● 茆懿心博士Dr Jennifer Mao Suppose the settlement prices for the SiMSCIFutures September contract over the period from the 24th to the31st of August are as shown in Column (3) of the accompanying table. Since Mr Tan buys one contract at 180.0 on 24 August andthe settlement price at the close of that day's trading is 182.4, hemakes a gain of 2.4 points. The profit of $480 (being $200 x 2.4) willbe credited to his margin account.
Suppose Mr Tan remains bullish on theSingapore stock market and does not close out his position till 31August. 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 positionis squared off by an offsetting trade. In the table, Mr Tan's daily gains (or losses) are shown in Columns (4) and (5). Aftereach 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 "margincall". Once the balance touches $4,000, however, Mr Tan must replenishhis margin account to the initial margin level of $5,000 if he doesnot want his position to be forced-closed. As such, in our example, Tan will need to meet a margin call for $2,240 when theindex 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 hismargin 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, heonly 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 $36,000with only a capital of $7,240.
When a speculator bets wrongly, gearingblows up the damage. If the bet is placed on the right side of thetable, the reward will be similarly magnified. If Mr Tan foresees the market downtrend correctly and sells the contract at 180.0on 24 August and buys it back at 165.2 on 31 August, his investment willbe just $5,000 (since he will not face any margin calls). He will have aprofit of $2,960, a 59.2% rate of return.
First of all, as withall speculative financial activities, profits are made when the bet isproven right; losses result if the bet turns out to be wrong. Tospeculate on broad market movements using SIF, one must be aware of the blow-up effect of gearing mentioned above.
Compared with anactual investment in a basket of shares, taking a long position in SIFhas another shortcoming. When the market drops, both shares and the longposition in SIF will lose value. However, shares do not "expire" (unlessthe company goes bankrupt and is liquidated) and if an investor with the holding power decides to hold on to the shares, he canalways do so. This however does not apply to SIF. Each SIF has a"maturity date" when any outstanding position in that contract must beclosed. In other words, one can choose not to realise paper losses whenone invests in shares; but, one will be forced to realise such losseswith SIF contracts. Of course, investors still bullish or bearish on the broad market can always place their bets on otherSiMSCI Futures contracts still outstanding.
First of all, asillustrated above, a bullish investor needs only a relatively small sumof money to bet on the broad trend of the 35 stocks included in the MSCIindex. For those who are bearish about the broad market movement, a short position in SIF allows them to profit from this view if itturns out to be right.
Secondly, for investors who have a view on thebroad market, but are not interested in picking specificcounters, SIF is an ideal instrument.
Thirdly, the transactioncosts for trading SIF contracts will not be proportional to the contractvalue. 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 SESstock trading.
Finally, with the low required capital and transaction costs, an investor can get in and out of the market easily andcheaply. If there is good liquidity of SiMSCI Futures to start with, avirtuous circle can set in to draw in more hedgers and speculators,leading to even lower transaction costs and higherliquidity.
(Part two of two) (The writer is Senior Lecturer of theDepartment of Finance and Accounting, NUS & a resource panellist ofSPH's Chinese Newspapers.)
Suppose Mr Tan remains bullish on theSingapore stock market and does not close out his position till 31August. 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 positionis squared off by an offsetting trade. In the table, Mr Tan's daily gains (or losses) are shown in Columns (4) and (5). Aftereach 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 "margincall". Once the balance touches $4,000, however, Mr Tan must replenishhis margin account to the initial margin level of $5,000 if he doesnot want his position to be forced-closed. As such, in our example, Tan will need to meet a margin call for $2,240 when theindex 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 hismargin 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, heonly 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 $36,000with only a capital of $7,240.
When a speculator bets wrongly, gearingblows up the damage. If the bet is placed on the right side of thetable, the reward will be similarly magnified. If Mr Tan foresees the market downtrend correctly and sells the contract at 180.0on 24 August and buys it back at 165.2 on 31 August, his investment willbe just $5,000 (since he will not face any margin calls). He will have aprofit of $2,960, a 59.2% rate of return.
First of all, as withall speculative financial activities, profits are made when the bet isproven right; losses result if the bet turns out to be wrong. Tospeculate on broad market movements using SIF, one must be aware of the blow-up effect of gearing mentioned above.
Compared with anactual investment in a basket of shares, taking a long position in SIFhas another shortcoming. When the market drops, both shares and the longposition in SIF will lose value. However, shares do not "expire" (unlessthe company goes bankrupt and is liquidated) and if an investor with the holding power decides to hold on to the shares, he canalways do so. This however does not apply to SIF. Each SIF has a"maturity date" when any outstanding position in that contract must beclosed. In other words, one can choose not to realise paper losses whenone invests in shares; but, one will be forced to realise such losseswith SIF contracts. Of course, investors still bullish or bearish on the broad market can always place their bets on otherSiMSCI Futures contracts still outstanding.
First of all, asillustrated above, a bullish investor needs only a relatively small sumof money to bet on the broad trend of the 35 stocks included in the MSCIindex. For those who are bearish about the broad market movement, a short position in SIF allows them to profit from this view if itturns out to be right.
Secondly, for investors who have a view on thebroad market, but are not interested in picking specificcounters, SIF is an ideal instrument.
Thirdly, the transactioncosts for trading SIF contracts will not be proportional to the contractvalue. 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 SESstock trading.
Finally, with the low required capital and transaction costs, an investor can get in and out of the market easily andcheaply. If there is good liquidity of SiMSCI Futures to start with, avirtuous circle can set in to draw in more hedgers and speculators,leading to even lower transaction costs and higherliquidity.
(Part two of two) (The writer is Senior Lecturer of theDepartment of Finance and Accounting, NUS & a resource panellist ofSPH's Chinese Newspapers.)