Here’s NG Clearing quarterly review of expiring Futures Contracts

On December 15, 2023, two contracts expired: NGX30Z3 and NGXPENSIONZ3.

Below are details of the contracts with sample scenarios.

1. NGX30 INDEX FUTURES

Code: NGX30Z3

Listing Date: June 13, 2023

Expiration Date: December 15, 2023

Listing Price: 2124.75

Closing Price: 2665.53

Contract Multiplier: 1000

Initial Margin: 6 percent

Sample Scenario for NGX30Z3 Futures:

If a speculative trader who, bought one contract of NGX30Z3 in June 2023, at the listing price of 2124.75, with an initial margin of 6percent 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 = (2124.75 × 1000) × 0.06 = N127,485

Now, if the trader held the contract until the expiration date (December 15, 2023) when it closed at 2665.53, the profit/ loss calculation would be as follows:

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

Profit = (2665.53 − 2124.75) × 1000 x 1= N540,780

So, in this scenario, the speculative trader would have made a profit of N540,780 on one NGX30Z3 Index Futures contract with an initial margin outlay of N127,485, representing 848.38percent annualized ROI between June 2020 and December 2023. 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: NGXPENSIONX3

Listing Date: June 13, 2023

Expiration Date: December 15, 2023

Listing Price: 2,341.75

Closing Price: 3124.96

Contract Multiplier: 1000

Initial Margin: 6 percent

Sample Scenario for NGX3PENSION30 Futures:

If a speculative trader who, bought one contract of NGXPENSIONZ3 in June 2023, at the listing price of 2341.75 with an initial margin of 6% 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 = (2341.75 × 1000) × 0.06 = N140,505

Now, if the trader held the contract until the expiration date (December 15, 2023) when it closed at 3124.96, the profit/ loss calculation would be as follows:

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

Profit = (3124.96 − 2341.75) × 1000 x 1= N783,210

So, in this scenario, the speculative trader would have made a profit of N783,210 on one NGXPENSIONZ3 Index Futures contract with an initial margin outlay of N140,505, representing 1114.85% annualized ROI between June 2020 and December 2023. 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 in Q1 2024.

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

Stanbic Securities