Bond Futures

A Bond Future is a contractual obligation for the contract holder to buy or sell a Bond on a specified date at a predetermined price. The buyer (long position) of a Bond Future is obliged to buy the underlying Bond at the agreed price on expiry of the future. The seller (short position) of a Bond Future is obliged to deliver the underlying bond at the agreed price on expiry of the Future. The JSE offers Bond Futures Contracts on the underlying government and corporate bonds.

Who is this for?

  • Hedgers use Bond Futures to protect an existing portfolio against adverse interest rate movements. Hedgers have a real interest in the underlying Spot Bonds and use Futures as a way of preserving their value.
  • Arbitrageurs profit from price differentials of similar products in different markets, like the price difference between the Spot Bonds and the Futures.
  • Investors use Bond Futures to enhance the long-term performance of a portfolio of assets.
  • Speculators use Bond Futures in the hope of making a profit on short-term movements in prices.

Features

  • Offer the opportunity to gain similar exposure to interest rates as you would with Spot Bonds, but at a fraction of the cost. You do not pay the principal or hold the physical Bond unless the future is held to expiry.
  • Can be used to protect an existing portfolio from adverse interest rate movements or enhance the performance of a portfolio over time.
  • Are standardised contracts traded on a regulated exchange which reduce the risk of both parties and increase the liquidity in the secondary trading market, making Bond Futures easy to buy and sell.
  • Allow investors to gain advantage from price movements in Spot Bond prices because they can take a view as to whether the prices will climb or decline.
  • Investing in Bond Futures can be risky because it involves trading at a future date with only current information. The risk is potentially unlimited, for either the buyer or seller of the Bond, because the price of the underlying Bond may change drastically between the exercise date and the initial agreement.
  • The difference between a security’s Cash (spot) and Futures prices is known as the cash-futures basis. The basis narrows as the Bond Futures contract nears expiry. This is known as basis convergence. While Futures trading can eliminate price level risk, it cannot eliminate the risk that the basis will change unfavourably and unpredictably during the lifetime of the Futures Contract. It can be influenced by general market factors or changes in interest rates.

How do I get Bond Futures

Register as a client with an authorised JSE Interest Rate and Currency Derivatives member , deposit the required initial margin and sell or buy according to your needs. ​​

Qualifying factors

  • Futures Contracts are subject to margining, which means that you would have to pay a deposit upfront to protect both parties should either party not hold up its part of the agreement. Interest is earned daily on this margin, which is held by the Exchange.
  • No limits apply to individuals, foreigners or corporate entities.
  • Please talk to your broker about the other qualifying factors.​

 

 

 

 

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