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Contract Specifications
The Singapore Exchange Derivatives Trading Limited first introduced financial futures in Asia in September 1984 with the trading of Eurodollar futures. Since then, it has emerged as a leading international futures centre in the Asia-Pacific offering a wide range of derivatives instruments to an ever growing base of global users.
With its ideal Asia-Pacific location, SGX-DT offers all the advantages of a highly useful, cost-effective and sound market which efficiently complements the 24-hour global trading operations of users around the world.
SGX-DT interest rate futures market presents added hedging and trading capabilities during the Asia-Pacific time zone, overlapping into the European morning and North American evening hours. It offers users an advantageous means to protect their interest rate related assets and liabilities from the impact of volatility by locking in interest rates in advance. It also provides traders the means to profit from the accuracy of their market views on interest rate movements and their evaluations of interest rate pricing. In this regard, these interest rate contracts can be used, both when western markets are closed and when they overlap with SGX-DT, in:
hedging loans and deposits in Singapore Dollar, US Dollar and Yen
hedging Singapore Dollar, US Dollar, Yen and interest rate swaps
intra-commodity, inter-commodity and intermarket trading and arbitrage
One-Stop Convenience And Cost Effectiveness
In managing global interest rate risks or in trading and arbitraging, users now have the opportunity to execute a variety of futures and options strategies concurrently, expeditiously and cost-effectively through a single broker in one marketplace — SGX-DT.
Greater Treasury Flexibility And Profitability
With the implementation of higher capital-asset ratio requirements internationally, financial institutions will inevitably be faced with increasing constraints on their treasury dealing activities. This could affect their ability to generate profits through the usual means. As an off-balance sheet instrument, therefore, the SGX-DT interest rate contracts provide an added avenue to increase treasury earnings without inflating the balance sheet.
Greater Dealing Capability With Reduced Credit Risk
As an instrument with a notional contract value requiring no actual movements of principal, there is not only no risk of the principal but also little need to be concerned about credit ratings and risks of counterparties as SGX-DT, together with its Clearing Members, stand to guarantee all trades cleared at the exchange. Moreover, with the daily revaluation of positions and settlement of profit and losses, the amount and risks associated with settlement are also minimized. All these mean that the normal country and bank dealing limits or lines need not pose a major constrain on treasury activities involving these interest rate contracts.
International Final Settlement Prices
SGX Eurodollar and Euroyen futures participants who hold their contracts to maturity have the added assurance that their SGX contracts are settled on maturity at prices common to similar contracts at other major markets. This practice applies to such markets which include the Chicago Mercantile Exchange (CME) for Eurodollar, Tokyo Stock Exchange (TSE) for JGB and Tokyo Financial Exchange (TFX) for Euroyen*. This means that hedgers, arbitrageurs and other users need not encounter any basis risks between SGX contracts and the underlying cash and related futures markets, making for more certain risk management, trading and arbitrage results.
* Note: The British Bankers' Association rate will be used for determining the final settlement price for the Euroyen LIBOR.
Options Products
SGX interest rate options present users with unique advantages and opportunities to protect against or profit from changes in interest rates. With the use of options contracts, hedging or trading can be tailored for a variety of needs and market views through outright positions and also combinations of options and futures positions.
The profit potential for an option buyer is unlimited while the maximum amount of risk is pre-defined by the premium paid. Buyers of calls profit from falling interest rates (rising futures prices) while buyers of puts benefit from rising interest rates (falling futures prices). With the purchase of options, risk managers can both hedge against adverse rate changes and also stand to gain from major rate movements that improve their cash positions.
Improving Investment Yields Or Borrowing Costs
The premium received from the sale (writing) of a call option against an existing investment or the sale of a put option against a debt issuance can be used to improve the investment yield or lower the borrowing cost, respectively. The investor who sold the call would therefore gain a known premium income though limiting his upward participation in the market if interest rates fall (futures prices rise). The borrower also gains a known premium but foregoes the advantage if interest rates rise (futures prices fall).
Setting The Level Of Protection Against Projected Rate Changes
Options with varying strike prices and premium costs can be selected, according to the strength of a given market view, to suit the desired amount or level of protection against and exposure to probable changes in interest rates. The relationship of the selected strike price to the underlying futures price also determines the potential risks and reward of outright trading positions.
Options positions can also be combined and used to match a trading or a hedging position to a given view of the market. An option spread combining a long and short option at different strikes, for instance, can be employed to hedge a probable range at lower net premium cost. Puts and calls can also be sold in order to profit from the expectation of a non-trending market. Options may also be combined with futures for various other hedging and trading objectives.
