Capital markets in Zimbabwe have welcomed many developments over the last two years. We recently took a deeper look at Options that were introduced by Finsec which added some depth to the markets. Now let’s look at the other type of derivative that Finsec introduced to us, Futures. Though still in early phases these contracts have the potential to bring Zimbabwean markets into the present more than any other development. So let’s take a look at futures.
Futures contracts are exactly what they sound like if you take the plain meaning of the name phrase. They are solid commitments for the sale of an item at a future determined date with a future determined price. Contrast this with the Options Contract which gives someone a right but not an obligation, to buy or sell an asset at a determined date for a determined price. This is not a strange animal as we may think it is. Futures contracts are a standard way of operating and are used in international markets for commodities such as crude oil, grains, meat and other commodities.
With Finsec futures we are looking at equity futures. As we have surmised by now these offer people the opportunity to either buy or sell shares at a predetermined date for a predetermined price. Just as it is with options the futures contracts are available for Delta, Econet, Ecocash, Innscor, Simbisa and selected indices. In the futures contract, the proposition is simple. Both sides benefit by agreeing on a future sale price. To understand why this is important let’s look at the crude oil market. This market operates on 90-day futures contracts. So that oil price you hear today is for crude oil that will be delivered 90 days in the future. If you consider firstly how critical fuel is to life as we know it today and secondly the processing required for crude oil you will understand why it needs a futures market. In the case of equities, the need exists more on the seller’s side. They may have held the equities for a defined purpose and locking in disposal (sale) price gives them certainty.
Futures on indices give investors a few more options in the market. Index investing has for many years been acknowledged as being better rewarding than individual stock picking. Even experts and top fund managers fail to beat indices consistently. When one “buys” an index they are simply placing faith in the aggregate performance of the constituents as opposed to individual performances. This is handy in Zimbabwe with a lack of depth in index investing options.
Once one enters into a Futures contract they will need to prove that they can fulfil the contract and as such are required to put up collateral. So if you are selling an underlying asset you will put the asset up as collateral. The same applies on the other side, you will have to prove the funds for the contract and put these up as collateral.
The margin in Futures contracts is similar to that in options contracts in that it is the price you pay for the contract. Futures contracts however differ from options because you may be required to make multiple margin payments known as margin calls. The idea is that as the contract date approaches the market may move and the other party in the contract needs to make sure you are up to the task. So these payments may be requested periodically. So when entering into a Futures contract you will have an initial margin charged upfront and may have additional margin calls.
Closing the contract
Unlike the Option contract which doesn’t have to be fulfilled the Futures contract is a solid contract, it must be executed. So the only way out of a Futures contract that does not include following through is to buy out the contract.
You can access Finsec futures markets through your registered stock broker or the Ctrade platform (web and Android app at present).