Futures closeout preview

MONEYWEB, Julius Cobbett, 15 March 2006

Opinions are divided on where the market could go on Thursday.”

Andisa Securities predicts a neutral or negative bias for the JSE at tomorrow’s futures closeout. However, Arthur Buchner of Nedcor Securities says the market could trade higher. The futures closeout is a volatile time for stock markets as billions of rands worth of positions are unwound.

The closeout happens on the third Thursday of every quarter, and is the date on which futures contracts expire. Futures closeouts present opportunities for sophisticated traders who have the opportunity to make “risk-free” money by exploiting market mispricing in the Alsi 40 future, which is a contract over the 40 most valuable shares on the JSE.

Mark Kalil of Andisa Securities explains that the theoretical price of a future is easily calculated, and is dependent on the price of the underlying shares, the interest rate and administration costs. However, the Alsi 40 future sometimes trades slightly above or below its theoretical value. This presents an opportunity for arbitrageurs, who will sell (short) the future and buy the underlying shares simultaneously or vice versa. As the future draws closer to expiry, its price will converge on the value of the underlying shares, and the arbitrageur will collect his or her profit.

Market swings matter not to the arbitrageur, whose net exposure is zero. However, volatile movements in the market can create good buying or selling opportunities for other players. A rough measure of the volume of shares that will be traded at closeout is the total number of “open interest” positions. On Monday open interest positions on the Alsi 40 future were worth R17,7bn.

At futures closeout, the JSE also adjusts its indices. As the values of certain companies change, they could fall into and out of indices. These movements are important because funds that track indices (Satrix, for example) may be obliged to either sell out of or buy into particular companies. This quarter, African Bank, the micro lender, looks likely to oust packaging company Nampak for a place in the Alsi 40 index. Onetime junior gold miner SXR Uranium One is also likely to be included in the Resources 20 index.

Posted in Market commentary

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