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Yield-X What are Currency Options § Currency Options are derivative contracts that grant the purchaser the right but not the obligation to trade a currency futures contract at a predetermined date in the future at a prearranged price, regardless of where the underlying market is trading. § Currency Options traded on Yield-X are based on the underlying Currency Futures contracts on a one-to-one basis. § Currency Options premium fluctuate with the movements in the underlying future and volatility.

Yield-X Two types of Currency Options: § Call Options: Grants the purchaser the right but not the obligation to buy the underlying currency future at a predetermined price at a predetermined date in the future. § Put Options: Grants the purchaser the right but not the obligation to sell the underlying currency future at a predetermined price at a predetermined date in the future.

Yield-X Major components of Option Contracts: § Expiry Date § The underlying security § Exercise/Strike price § Volatility § Premium § Initial margin and variation margin

Yield-X Initial Margin § Unlike Currency Futures the initial margin for Options can change as it gets calculated on a daily basis depending on the risk of the option § When a position is opened (either long or short), the investors are required to pay an initial margin in cash (known as a good faith deposit) with the broker who subsequently deposits it with the clearinghouse § This amount remains on deposit as long as the investor has an open position § The initial margin attracts a market related interest rate which is refunded to the investors once the position is traded out, or if the contract expires (close out) § The initial margin requirement varies between the different currency futures offered

Initial Margin Yield-X

Yield-X Premium Variation Margin § The premium is paid over the life of the Option contract. § Variation Margin fluctuates each day, depending on the change in value of the option § Note, however that the Initial Margin might counter cash flows in order to manage the risk. § Because of daily variation margining at each day’s close the position is fully valued for both parties, this avoids a situation where the risk exists of a default on several days.

Yield-X Currency Options listed on Yield-X § Dollar / Rand § Euro / Rand § Pound / Rand § Australian Dollar / Rand

Yield-X Options Pricing Intrinsic value of a call option Value of a put option Any extra value above intrinsic value is referred to as time value This diagram shows a simplified analysis of an option’s value.

Yield-X “In, Out and At the Money” Call Option: § When the underlying asset’s price is higher than the strike price a call (buy) option is said to be “in-the-money” § When the underlying asset’s price is less than the strike price, a call (buy) option is said to be “out-the-money” § When the underlying asset’s price is equal to the strike price a call (buy) option is said to be “at-the-money”

Yield-X Currency Options Product Specifications § Underlying Instrument Ø Rate of exchange between one US Dollar and SA Rand § Standardized contracts Ø Fixed expiries in March, June, September and December § Rand Denominated Ø Naked Options (premium): Rand’s per contract Ø Delta trades: Volatility to 2 decimal places § Cash Settled Ø No physical delivery of foreign currency § Contract sizes Ø 1000 foreign underlying currency e. g. $ 1000, £ 1000, € 1000 and ZAAD 1000

Yield-X Currency Options Product Specifications Cont… § Expiry Dates & Times Ø 10 H 00 New York time, two business days prior to the third Wednesday of the expiry month § Expiration Valuation Method Ø 30 Iterations, arithmetic average of the underlying spot taken every 1 minute for a period of 30 minutes. § Exercise Style Ø European style, Options may be exercised only on the expiration of the contract.

Yield-X Call Option Example: An Importer is concerned that the Rand will weaken against the Dollar. He needs the Rand to trade at a specific price to ensure his production price is more than his selling price The Dollar/Rand spot exchange rate is currently trading at R 9. 00 and the Currency Future at R 9. 15 Buy “At the Money” Call Option with a strike price on the future of R 9. 15 and at a premium of R 240 per option contract (With a Volatility of 25%)

Call Option Example Cont…. Yield-X Scenario 1 – Rand Weakens − On future date the Rand Currency Future is trading at R 10. 20 − Exercise the option and buy the Currency Futures Contract at R 9. 15 At Expiration: − Call Option = (Exchange Rate – strike price) x 1000 units of the underlying = (10. 20 – 9. 15) x 1000 = R 1050 Profit = R 1050 – R 240 = R 810

Yield-X Call Option Example Cont… Scenario 2 – Rand Strengthens − On future date the Rand Currency Future is trading at R 8. 50 − Why would you exercise your option and buy the future at R 9. 15 if you can buy it at its current future trading price of R 8. 50? − Loss = Premium of R 240

Yield-X Put Option Example: An Exporter is concerned the Rand is going to Strengthen against the Dollar The Dollar/Rand spot exchange rate is currently trading at R 9. 00 and Currency Future at R 9. 15 Buy “At the Money” Put Option with a strike price on the future of R 9. 15 at a premium of R 240 per option contract (With a Volatility of 25%)

Put Option Example Cont… Scenario 1 – Rand Strengthens − On future date the Rand Currency Future is trading at R 8. 30 − Exercise your option and sell the rand future at R 9. 15 At Expiration: − Put Option = (Strike Price – Exchange rate) x 1000 units of the underlying = (9. 15 – 8. 30) x 1000 = R 850 Profit = R 850 – R 240 = R 610 Yield-X

Yield-X Put Option Example Cont… Scenario 2 – Rand Weakens − On future date the Rand is trading at R 9. 50 − Why would you exercise your option and sell the future at R 9. 15 if you can sell it at its current trading price of R 9. 50? − Loss = Premium of R 240

Yield-X Why Trade Currency Options? § Hedge against currency exposure risk § Protect the value of your Currency § Time to make sure – Buying an option enables you to defer your decision until the option’s date of expiry § Speculate § Trade on a regulated and efficient platform § Allow for transparent pricing § Equalise the playing field for investors § Allow individuals and smaller corporates to access favorable rates usually reserved for larger corporates

Yield-X Risks Gearing § Post small amount but valued on full nominal value § Can make money but can also lose money! § Loss can be more than the initial margin posted if unfavourable position is not closed out Trading Hours § Global currency markets open 24 hours a day § Local market only open Mon-Fri 9 am-5 pm § Market could move against you while local market is closed and you will have to wait until the next day’s opening of the market to trade out – some banks can put stop losses in place though

Yield-X Costs § Exchange fees to the members are R 0. 50 (excl VAT) per currency option contract traded § These are the fees the exchange charges the broking community however the fees that the brokers charge the clients vary from broker to broker

Yield-X Currency Options Statistics Update (November 2009) § Total number of Contracts: 846, 525 § Total Contract Value: R 1, 1 Billion

QUESTIONS? Yield-X