JSE lists first 'exotic' currency options

15 June 2011

In a bid to offer currency traders even greater choice and flexibility, the Johannesburg Stock Exchange (JSE) and Absa Capital have listed the first "exotic-style" currency options contracts.

The two new options are based on the dollar/rand exchange rate and are "knock-out barrier options up-and-out and down-and-out". They offer asset manager and hedge fund participants an exchange-traded product similar to what has previously only been available over-the-counter (OTC).

OTC instruments are not traded on a stock exchange and are typically contracts between an investment bank and a client.

No foreign exchange clearance required

These options represent the first currency "can-do" contracts offered by the JSE. Can-do options are a type of product first created by the JSE in June 2006 to offer investors the flexibility of an OTC product with the credibility and transparency of the listed derivative. They offer infinite variety to the professional investor.

On-market instruments require no foreign exchange clearance and are settled in rands.

"The products will allow investors to create more diversified trading strategies using exchange traded products without taking on any credit risk," the JSE's general manager of derivatives trading, Warren Geers, said in a statement this week.

"As market participants seek to avoid bilateral counter-party risk and with more regulation being imposed, our new products offer a regulated alternative and compete directly with OTC contracts."

Absa Capital, through working closely with its clients to solution an appropriate delivery vehicle, identified the need for an exchange traded option contract. To this end they worked closely with the JSE to ensure these contracts were listed and tradable.

Product innovation

Product innovation forms part of the JSE's continued drive to grow the currency derivatives market by introducing new flexibility while ensuring that strict regulation is adhered to.

"The JSE realises that in order to be more competitive it needs to offer foreign exchange products that are viable alternatives to those traded in the OTC space," Geers said.

Both new contracts can be triggered anytime by the event. When it comes to fees, both products operate on a competitive sliding scale and will be capped at R39�900 per deal to entice bigger contracts.

SAinfo reporter