Q3 2024 – Quarterly Review of Expiring Futures Contracts
On September 13, 2024, 2 contracts expired: NGX30U4 and NGXPENSIONU4.
Below are details of the contracts with sample scenarios.
1. NGX30 INDEX FUTURES
Code: NGX30U4
Listing Date: March 11, 2024
Expiration Date: September 20, 2024
Listing Price: 3,954.50
Closing Price: 3,623.70
Contract Multiplier: 1000
Initial Margin: 6%
Sample Scenario for NGX30U4 Futures:
If a speculative trader who, sold one contract of NGX30U4 in March 2024, at the listing price of 3,954.50, with an initial margin of 6% and using a contract multiplier of 1000, the initial margin requirement for one contract would be calculated as follows:
Initial Margin = Listing Price ×Multiplier × Initial Margin Percentage
Initial Margin = (3954.50 × 1000) × 0.06 = ₦237,270
Now, if the trader buys the contract at the expiration date (September 20, 2024) when it closed at 3623.70, the profit/ loss calculation would be as follows:
Profit = (Listing Price minus Closing Price) × Multiplier x number of contracts
Profit = (3954.50 – 3623.70) × 1000 x 1= ₦330,800
So, in this scenario, the speculative trader would have made a profit of ₦330,800 on one NGX30U4 Index Futures contract with an initial margin outlay of ₦237,270 representing 139.4% ROI between March 2024 and September 2024. This example reflects the gearing effect of derivatives, but it is also worth noting that this gearing can also multiply potential losses.
2. NGXPENSIONS INDEX FUTURES
Code: NGXPENSIONU4
Listing Date: March 11, 2024
Expiration Date: September 20, 2024
Listing Price: 3,789.75
Closing Price: 3,895.36
Contract Multiplier: 1000
Initial Margin: 6%
Sample Scenario for NGXPENSIONU4 Futures:
If a speculative trader who, bought one contract of NGXPENSIONU4 in March 2024, at the listing price of 3789.75 with an initial margin of 6% and using a contract multiplier of 1000, the initial margin requirement for one contract would be calculated as follows:
Initial Margin = Listing Price ×Multiplier ×Initial Margin Percentage
Initial Margin = (3789.75× 1000) × 0.06 = ₦227,385
Now, if the trader held the contract until the expiration date (September 20, 2024) when it closed at 3,895.36, the profit/ loss calculation would be as follows:
Profit = (Closing Price minus Listing Price) × Multiplier x number of contracts
Profit = (3895.36 − 3789.75) × 1000 x 1= ₦105,610
So, in this scenario, the speculative trader would have made a profit of ₦105,610 on one NGXPENSIONU4 Index Futures contract with an initial margin outlay of ₦227,385, representing 46.45% ROI between December and June. This example reflects the gearing effect of derivatives, but it is also worth noting that this gearing can also multiply potential losses.
Some Practical Uses of Index Derivatives Futures:
Hedging Risk:
Portfolio Hedge: If an investor holds a portfolio of stocks that closely mirrors the components of the NGX 30 INDEX or NGXPENSION INDEX, they can use futures contracts to hedge against the risk of market downturns. By taking a short position in the futures, any potential losses in the underlying stock portfolio may be offset by gains in the futures position.
Speculation:
Investors who do not own stocks in the NGX30 INDEX or NGXPENSION INDEX may use futures contracts to speculate on the future direction of the index. By taking a long position, they can profit from potential increases in the index level. See example below.
Diversification and Exposure:
Investors who wish to gain exposure to the NGX 30 INDEX or NGXPENSION INDEX without purchasing individual stocks can use futures contracts. This allows the investor to gain exposure without having to buy each stock individually, at a cheaper cost and it requires a smaller upfront investment compared to buying the actual stocks.
Steps for Investors:
Investors should get in touch with their brokers who are also accredited Trading License Holders (TLHs) to inquire about trading NGX 30 INDEX and NGXPENSION Futures. NGX Exchange is also planning to introduce Single Stock futures soon.
Some registered TLHs include:
Apel Asset Limited
APT Securities
CardinalStone Securities
Chapel Hill Denham Securities
Cordros Securities
FSL Securities
Meristem Securities
PAC Securities
RMB Nigeria Stockbrokers
Stanbic Securities
