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In a move to encourage more private investors to embrace currency derivatives, the Johannesburg Stock Exchange (JSE) is expanding its Quanto derivatives range to include a currency contract based on the Euro/Dollar exchange rate, the world’s most actively traded currency pair.
Quanto derivatives are futures where the underlying product traded follows the movements of a foreign asset, but the instrument itself is settled in another currency. Quanto derivatives traded on the JSE will be settled in Rand, even though they will track the movements of the prices of the Euro which is quoted in US Dollars.
Quanto futures mirror the underlying movement on a 1 for 1 basis. If the price of the Euro/Dollar increases by 20% in Dollar terms, then the value of the investor's Rand position in Euro/Dollar will also increase by 20%. Since the futures are settled in Rand it does not count towards an investors’ foreign allocation allowance.
Geers says the ability to offer a Quanto contract on the JSE currency derivatives platform will bring the South African financial market further in line with international standards.
“This type of product has attracted investors around the world who want exposure to the most traded currency globally This new currency contract will be primarily traded by investors hoping to make a profit on the movements of the Euro Dollar exchange rate,” says Warren Geers, General Manager of Bonds and Financial Derivatives at the JSE.
The Euro/Dollar market is the world's primary internationally traded currency pair. Geers says there has been an increased amount of interest from market participants in South Africa to trade the Euro/Dollar and this product now allows us to offer a competitive product in South Africa. “This product will provide the SA financial market with an instrument that exposes them to the one of the world’s most popular currency derivative pairs,” says Geers.
The JSE first introduced Quanto derivatives in the commodity derivatives market last year and the product has received much praise from the market for the level of innovation and the consideration of the market’s needs. The offering includes Quanto futures on a variety of hard and soft commodities including gold, silver, platinum, copper, Brent crude oil, heating oil, gasoline, natural gas, palladium, sugar, cotton, cocoa, coffee and corn.
