Dr Jennifer Mao：Speculating with Stock Index Futures
茆懿心博士 Dr Jennifer Mao：Speculating with Stock Index Futures 如何以股价指数期货投机？
Suppose the settlement prices for the SiMSCI Futures September contract over the period from the 24th to the 31st of August are as shown in Column (3) of the accompanying table. Since Mr Tan buys one contract at 180.0 on 24 August and the settlement price at the close of that day's trading is 182.4, he makes a gain of 2.4 points. The profit of $480 (being $200 x 2.4) will be credited to his margin account.
Suppose Mr Tan remains bullish on the Singapore stock market and does not close out his position till 31 August. Then, his daily gain (or loss) will be determined by the settlement price at the end of each day. This daily computation of profits and losses will be carried out until the position is squared off by an offsetting trade. In the table, Mr Tan's daily gains (or losses) are shown in Columns (4) and (5).
After each day's settlement, if the balance of his margin account is above the "maintenance margin" level of $4,000, Mr Tan will not get a "margin call". Once the balance touches $4,000, however, Mr Tan must replenish his margin account to the initial margin level of $5,000 if he does not want his position to be forced-closed. As such, in our example, Tan will need to meet a margin call for $2,240 when the index falls 6.4 points on 27 August and his margin account dips to $2,760.
Suppose Mr Tan finally decides to close out his position on 31August at a price of 165.2 points. After deducting his final day's loss of $960, he can withdraw the $4,280 left in his margin account.
Over the eight-day period, Tan loses a total of $2,960 (= $200 x (165.2-180.0)). This can be verified by his cash flows: Altogether he pays $7,240, the sum of the initial margin $5,000 and a margin call of $2,240. However, at the end of the game, he only gets back $4,280. On total cash outflows of $7,240, the loss of $2,960 amounts to a 40.9% loss while the index drops by a relatively small 8.2%. Such is the power of "leverage" or "gearing", i.e., being able to bet on something worth $36,000 with only a capital of $7,240.
When a speculator bets wrongly, gearing blows up the damage. If the bet is placed on the right side of the table, the reward will be similarly magnified. If Mr Tan foresees the market downtrend correctly and sells the contract at 180.0 on 24 August and buys it back at 165.2 on 31 August, his investment will be just $5,000 (since he will not face any margin calls). He will have a profit of $2,960, a 59.2% rate of return.
First of all, as with all speculative financial activities, profits are made when the bet is proven right; losses result if the bet turns out to be wrong. To speculate on broad market movements using SIF, one must be aware of the blow-up effect of gearing mentioned above.
Compared with an actual investment in a basket of shares, taking a long position in SIF has another shortcoming. When the market drops, both shares and the long position in SIF will lose value. However, shares do not "expire" (unless the company goes bankrupt and is liquidated) and if an investor with the holding power decides to hold on to the shares, he can always do so. This however does not apply to SIF. Each SIF has a "maturity date" when any outstanding position in that contract must be closed. In other words, one can choose not to realise paper losses when one invests in shares; but, one will be forced to realise such losses with SIF contracts. Of course, investors still bullish or bearish on the broad market can always place their bets on other SiMSCI Futures contracts still outstanding.
First of all, as illustrated above, a bullish investor needs only a relatively small sum of money to bet on the broad trend of the 35 stocks included in the MSCI index. For those who are bearish about the broad market movement, a short position in SIF allows them to profit from this view if it turns out to be right.
Secondly, for investors who have a view on the broad market, but are not interested in picking specific counters, SIF is an ideal instrument.
Thirdly, the transaction costs for trading SIF contracts will not be proportional to the contract value. Instead, it will be a flat fee per contract for a round trip. There is no doubt that the actual cost figure will be significantly lower than the commissions and clearing fees incurred for SES stock trading.
Finally, with the low required capital and transaction costs, an investor can get in and out of the market easily and cheaply. If there is good liquidity of SiMSCI Futures to start with, a virtuous circle can set in to draw in more hedgers and speculators, leading to even lower transaction costs and higher liquidity.
(Part two of two)
(The writer is Senior Lecturer of the Department of Finance and Accounting, NUS & a resource panellist of SPH's Chinese Newspapers.)
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