16 September 2008
Investors on the Yield-X will now be able to invest in currency options, a new investment avenue that complements the existing currency futures, which the JSE believes is sure to increase both trading volumes and liquidity in the local currency market.
The first contract will initially be based on the rand-dollar, with other contracts to be requested from the relevant market markers. Like currency futures, currency options allow investors and speculators to benefit from the movement of the rand against other currencies, but differ in that they come with a “built-in insurance policy”.
In other words, currency options are contracts that grant the investor the right but not the obligation to buy or sell currency at a set rate at a set time.
“In layman’s terms what this means is that currency options allow the investor the choice not to exercise the contract if the exchange rate is not in his or her favour,” JSE trading GM Warren Geers said in a statement this week.
According to the JSE, it is working together with Super Derivatives, a global derivatives solutions provider, to determine the currency options closing prices that will be used on a daily basis.
Best means of hedging
Due to their flexibility, currency options are considered one of the best ways for companies, the agricultural community and individuals to hedge against adverse movements in the exchange rates.
Currency futures are used by investors who are very confident that the currency will move in a certain direction while options are ideal for those who need to purchase foreign currency but are uncertain of the movements of the currency.
“Of course, like an insurance policy, the investor will pay more of a premium for this peace of mind,” Geers said.
Geers added that the JSE was confident that currency options would attract a different investor to that of currency futures, and is expecting a greater show of interest from institutional investors and the agricultural sector.
“The currency futures market has done exceptionally well – it recently broke through the R18-billion mark,” Geers said. “The introduction of currency options as well as the new sliding scale fee system model we have recently introduced should further boost this market.”
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