WHY SSFs?

SSFs have fundamentally changed the landscape of derivative trading globally by allowing investors to

easily and with minimum capital hedge their portfolio and exploit market opportunities to achievemaximum returns on their investment. South Africa currently hosts the largest single-stock futuresmarket in the World, trading on average 700,000 contracts daily. The SSF trading market in SA ishosted by SAFEX which when established in1999 offered 4 leading shares but now covers over 250counters.

THE INCREDIBLE BENEFITS WHEN YOU TRADE SSFs:

Impressive hedging capabilities - you are able to fully exploit market movement by selling short in falling markets and buying long in rising markets

Highly capital efficient - they are highly geared investments giving exposure to a large amount of underlying shares for only a small initial deposit.

Low brokerage costs - they incur lower brokerage costs than when trading in the underlying shares Very liquid - easily traded using PSG Online’s Direct Market Access platform Earn interest - your initial margin earns interest for the duration of the contract Benefit from Corporate Actions - corporate actions which affect the underlying share are also taken into

account in pricing SSFs Cheaply diversify risk - you are able to leverage your funds on a number of investments due to the low

cost of trading with SSFs Protect your Portfolio - hedge your risk by selling SSFs in the same companies Benefit from pairs trading - by entering into a trade one long and the other short in the correct ratios a

net positive profit can be realised

Why SSFs Cont.

The Higher The Risk The Greater The Reward

Remember the higher the risk the greater the reward and SSFs are

no exception to the rule. Due to the high degree of leverage inSSFs both profits and losses are felt immediately as they arerealized on a daily basis, and therefore although there potential

toearn significant returns on your investment is impressive, you

mayalso incur severe losses.

WHAT ARE SSFs?

By Definition:

Single-stock futures (SSFs) are a legally binding agreement (an exchange-traded contract) based on an underlying stock. This futures contract gives the holder the ability to buy or sell the underlying asset at a fixed price on a future date. Being futures contracts they are traded on margin, thus offering leverage. When purchasing SSFs there is no transmission of share rights or dividends. If you hold a SSF until expiration you either have to take delivery or make delivery of the underlying – or you have to roll over the position into the next dated futures contract in the same underlying instrument.

A futures contract is:1. A standardised contract2. That is listed on the South African Futures Exchange (SAFEX), a subsidiary of the JSE3. Of a standard quantity (100) of a specific underlying asset , usually a listed share4. That expires on a predetermined future date, usually the third Thursday of every March, June, September

and December5. At a price reflecting the ruling price of the underlying asset on the expiry date, including all relevant

dividends and interest

Remember that SSF contracts equate to100 shares of the underlying instrument and therefore orders for SSF contracts must be placed in multiples of 100, e.g. 1 SSF contract = 100 shares of the underlying. Because SSFs are created at the close of trading for all matched orders, all unmatched SSF orders expire at the end of the trading day. All partially matched orders – i.e. orders for lots of 100 shares that have not filled 100 shares of the underlying instrument – will be cancelled at the end of the day.

HOW DO SSFs WORK?What This Means:

SSFs are contracts entered into between 2 parties, where 1 party commits to buy a set quantity of stock and 1 party agrees to sell a set quantity of stock at a specified future date. This creates the right for the buyer to take delivery of that stock on the date of the contract’s expiry, i.e. the buyer doesn’t purchase the stock but rather a ‘deposit’, known as the initial margin is made and used as security against the right to take delivery of the stock at the specified contract’s future date. Most clients do not, however, take delivery of SSFs – rather clients close out positions every quarter or roll positions over to the next expiry date. A SSF contract is made up of 100 shares of the underlying and the margin is geared at around 15% of the underlying instrument’s share price.

An example:INVESTOR A (Equity / Share Trader)

• Investor A is confident that Sasol Ltd shares will increase in the oncoming months.

• She has R35,000 which she can invest.

• Sasol’s share price is R350, therefore she buys 100 shares.

• 3 months later the price has increased by 10% so she sells her shares to make a R3,500 profit. Her return on her investment is 10%.

