FUTURES More about share index premiums

Press, 7 January 1987, Page 29

FUTURES More about share index premiums

January share index futures were 45 points down at the close yesterday compared with Monday’s final prices. This represents $9OO a contract. This compares with a fall of 9.71 points in the index itself. The share futures closed on their lows in extremely light trading — much too light to be taken as a trend. The January contract is now at a discount of 26.90 points to the index, while march contracts are at a discount of only 6.90 points. Comments in the futures column yesterday about the theoretical premium on futures over holdings in the underlying commodity or financial instrument (such as shares representing make-up of a share index contract) have created interest among readers. The Wellington broker who remarked about the premium on Monday said last evening his firm’s calculation of the theoretical premium was done this way. The face value, or deliverable value (or theoretical deliverable value in the case of the nondeliverable share index contract) is first calculated. Share index futures are on the basis of $2O a point of the Barclay’s index. Therefore, 20 times yesterday’s index (3781.90) gives a “theoretical delivery” value of $75,638. From this is deducted the deposit on a futures contract, $l2OO. Interest on this amount, $74,438, is then calculated at appropriate current rates (25 per cent a year) for the period until the contract expires. This gives $1550 for the January contract. Divided by 20 (for $2O a point) this gives a theoretical one-month premium of 77 points. This premium is the opportunity cost of holding money in shares representing the face value of the futures contract. However, this is only one factor to the futures trader.

The expected direction of the index is probably the primary factor. Futures on the Australian all-ordinaries contract (these move at sAustloo an index point) for most of last year were at a discount to the price of shares representing the share index. Only recently have they traded at a premium. Mr Geoff McDonnell, futures manager of Mair Astley, Ltd, said yesterday his firm had surveyed South Island sharebrokers and found most of them expected the Barclay’s index to fall between now and March. “We find this faintly puzzling,” Mr McDonnell said, citing what he believes are the strengths of the market — the number of “entrepreneurs” such as Brierley, Hawkins, Reynolds, Francis, and Renouf, who he believes will hold confidence up. The U.S. dollar futures contract eased yesterday with the stronger kiwi dollar. At the close, the January contract was down 150 points, or SNZ7SO a contract. Government stock contracts were 10 points down on Monday (close to close). Mr McDonnell said the physical secondary market for Government stock was being affected by higher interest rates on the short-term market. This was causing yields to rise, and thus putting downward pressure on Government stock futures, which move inversely to the physical market. Mr McDonnell says the stronger kiwi dollar may put pressure on wool prices at auction, and thus on wool futures. Wheat futures are dormant again. Some brokers say the minor flurry of trading in this contract between Christmas and New Year was contracts being closed out.' The commercial bills contract (PCPs), which dropped in interest because of the varying quality of the under-, lying paper presented for de-

livery, is now virtually dead. The 22 contracts traded yesterday were investors closing out, Mr McDonnell said. In Sydney, March share price index futures closed 15.0 points higher at 1549.0 after reaching 1562.0. - Details of yesterday’s New Zealand trading: SUS CONTRACTS Mth Open H/L Last Vol Jan 1.8850 8850/700 8710 44 Contracts traded: 44. Open positions at Jan 5: Jan 501, Feb 14, Mar 20, total 535 (down 63). COMMERCIAL BILLS Mth Open H/L Last Vol Mar 7750 750/750 750 22 Contracts traded: 22. Open positions at Jan 5: Jan 6, Feb 5, Mar 371, Jun 123, Sep 43,Dec 40, Mar 39, Jun 10, total 637 (same). GOVERNMENT STOCK Mth Open H/L Last Vol Jan 8280 290/280 290 2 Mar 8293 294/283 289 82 Contracts traded: 84. Open positions at Jan 5: Jan 8, Mar 2520, total 2528 (up 73). WOOL FUTURES Mth Open H/L Last Vol Jan 577 578/577 578 3 Mar 584 584/580 580 4 May 593 593/591 591 14 Dec 611 611/610 610 6 Jan 612 612/611 611 3 Mar 615 615/615 615 5 May 615 617/615 617 4 Contracts traded: 39. Open positions at Jan 5: Jan 113, Mar 394, May 510, Aug 217, Oct 184, Dec 133, Jan 205, Mar 201, May 99, total 2056 (down 1). WHEAT FUTURES Contracts traded: nil. Open positions at Jan 5: Same. M-DAY BANK BILLS Mth Open H/L Last Vol Jan 7580 630/580 582 50 Feb 7690 690/685 690 5 Mar 7810 810/765 765 22 Contracts traded: 77. Open positions at Jan 5: Jan 793, Feb 38, Mar 129, Jun 25, Sep’l6, Dec 21, Mar 21, Jun 20, Sep 20, Dec 20, total 1103 (up 6). Barclay’s Share Index Mth Open H/L Last Vol Jan 3775 775/755 755 4 Mar 3790 790/775 775 2 Contracts traded: 6. Open positions at Jan 5: Jan 8, Mar 27, total 35 (up 35).