Making dollars and sense
New market should serve to decrease volatility
FINANCE MINISTER Trevor Manuel’s budget this year included a dispensation for a rand-currency futures market on the JSE, for the first time putting SA retail investors in a position to deal in the currency market. It’s another step on the “tread softly” road towards liberalised exchange controls, but a significant one.
The market, to be housed with Yield-X, the JSE’s interest rate exchange platform, is conceptually the same as a derivative on any other asset. Currently, South African residents who want to reduce rand exposure would have to physically sell their rand, thereby putting direct pressure on the unit. By going short on rand by selling rand futures, while still holding the physical rand, the effect on the currency is muted.
Allan Thomson, director of trading at the JSE, says the new market should serve to decrease volatility in the local currency. “For every buyer there’s a seller, so unlike the traditional view that the rand would always depreciate against hard currencies, it becomes a two-way bet, given the positive outlook for the SA economy and improved fiscal discipline.”
Thomson believes that the market needs hedges and speculation to create efficiencies.
“The futures market will provide a new avenue for both locals and foreigners to invest, speculate and hedge.”
Bought through Yield-X members, US$1000 contracts would require an initial margin of approximately R750.
Assuming the investor is bullish on the rand and bearish on the dollar, he would take a position that would benefit from a strengthening rand over the three-month period of the contract. Realistically though, the investment could be for three minutes’ duration or rolled into new contract periods longer than three months.
Thomson says that at this stage the only legal entities not permitted to trade futures are corporates and trusts, unless they have special Reserve Bank approval. At 2,5 basis points per deal, transaction costs are relatively small, and he’s confident of a good take-up when the exchange kicks off, likely this May.
For every buyer there’s a seller. Allan Thomson