INVESTOR B (SSFs Trader)

• Investor B is confident that Sasol Ltd shares will increase in the oncoming months.

• Sasol’s share price is R350, therefore he buys a Long Sasol SSF contract.

• The initial margin set by the broker is R5,250 which is paid by the buyer.

• After 3 months the price has increased by 10% and the investor closes out his position and sells out of the Sasol SSF contract he is holding. His profit is R3,500 but his return on his investment is 67%.

Essentially, SSFs allow investors the ability to benefit from the price movement of the underlying share but require a

much smaller capital investment to gain the same exposure when equity trading.

TERMINOLOGY:

Going Long – is when an investor buys a SSF contract to benefit from an increase in the underlying share’s price.

Going short – is when an investor sells a SSF contract to benefit from a decrease in the underlying share’s price.

Closing a position – this is when investors choose to sell the position if they hold a long SSF contract or buy the position if they hold a short SSF contract.

Expiry date – the date at which the SSF contract is set to expire. SSF contracts expire automatically every quarter on the second-last Thursday of March, June, September and December of every year. Therefore, contracts bought in January 2009 will automatically expire in March 2009. All contracts are automatically rolled over to the next valid expiry date unless investors specifically arrange otherwise with PSG Online in writing.

Initial margin – the deposit made in order to secure the SSF contract. The exact amount is specified as a cents per share amount and fixed by SAFEX, but it usually equates to about 15% of the value of the contract.

Variation margin – the daily process through which the unrealised profits and losses are processed onto the client’s cash account. Should this account move into a negative balance, the client will be required to settle that negative balance through either depositing a cash amount or closing positions to the value of the unrealised loss.

Rolling a position – the quarterly process through which a SSF contract is automatically closed and then re-opened with the next dated expiry date for a SSF contract in the same underlying instrument. This is the default option for all SSF contracts.

Underlying instrument – SSFs are derivatives because they derive their value from the underlying instrument. These will be mostly shares listed on the JSE and certain Exchange Traded Funds (ETFs).

HOW TO “GO LONG”A PRACTICAL EXAMPLE:

Assume that Sasol Ltd shares are trading at R410 and the SSF price is R413.

You have heard that a hurricane is predicted to hit oil rigs in the Gulf of Mexico in the ensuing week, which may affect output rates due to the damage. You believe that this will cause the price of oil to increase as supply decreases. You decide to buy a Long SSF and purchase one DEC08 SOLQ contract which gives you the equivalent exposure of 100 Sasol shares.

The contract value is R41,300 and the initial margin is R6,195. This amount will be taken from your SSF account and deposited in a trust with SAFEX, which earns interest at the specified rate. Your exposure is now 1 contract.

The hurricane hits oil rigs in Mexico and this has affected the price of oil causing the share price to increase by 20%, from R413 to R495. You believe that the share price won’t increase much further and so decide to close out your position and sell out the one DEC08 SOLQ contract you are holding.

At this point your initial margin along with the difference between the value of the underlying shares when you opened and closed the contract is refunded which is 100 shares x (R495 – R413) = R8200 which equates to a profit of 132% for an initial capital outlay of R6,195.

The realised profit and initial margin returned are available for new positions immediately, even though the cash will only be processed onto the trading account at the conclusion of the trading day.

HOW TO “GO SHORT”A PRACTICAL EXAMPLE:

Assume that Standard Bank shares are trading at R94 and the SSF price is also R95.

You have been doing some research and have found that most economists argue that inflation data soon to be released will be worse than predicted. You believe these arguments to be true and know that this news will create negative sentiment in the financial market, causing bank stocks to fall. You decide to buy a Short SSF and sell two DEC08 SBKQ contracts, which give you the equivalent exposure of 200 Standard Bank shares.

The value of each contract is R9,500 – therefore R19,000 in total – and the initial margin is R2,850. This amount will be taken from your SSF account and deposited in a trust with SAFEX, which earns interest at the specified rate. Your exposure is now two contracts.

The inflation data released is worse than predicted causing markets to fall. Your Standard Bank shares fall by 4% on the same day as the data is released. The share price decreases from R94 to R90. You decide to close out your position and sell out the two DEC08 SBKQ contract you are holding.

