Guru Speak

Last November, TFEX launched singlestock futures contracts as a hedging instrument and another alternative for Thai investors.

The first set of such futures had only three stocks as underlying assets: Advanced Info Service, PTT and PTT Exploration and Production.

However, average trading volume was only 150 contracts per day. This lack of liquidity was due to investors' unfamiliarity with the product, the limited number of underlying stocks and the overall stock market's downward trend.

In addition, some participants questioned as to whether stock futures accelerated the underlying stock market's descent.

To help resolve these issues, TFEX introduced many measures, including appointing two marketmarkers for singlestock futures and listing a second set of stock futures.

The marketmakers enhanced liquidity by providing continuous bids and offers, boosting the confidence of investors, as they could get in and out of positions easily.

TFEX's second set of stock futures increased investors' choices for underlying stocks, with Banpu, Bank of Ayudhya, Bangkok Bank, ItalianThai Development, Kasikornbank, Krung Thai Bank, Land & Houses, Quality Houses, Siam Commercial Bank, Siam Cement and Thoresen Thai Agencies as the underlying shares.

These 11 shares are popular, with large market capitalisation, high liquidity and higher than average price volatility. They are in diverse industrial sectors, and thus suit investors' needs for hedging and trading in diversified sectors.

To illustrate how investors might use singlestock futures to hedge, let's look at institutional investors, such as equity mutual funds. Such funds, on average, have about 60 per cent of their portfolio in banking stocks.

They can now short stock futures to guard against a potential price fall of their bank stock holdings.

In contrast, they can long futures in a particular banking stock to increase exposure if they expect that stock to outperform other shares.

Increasing or decreasing exposure using stock futures is more costeffective than trading in the underlying shares.

This is because trading stock futures requires a margin deposit of only 15-20 per cent of the contract value as initial investment, while buying stocks requires the full value of the security.

Also, margin requirements can be reduced if investors hold certain positions that result in risk reduction.

For example, holding a long position in one stock future and a short posi¬tion in the same future but with a different contract month - the socalled calendar spread position - will result in lower margin requirements because any loss from holding long positions will always be offset by any gain in short positions, and vice versa.

This helps reduce the risk of the total position and thus margins collected are lower.

Margin requirements may be further lowered if investors hold certain riskoffsetting positions in stock futures with different underlying stocks.

Since the listing of the second set of the stock futures on June 22, daily trading volume of singlestock futures increased from 150 contracts to 550-600 contracts, with a value of Bt45 millionBt50 million per day. Although it is too soon to conclude that stock futures have gained more attention from investors, things seem to be on the right track.

It is key that investors who trade stock futures realise that futures are leverage products, and therefore trading involves more risk - for both gains and losses - than trading the underlying products.

If the characteristics and risks of the product are well understood and prudently used, then stock futures should well serve investors for their trading and hedging.

Those who are interested in learning more about stock futures should visit www.tfex.co.th