Market demand grows for JSE listed Variance Futures
October 26, 2010
Johannesburg, 25th October 2010 - A new type of investment
instrument offered by the JSE is attracting increased interest from traders on
the exchange. Variance futures are exotic (or complex) derivatives allowing
investors to profit from volatility in the market or a portfolio, or to insure
against it. These instruments are particularly useful at times when analysts
anticipate increased movement in the market due to changes in market sentiment.
Increasingly complex investment strategies in a competitive market mean
that professional investors are constantly looking for new ways to gain the
returns they require. The JSE, recognised for its innovation and creativity in
designing new products, is one of the few exchanges in the world that offers
variance futures. Launched in early 2010, interest in these exotic products has
grown fast during the last quarter, says JSE director Allan Thomson.
“Investors trade these assets for two main reasons,” says Thomson. “They
may wish to speculate on changes in volatility in the market directly, without
being affected by market direction. In effect, these speculators wish to trade
on levels of anxiety in the market. Or they may wish to hedge an option
portfolio against unwanted volatility, that is, they may have a view on the
market’s future direction and want to trade that, without being impacted by how
much the market fluctuates while moving up or down over time.”
Volatility is the rate at which the price of a security moves up and
down. If the price of a stock fluctuates rapidly, it has high volatility (and
greater risk). If the price almost never changes, it has low volatility. At the
JSE, this information is reflected in the South African Volatility Index (SAVI),
launched in 2007. Variance measures the price fluctuation of an instrument over
a period of time.
It is possible to trade exotic derivatives over the
counter (OTC), without going through a stock exchange. When that happens, the
derivatives are valued by the traders themselves. Thomson says instruments
traded through an exchange have advantages over OTC products. First, valuations
are done by an independent third party (the exchange). Second, trading through
the JSE eliminates counterparty risk as the exchange has strong risk management
processes.
The JSE offers two types of variance futures – standardised
variance products, which can currently be traded free of charge, and Can Do
variance products, which are tailor made to fit the needs of each client. Can
Do’s, unusual products on stock exchanges where mostly standardised products are
traded, are the more popular instruments of the variance group. “The derivatives
team meets with clients, finds out about their needs based on the portfolios
they hold, and structures Can Do products to meet these specific needs,” says
Thomson.
Often, holders of Can Do products don’t trade them after
entering into the contract. However variance derivatives can be traded
throughout the life of the contract and – as variance is linear in time – the
derivatives can be valued even after the initial trade. The only difference to a
client wanting to trade into a Variance future between contract expiry dates
will be the traded price. This is because the price you will be trading at will
have a realised variance portion as well as an implied portion as opposed to
only an implied value.
In the past, traders wanting to trade volatility
have done so by hedging their portfolios with options, which act as an insurance
policy against increases or decreases in the market in order to isolate the
investor’s exposure to volatility itself. The disadvantage of this approach is
that as soon as the market rises or falls, the investor has to buy a new option
applicable to the new value to eliminate directional risk. Trading variance is
more efficient as it eliminates the need to constantly re-hedge as the market
moves about.
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FOR MEDIA ENQUIRIES:
Victoria Williams
Corporate
Communications Consultants (Pty) Ltd
Tel: (011) 783 8926
Fax: (011) 783
7608
Email: victoria@corpcom.co.za
On
behalf of Allan Thomson
JSE Ltd
Tel (011) 520 7082
082 377 0717
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