SSFs


What are Single Stock Futures? (SSF's) 

An SSF contract is a futures contract where the underlying security is an equity listed on an exchange (in the case of South Africa these will be shares listed on the JSE). An SSF contract is a legally binding commitment made through a futures exchange to buy or sell a single equity in the future. Each SSF contract is standardised with regard to size, expiration, and tick movement.

The value of an SSF contract is equal to 100 times the particular share’s futures price. For example, if Company X is trading on Safex at R52.00 then holding one future contract in Company X is the equivalent of investing R5200 in Company X shares. The price for an SSF contract is negotiated through Safex’s order matching platform called the Automated Trading System (ATS).  Safex also lists options on SSFs, which are American style options exercisable into SSFs. This means that upon exercising of an SSF option contract, the buyer or seller of the option then becomes the buyer or seller of a Single Stock Futures contract. Each SSF contract, upon expiry, is physically settled i.e. the long position holder (buyer) of a futures contract takes delivery of the actual scrip from the short position holder (seller).

 

 SSFs offer investors an opportunity to enhance the performance of their equity portfolios, protect their investments against adverse price movements and cheaply diversify risk.


Who uses SSF Contracts? 

SSFs appeal to a wide audience – from the sophisticated retail investor to a range of professional traders, asset managers and short-term equity traders. Buyers and sellers of SSFs will normally either be hedgers or speculators. Hedgers seek to reduce risk by protecting an existing share portfolio against possible adverse price movements in the physical market. Hedgers have a real interest in the underlying shares and use futures as a means of preserving their performance. Speculators use SSFs in the hope of making a profit on short-term movements in the futures price. Speculators may have no interest in the underlying other than taking a view on the future direction of its price.


Buyers of Physical Shares

Buyers of physical shares use SSFs to protect against rising prices in the physical market. The long, or purchasing hedge is where futures contracts are bought and later sold when shares are purchased on the physical market. A rise in the physical market price over the period of the hedge will be offset by a gain on the futures transaction. Conversely, a fall in the physical market price over the period of the hedge will be offset by a loss on the futures transaction. Whatever the outcome, the buyer has obtained price security against rising prices over the period of the hedge. An added advantage to the buyer of a futures contract is that it allows the buyer to benefit from a favourable market without having to layout the full capital cost of buying the underlying asset. For example, one futures contract for an Anglo-American Corporation share currently costs R4500. One futures contract implies an exposure to 100 Anglo American shares worth R45000 in the physical market. Any positive moves in the share price during the term of the hedge will clearly have more effect on the futures position (by virtue of its gearing effect) than on the physical position.  


Sellers of Physical Shares 

Holders of physical shares use futures to protect against falling prices in the physical market. Instead of selling the shares, and buying them back later once the market has fallen, a holder of shares could, instead, sell the equivalent in future contracts. The short, or selling hedge is where a futures contract is sold by a seller and later bought back when the shares are sold on the physical market. A fall in the physical market price over the period of the hedge will be offset by a gain on the futures transaction. Conversely, a rise in the physical market price over the period of the hedge will be offset by a loss on the futures transaction. Whatever the outcome, the holder of the shares has obtained price security against falling prices over the period of the hedge. In addition, the transaction costs are greatly reduced by using futures. The brokerage incurred from selling the shares and then later buying them back, once the seller feels that the market has bottomed out, would far exceed the costs relating to the futures transaction.


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