Two derivatives futures contract expires at NGX

ON Friday, March 15, two futures contract, the NGX30 Index Futures and NGX Pension Index Futures, expired at the floor of the Nigerian Exchange.

The NGX30 Index Futures, listed on September 11, 2024 expired after three months on March 15.

Listed at an initial margin of six percent, the contract closed at 3,907.47 as against a listing price of 2,616.75.

Giving a sample scenario of the NGX 30 Index Futures, NG Clearing noted that if a speculative trader who bought one contract of NGX30H4 in September 2024, at the listing price of 2,616.75, with an initial margin of six percent and using a contract multiplier of 1,000, the initial margin requirement for one contract, the initial margin would be N157, 005.

“Now, if the trader held the contract until the expiration date (March 15, 2024) when it closed at 3907.47, the profit/ loss calculation would be the closing price subtracted from listing price, multiplied by multiplier and number of contracts.

“So, in this scenario, the speculative trader would have made a profit of N1,290,720 on one NGX30H4 Index Futures contract with an initial margin outlay of N157,005, representing 722.09 per cent ROI between September 2023 and March 2024. This example reflects the gearing effect of derivatives, but it is also worth noting that this gearing can also multiply potential losses.”

Meanwhile, the NGX Pension Index futures, listed on September 11, 2023 also expired in March 15, 2024. The future, listed at 3022.25 closed at 3899.90 with contract multiplier of1,000 and initial margin of 6.37 percent.

This means if a speculative trader had bought one contract of NGXPENSIONH4 in September 2023 at the listing price of 3022.25 with an initial margin of 6.37 percent and using a contract multiplier of 1,000, the initial margin requirement for one contract.

Speaking in the benefits of trading Index Derivatives Futures, Mr Farooq Oreagba, MD/CEO, NG Clearing Limited noted that with components of the futures contract, investors 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.

He added that speculative investors who do not own stocks in the NGX30 INDEX or NGXPENSION 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.

Oreagba also noted that trading derivatives aids diversification and exposure. “Investors who wish to gain exposure to the NGX 30 INDEX or NGXPENSION 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.”

Kehinde Akinseinde-Jayeoba