More N.Z. investors putting money into the futures market

Press, 7 March 1984, Page 26

More N.Z. investors putting money into the futures market

By

NEILL BIRSS

Futures, the investment for the person with a cool nerve, plenty of spare cash, and a taste for the thrills of speculation is attracting more and more money from the New Zealand investors. New commodities could well be traded on the futures market later this year, joining wool. The turnover of the New Zealand wool futures market in January was $4O million. In January the previous year it was only $l2 million. In Chicago, the home of commodities trading, investors can speculate in coffee, cotton, orange juice, geld, pork bellies, palladium (metal), wood, Eurodollars, Treasury bills, share indices, plywood, rice, oats and scores of other goods. In all, it is possible to trade in 96 futures markets in America. In London, at least five exchanges trade in commodities, some of which, including soybean oil, sugar, and crude oil, rank below the New Zealand crossbred wool futures in importance. Contracts on the New Zealand wool futures market are traded daily through the London and New Zealand Futures Association exchange. In Australia, futures contracts are traded in Merino wool, live cattle, gold, United States dollars, fat lambs, interest rates, silver, and on the share index. Trading in futures or commodities, has come late

to New Zealand. It began with the crossbred wool contract in 1980, and at present this is still the only commodity being traded. The Auckland Coin and Bullion Exchange is running an exchange in gold and silver options, but this is not a full futures market. Thus, at present, those with a taste for the thrills of futures trading must be satisfied with trading in contracts based each on 2500 kg of scoured wool, type 35F2D — about 21 bales of wool. The contract is an agreement to deliver the wool at a certain date, or to take delivery of it. However, such physical delivery seldom takes place. About 98 per cent of contracts are instead closed (cancelled out), by the speculator’s taking the opposite position. For example an investor might open a contract, buying August wool futures at 400 c per kg on March 1. The investor might close out by negotiating a contract on May 20 to sell August wool futures at 430 c per kg. The investor would thus take a profit of 30c per kg. For each 1c movement in the price of wool there is a $25 change in the position of the speculator. Our investor would have made $750, less $BO brokerage. Losses can be made as easily. Hedging is another side to the market. This is why. futures arose. Hedging altows commodities producers

or users, such as farmers or merchants, to reduce their risks. For example, a farmer might sell futures contracts to coincide with the shearing of his wool. The futures market will probably closely reflect the present actual, or physical market for wool. Come shearing time, if the price of wool is down, the fanner will be able to

counter this by making money on the wool futures market. He would do this by buying contracts to supply wool, which would be cheaper, to close out his earlier selling contract. The producer or merchant thus uses the market to lessen the risks of fluctuations in prices but sacrifices chances of' windfall gains. The speculator buys the

chance of making these windfall gains but must bear the risk losses. For the speculators the rewards and punishments can be very swift. Futures, unlike shares, cannot be purchased and safely stored away while the owner goes overseas for a holiday. The rapid see-sawing comes from what the brokers call leverage: typically the speculator is asked

to put up 4 per cent to 10 per cent of the full contract value. Thus on the 2500 kg of wool, worth perhaps $lO,OOO, the speculator puts up $4OO. Thus a 10 per cent movement in the value of wool futures contract is likely to mean a move of about 250 per cent in the value of the speculator’s deposit.