At this point your initial margin along with the difference between the value of the underlying shares when you opened and closed the contract is refunded which is 200 shares x (R90 – R94) = R800 which equates to a profit of 28% for an initial capital outlay of R2,850.

The realised profit and initial margin returned are available for new positions immediately, even though the cash will only be processed onto the trading account at the conclusion of the trading day.

WHAT ARE THE FEES & CHARGES?

The following fees are involved with SSF trading:

0.5% (excl VAT) + R60 booking fee

o Brokerage at 0.4% (excl VAT) of the value of the transactiono Market maker’s commission at 0.1% (excl VAT) of the value of the transactiono Booking fee of R60 per future code in which a new position is opened per day –

therefore you pay only for the opening leg of all transactions, and only once per day per future code

Interest payable on the SSF will be determined daily by the market maker in relation to the ruling SAFEX rates. The final SSF price will include this interest.

Interest will be paid on cash balances in the SSF account at the JSE Trustees rate.

HOW IS THE PRICE OF AN SSF DETERMINED?

Part One:

The following variables are used to calculate the price of an SSF:

The underlying share price Eg R100 in the case of ABSA (ASA)

The interest to be paid on the total cost of the SSF Eg 12.5% on R10,000 (R100 per share * 100 shares per contract) for 3 months

The dividends that are expected to be paid on the shares held within the SSF Eg R5 per share

Market maker’s commission and brokerage Eg 0.5% per transaction

Part Two

The following example will illustrate these costs:

Calculation of a SSF price based on an underlying share

Purchase price of underlying shares (cents) 10000SSF purchase date 22 September 2008SSF close-out date 18 December 2008Days between purchase date and close-out date 87

SSF interest rate per year 11.93%SSF interest rate up for duration of SSF contract 2.84%Market maker's commission and brokerage included in SSF price 0.50%

Dividend expected (cents) 300 Dividend adjustment for interest to be earned (cents) 306 LDT for dividend expected 15 October 2008

SSF price including all costs and dividends expected* 10028

* SSF price = Underlying price (adjusted for interest payable) 10284 - Dividend expected (adjusted for interest receivable) -306 + Market maker's commission 50

10028

HOW IS THE PRICE OF AN SSF DETERMINED?

WHAT ABOUT DAILY MARGIN CALLS?

All realised profits and losses are processed onto accounts immediately after trading – and therefore realised profits and returned initial margin will be available for trading immediately.

Should positions remain open overnight, they will have produced either unrealised profits or unrealised losses. These are processed by SAFEX as cash journals on the SSF account. Therefore, if an account has a cash balance of R5,000 and total unrealised losses of R7,500 at the close of trading, SAFEX will process the loss of R7,500 on the account to leave the account with a negative cash balance of R2,500.

All standard SSF account holders will be required to pay in that R2,500 as variation margin by 16:00 on the following trading day – regardless of intraday share movements on that following trading day. If an account holder fails to deposit the required variation margin, the PSG Online dealing desk will close out sufficient contracts to cover the unrealised loss.

WHAT ABOUT THE SSF EXPIRY DATE?

SSFs expire every quarter – usually on the third Thursday of March, June, September and December of each year.

The holder of a SSF may take delivery of the actual underlying instruments, but this will only be the case if the holder of the SSF has arranged in writing for PSG Online to take delivery of the instruments. In the absence of any specific instruction to this effect, PSG Online will simply roll the SSF to the next available SSF expiry date for the same underlying instrument.

WHAT ABOUT CORPORATE ACTIONS AND SSFs?

Corporate actions will be processed onto SSF contracts by the JSE and owners of SSF positions will not be prejudiced by movements in the underlying instruments.

Dividends expected during any given quarter are priced into SSFs – including the expected interest to be received on the dividend payment – and therefore investors do not receive dividends as a cash payment even though they do benefit from them. By way of a very simple example, if a share trades at R100 and a R5 dividend is expected before the next SSF expiry date, the SSF price will be R95 because the dividend will be paid out and the share price will fall commensurately before the SSF expiry date.