A Currency Futures (CFs) Contract is an agreement that gives the investor the right to buy or sell and underlying currency at a fixed exchange rate at a specified date in the future. One party to the agreement agrees to buy (longs) the Future at a specified exchange rate and the other agrees to sell (shorts) it at the expiry date. The underlying instrument of a CFs Contract is the rate of exchange between one unit of foreign currency and the South African rand. Contracts are cash settled in rands and no physical delivery of the foreign currency takes place.
Who is this for?
Investors, importers, exporters and travellers can use CFs to hedge themselves against movements in the exchange rate. Speculators use CFs to make a profit on short-term movements in prices. Arbitrageurs use them to profit from the price differentials of similar products in different markets. Some investors trade CFs to enhance the performance of a portfolio of assets over the long term.
- Provides protection against exchange rate fluctuations in investment portfolios.
- Allows the holder to fix prices for import and export purposes.
- Allows investors to take advantage of price movements in the exchange rate because they can take a view as to whether the exchange rate will strengthen or weaken.
- Individual investors can trade over and above their foreign allocation.
- Standardised contracts traded on a regulated exchange eliminate counterparty risk.
- Highly liquid market.
- Are traded based on margins that change based on the underlying currency’s volatility. This means that investors may be required to make additional payments on a daily basis should their initial margin payment become insufficient because of movements in the underlying currency.
- The main risk associated with CFs trading results from the effect that gearing or leverage has on a position. A geared transaction is simply the deposit of a smaller amount of cash, but being exposed to the full value of the transaction. Investors deposit the initial margin amount but are exposed to the full nominal value of the contracts traded. This means that investors can end up losing much more than the initial margin they paid to open a Futures Contract. The profits and losses on the underlying currency can be up to ten times more than on the Future.
How to get it
Register as a client with an authorised JSE Currency Derivatives member, deposit the required initial margin and sell or buy according to your needs.
- No limits apply to individuals, foreigners or corporate entities.
- South African pension funds, collective investment schemes, financial services providers and insurers are subject to their foreign portfolio allowances.
- For all the details relating to qualifying factors, please speak to your broker.