The NG Clearing in its recent report on expired futures contracts for second quarter (Q2) of 2024 noted that on June 21 two futures contracts expired. The expired futures contracts are NGX30H4 and NGXPENSIONH4,
1. NGX30 Index Futures
Code: NGX30M4
Listing Date: December 18, 2023
Expiration Date: June 21, 2024
Listing Price: N2,750.75
Closing Price: N3,694.66
Contract Multiplier: 1000
Initial Margin: 6percent
If a speculative trader bought one contract of NGX30M4 in December 2024, at the listing price of 2,750.75, 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 = (N2750.75 × N1000) × 0.06 = N165,045
Now, if the trader held the contract until the expiration date (June 21, 2024) when it closed at 3694.66, the profit/ loss calculation would be as follows:
Profit = (Closing Price minus Listing Price) × Multiplier x number of contracts
Profit = (N3694.66 − N2750.75) × 1000 x 1= N943,910
So, in this scenario, the speculative trader would have made a profit of N943,910 on one NGX30M4 Index Futures contract with an initial margin outlay of N165,045 representing 472.91 percent ROI between December 2023 and June 2024. This example reflects the gearing effect of derivatives, but it is also worth noting that this gearing can also multiply potential losses.
2. NGX Pensions Index Futures
Code: NGXPENSIONM4
Listing Date: December 18, 2023
Expiration Date: June 21, 2024
Listing Price: N3,225.50
Closing Price: N3,688.86
Contract Multiplier: 1000
Initial Margin: 6 percent
Sample Scenario for NGXPENSIONM4 Futures:
If a speculative trader bought one contract of NGXPENSIONM4 in December 2023, at the listing price of 3225.50 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 = (N3225.50× N1000) × 0.06 = N193,530
Now, if the trader held the contract until the expiration date (June 21, 2023) when it closed at 3,688.86, the profit/ loss calculation would be as follows:
Profit = (Closing Price minus Listing Price) × Multiplier x number of contracts
Profit = (N3688.86 − N3225.50) × 1000 x 1= N463,360
So, in this scenario, the speculative trader would have made a profit of N463,360 on one NGXPENSIONH4 Index Futures contract with an initial margin outlay of N193,530, representing 139.43percent ROI between December and June. 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:
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 NGX Pension 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.
Diversification and exposure:
Investors who wish to gain exposure to the NGX 30 Index or NGX Pension 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.