has exceeded growth expectations. Year-on-year, for the first six months of 2009, Yield-X has grown 122% in value of trades, and much of this growth can be attributed to currency futures, which have grown by 205%.

The value of trades in currency futures currently stands at more than R88-billion since inception, while the value of trades in currency options currently stands at approximately R1-billion.

“Our participation should bring much needed liquidity to the currency options market and as such, facilitate the participation of more and more retail, but also institutional investors in this space,” said Absa Capital’s Justin Nichols.

SAinfo reporter

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