TERM AND OPTION CONTRACTS

The use of forward contracts and options keep forward pricing transparent.

Futures and options
The use of forward contracts or futures (hereinafter referred to as forward contracts) and options make forward pricing both transparent and it binds both sides contractually to the transaction. The risk of non-delivery are thus removed from the historical supplier (s) and transferred to a controlled, authoritative market place.

Futures
Safex, or the “South African Futures Exchange”, is a market environment where buyers and sellers meet or are represented, with the purpose of buying or selling futures contracts. A future is a standardised contract traded on the stock exchange. The futures contract is standardised in terms of the quantity and quality of a particular commodity delivered at a specific location during a specific month in the future. Buyers and sellers trade freely on electronic screens negotiating the price of the futures contract. Except for the price all other aspects of the futures contract is standardised and non-negotiable.

Term Contract specifications
To protect the futures market, every buyer and seller pay an initial margin. The margin is R100 per ton and interest can even be earned on it. The position of every person with an open position on the futures exchange will be calculated according to the closing price of the market – “Market-to-market”. Using the market’s calculating processes a sum equal to the amount by which the customer’s position moved on the particular day will be calculated.

Options
An option is an instrument that transfers the right to trade from one person to another. There are two types of options: a call option and a put option ‑ sale or supply option. Like a futures contract it can be bought and sold.

Call option
A call option gives the buyer the right to buy the underlying asset at a certain pre-agreed price at some future date. For the right to buy the underlying asset an option premium is paid. On Safex the underlying asset of the option is the corresponding futures contract, not the commodity, such as the maize itself. The value of a call option will increase when the price of the underlying futures contract rises. For a person who wants to speculate, thinking that the futures prices will rise, it is ideal to buy a call option. If prices rise, the value of the option rises with it, and if prices fall, the option premium is the maximum that you can lose.

Farm/delivery option
A Farm/delivery option gives the buyer the right to sell the underlying asset at a certain pre-agreed price at a future date. The value of the farm/delivery option will increase as the price of the underlying futures contract decreases. Should the price of the futures contract rise, the option premium is the maximum loss that could be incurred.