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Alternative Investments
Wednesday, October 1, 2008
Rand hedge

Last month the JSE’s Yield-X launched its currency options service with the first contract initially based on the rand-dollar with other contracts to be requested from the relevant Market markers. This new investment avenue compliments the existing currency futures market and it is hoped will increase both trading volumes and liquidity in the local currency market.

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’. This is because 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.
“What this means is that currency options allow the investor to back out of the contract if the exchange rate was not in his or her favour,” explains Warren Geers, General Manager of Trading at the JSE. Due to their flexibility, currency options are considered one of the best ways for corporate sector, 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 which direction it will trade. “Of course, as with an insurance policy, the investor will pay a premium for this peace of mind,” he adds.
With currency options the JSE hopes to attract a different market element and sector from that of currency futures. “We expect a great response from the agricultural sector and from institutional investors,” comments Geers.
“The currency futures market has done exceptionally well. It recently broke through the R18 billion mark,” he notes. “The introduction of currency options as well as the new sliding scale fee system model we have recently introduced should further boost this market.”
Super Derivatives, one of the worlds leading derivative solution provider was instrumental in assisting the JSE determining the currency options closing prices that will be used on a daily basis.
 

Copyright © Insurance Times and Investments® Vol:21.9 1st October, 2008
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