BAF3009 Financial Institutions & Markets

TUTORIAL 9: SINGAPORE EXCHANGE – DERIVATIVES TRADING & SICOM

Question 1

(a) Explain the meaning of one tick on a SGX-DT futures contract.

One tick is the minimum price fluctuation allowed for each type of SGX-DT contract (with
exception of some where they are allowed changes of ½ or ¼ ticks)

(b) Calculate the value of one tick for each of the following type of contract:

(1) SGX 3-month Euroyen Libor Futures

Contract Size ¥100,000,000 per contract
Price Quoted 99.385 (e.g.)
One Tick 0.01%
½ Tick (Minimum) 0.005%

0.01/100 x ¥100,000,000 x 90/360 = ¥2,500

Minimum fluctuation is ½ tick = ¥2,500 x 0.5 = ¥1,250

(2) SGX Nikkei 225 Index Futures

Contract Size ¥500 x Nikkei 225 stock index futures price
Price Quoted 15,745 (e.g.)
One Tick 5 index points

5 points x ¥500 = ¥2,500

(3) SGX MSCI Singapore Index (SGX SiMSCI) Futures

Contract Size S$200 x SGX MSCI Singapore index futures price
Price Quoted 263.2 (e.g.)
One Tick 0.1 index point

0.1 point x $200 = S$20

(c) Based on the value of one tick computed in (a), determine the profit or loss
(realised or unrealised) on the following contracts:

(1) Buy 5 Euroyen - 3-month deposit contracts at 98.50 and square off at 98.86

Gain (98.86 – 98.50) = 36 ticks

36 x ¥2500 x 5 = ¥450000

(2) Long on 10 Nikkei 225 contracts at 20,350 and mark-to-market at 20,365

Gain 15 Indices (20365 – 20350)

Looking at the first question, 5 index point = 1 tick, therefore:
3 x ¥2500 x 10 = ¥75000

(3) Short on 5 MSCI Singapore stock index contracts at 268.5 and square off at
268.7

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Loss = (268.7 – 268.5) = 0.2 = 2 ticks per contract

i.e. 5 x 2ticks x S$20 = S$200 (realized)

Question 2

(a) In your own words, explain the “SGX SiMSCI” September contract.

SiMSCI is a stock index which represents the price movements of 35 share

counters listed in the SGX.

September contract means an investor can buy or sell this index in August and
must ‘settle’ the contract on the last trading day of September i.e. if he had bought
the contract in August, he may choose to sell it anytime before the ‘maturity’ date.

On settlement date, he must ‘square’ the position to either pay/ receive the
difference.

(b) On 24 Aug, Peter longed one SGX SiMSCI Futures contract @ the price of 200.0. The
Initial Margin was S$5,000 and the Maintenance Margin was S$4,000.

(i) Using the mark-to-market system, decide whether there was any margin call
from 24 Aug to 31 Aug and the amount to top up.

Profit/ Loss Deposit Margin

Trade (Buy Traded or daily Balanc Call
Date / Sell) settlement price e
24-Aug Buy 200.0 - 5000
24x20 = 5480 N
24-Aug 202.4 480
25-Aug 201.0 (280) 5200 N
26-Aug 195.2 (1160) 4040 N
27-Aug 188.8 (1280) 2760 Y(2240)
28-Aug 190.0 240 5240 N
31-Aug Sell 185.2 (960) 4280 -

(ii) Calculate the realised profit/loss when the position was square off on 31 Aug @
185.2.

(2960)

(c) Explain the justification for requiring only a small fraction of the purchase price (i.e.
margin) for futures trading.

- The margins required should be sufficient to cover possible losses from

price movements.
- Marking-to-market on a daily basis and making margin calls, when
necessary limits the possibility of losses exceeding the margins placed on
deposit.
- Moreover, in most cases, there is a counterparty willing to trade the contract,
and this allows losses to be limited to a level in line with the margin
deposited.

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(d) Discuss the advantages of trading in this index as compared to trading in the shares in
the stock market.

- A flat fee per contract for a round trip (i.e. transaction costs are not
proportional to the contract value unlike for shares trading where
commission is based on the contract value)
- The futures contract allows an investor to take a ‘position’ in the 35 shares
included in the index instead of having to take a position in the 35 different
shares.

Question 3
Refer to article:
“Jim Rogers sees S’pore as commodity hub” – Business Times dated 12 April 2008

A renowned commodities investor, Jim Rogers values Singapore very highly. What are his
rationale for such an opinion?

Jim’s rationale for such high valuation are based on:

• There are no commodities centers in Asia, yet Asia is the main producer and
consumer of commodities in the world.
• Singapore is an independent country which has a sound currency and an
independent regulatory board like the SGX. Singapore is friendly towards
international investors and the commodities trade.
• It will be unlikely for other Asian locations, such as Hong Kong, Japan, India or
China, to emerge as commodities hubs. Hong Kong’s currency is suspect and may
disappear. It is tied to the US dollar. China will act in the interests of China, not
Hong Kong.

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