Here’s quarterly review of expiring Futures Contracts for Q1’24

At NG Clearing Limited, two (2) contracts: NGX30H4 and NGXPENSIONH4 expired on Friday, March 15, 2024.

Details of the contracts with sample scenarios.

1. NGX30 INDEX FUTURES

Code: NGX30H4

Listing Date: September 11, 2024

Expiration Date: March 15, 2024

Listing Price: 2616.75

Closing Price: 3907.47

Contract Multiplier: 1000

Initial Margin: 6%

Sample Scenario for NGX30H4 Futures:

If a speculative trader who, bought one contract of NGX30H4 in September 2024, at the listing price of 2,616.75, with an initial margin of 6 percent and using a contract multiplier of 1000, the initial margin requirement for one contract would be calculated as follows:

Initial Margin = Listing Price ×Multiplier × Initial Margin Percentage

Initial Margin = (2616.75 × 1000) × 0.06 = N157, 005

Now, if the trader held the contract until the expiration date (March 15, 2023) when it closed at 3907.47, the profit/ loss calculation would be as follows:

Profit = (Closing Price minus Listing Price) × Multiplier x number of contracts

Profit = (3907.47 − 2616.75) × 1000 x 1= N1290720

So, in this scenario, the speculative trader would have made a profit of N1,290,720 on one NGX30H4 Index Futures contract with an initial margin outlay of N157,005 representing 722.09 percent ROI between September 2023 and March 2024. This example reflects the gearing effect of derivatives, but it is also worth noting that this gearing can also multiply potential losses.

2. NGXPENSIONS INDEX FUTURES

Code: NGXPENSIONXH4

Listing Date: September 11, 2023

Expiration Date: March 15, 2024

Listing Price: 3022.25

Closing Price: 3899.90

Contract Multiplier: 1000

Initial Margin: 6.37%

Sample Scenario for NGXPENSIONH4 Futures:

If a speculative trader who, bought one contract of NGXPENSIONH4 in September 2023, at the listing price of 3022.25 with an initial margin of 6.37 percent and using a contract multiplier of 1000, the initial margin requirement for one contract would be calculated as follows:

Initial Margin = Listing Price ×Multiplier ×Initial Margin Percentage

Initial Margin = (3022.25× 1000) × 0.0637 = N192,517.325

Now, if the trader held the contract until the expiration date (March 15, 2023) when it closed at 3899.90, the profit/ loss calculation would be as follows:

Profit = (Closing Price minus Listing Price) × Multiplier x number of contracts

Profit = (3899.90 − 3022.25) × 1000 x 1= N877,650

So, in this scenario, the speculative trader would have made a profit of N877,650 on one NGXPENSIONH4 Index Futures contract with an initial margin outlay of N192,517.325, representing 355.88% ROI between September 2023 and March 2024. This example reflects the gearing effect of derivatives, but it is also worth noting that this gearing can also multiply potential losses.

Some Practical Uses of Index Derivatives Futures:

Hedging Risk:

Portfolio Hedge: If an investor holds a portfolio of stocks that closely mirrors the components of the NGX 30 INDEX or NGXPENSION INDEX, they can use futures contracts to hedge against the risk of market downturns. By taking a short position in the futures, any potential losses in the underlying stock portfolio may be offset by gains in the futures position.

Speculation:

Investors who do not own stocks in the NGX30 INDEX or NGXPENSION INDEX may use futures contracts to speculate on the future direction of the index. By taking a long position, they can profit from potential increases in the index level. See example below.

Diversification and Exposure:

Investors who wish to gain exposure to the NGX 30 INDEX or NGXPENSION INDEX without purchasing individual stocks can use futures contracts. This allows the investor to gain exposure without having to buy each stock individually, at a cheaper cost and it requires a smaller upfront investment compared to buying the actual stocks.

Steps for Investors:

Investors should get in touch with their brokers who are also accredited Trading License Holders (TLHs) to inquire about trading NGX 30 INDEX and NGXPENSION Futures. NGX Exchange is also planning to introduce Single Stock futures soon.

Some registered TLHs include: Apel Asset Limited, APT Securities, CardinalStone Securities, Chapel Hill Denham Securities, Cordros Securities, FSL Securities, Meristem Securities, PAC Securities, RMB Nigeria Stockbrokers, and Stanbic Securities.