Fledgling N.Z. futures in increasing favour

Press, 27 November 1986, Page 33

Fledgling N.Z. futures in increasing favour

The sharemarket has been attracting investors in ever-increasing numbers over the last 12 months at an almost alarming rate.

Another market which has also been in favour, but not to the same extent, is the fledgling New Zealand futures industry.

Contracts with a face value of over $lB billion have been traded over the last six months covering interest rates, foreign exchange, wool and wheat.

The futures market is different things to different people. According to Dr Brent Layton in a recent publication by Egden Wignell and Co. Futures. Ltd: “A futures contract is a legally binding agreement to buy or sell a specified quantity of a particular commodity or financial instrument at a predetermined date in the future at a price agreed upon when the contract is entered into. “Contracts are traded on exchanges in a manner

similar to the way in which shares are traded, with brokers bidding and offering, and trades taking place when the buyer and the seller agree on a price. The by-laws of the exchange relating to the contract detail requirements for delivery of the commodity or financial instrument upon the maturity of the contract. “The by-laws of some contracts provide for final settlement of accumulated profits or losses at maturity to be by a cash payment, and in these contracts there is no delivery of the actual commodity or financial instrument at maturity. “Futures contract positions, once opened, can either remain open until maturity, when delivery or cash setlement, as specified in the contract by-laws, takes place, or may be offset by opening an equivalent, but opposite, position in the same contract month of the contract for the same commodity or financial instrument.

"In other words, if a trader who originally opened one bought contract, he or she could liquidate, or offset, that position by taking one sold contract for the same delivery month in the same contract. “Likewise, a trader who originally opened one sold contract can liquidate his or her position by taking one bought contract in the same contract month. Virtually all contracts entered into on futures markets are offset in this manner before delivery or cash settlement. “There is no necessity when liquidating, or offsetting, a futures position to enter into the opposite contract with the same party as was on the other side in the transaction in which the original position was opened.

“The difference between the value of the contract in the original agreement and the value of the later offsetting contract is the profit or loss on the futures transaction.”