Opportunities in Trading World Indices with CFDs

Opportunities in Trading World Indices with CFDs

Updated 26.11.2012

Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. Phillip Securities accepts no liability whatsoever with respect to the use of this document or its contents.


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• Investments are subject to investment risks. The risk of loss in leveraged CFD trading can be substantial. You may sustain losses in excess of your initial funds and may be called upon to deposit additional margin funds at short notice. If the required funds are not provided within the prescribed time, your positions may be liquidated.

• You should also consider the commission and finance costs involved for trading CFDs. The resulting deficits in your account are subject to penalty charges. The value of investments denominated in foreign currencies may diminish or increase due to changes in the rates of exchange.

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Disclaimer


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• CFDs may not be suitable for clients whose investment objective is preservation of capital and/or whose risk tolerance is low. Clients are advised to understand the nature and risks involved in margin trading.

• You are advised to read carefully and understand the Risk Disclosure Statement from www.phillipcfd.com/download/PhillipCFDRiskDisclosureStatement.pdf before undertaking transactions in CFDs.

• Any CFD offered is not approved or endorsed by the issuer or originator of the underlying security and that the issuer or originator is not privy to the CFD contract.

• Phillip Securities Pte Ltd reserves the right to amend the information presented without prior notice.

• The Straits Times Index CFD (the “Securities”) are not in any way sponsored, endorsed, sold, or promoted by FTSE International Limited, The London Stock Exchange Plc, The Financial Times Limited, SPH Data Services Pte Ltd, Singapore Press Holdings Ltd or Singapore Exchange Securities Trading Limited (collectively, the “Index Sponsor”), and the Index Sponsor bears no liability in connection with the administration, marketing or trading of the Securities. No warranty or representation or guarantee of any kind whatsoever relating to the Straits Times Index (the “ST Index”) or the Securities is given by the Index Sponsor. Singapore Press Holdings Ltd is entitled to all intellectual property rights in the ST Index.

• Some information in this presentation as been obtained from public sources which PSPL has no reason to believe are unreliable. PSPL has not verified such information and no representation or warranty, expressed or implied, is made that such information is accurate, complete or verified or should be relied upon as such.



Disclaimer (continued):



What is Contracts for Difference (CFD)?

A CFD is a derivative product

that allows you to participate

in the price movement of an

underlying share / index,

without owning the shares of

the company.




Client BrokerageHouse

CFD trades

Contractual agreement between two parties to settle the difference between the closing and opening price at the close of contract.

Definition of CFD




CFD – A trading instrument to complement your trading strategies

Convenient to short sell

Flexible trading strategies

Diversify with up to 20 times leverage

Gross Profit or Loss =

(Closing Price – Opening Price) x Value of 1 Index Point x Quantity



Let’s zoom into the World Indices…



What is an Index?

• An index is a compilation of stocks constructed in such a manner to track a particular market, sector, commodity, currency, bond, or other asset

• Provides investors a macro view of the performance of the area which the index tracks by referencing to a single value



Is the Index Tradable?

• The answer is YES• Technically one can replicate the index by

buying a basket of underlying stocks in their respective weightage but it proves to be …– Cumbersome – Costly – High error of execution – Tiring



Is the Index Tradable?

• Introduction of derivative and specially structured products easy access to trading the index

• World Indices CFD, Index Warrants, Index ETFs, Index Futures, Index Options



Features of the World Indices CFD

• Gain exposure to market movement of underlying indices

• Up to 20x leverage• Long and Short• Competitive spread• No expiry unlike Futures, Options and Warrants• Enjoy corporate actions on ex-date• Small contract size – minimum of 1



Kinds of World Indices CFDs

• There are currently 2 kinds of index CFDs listed in our World Indices CFDs offering– Cash-derived Index CFDs

– Cash-correlating Index CFDs



Cash-Derived Index CFD

• Straits Times Index SGD5 CFD• Quotes are based on the STI and a 3.6 point

spread is marked around it. • The 3.6 point spread is fixed around the index

but skews may occur.



Cash-Derived World Index CFD

Cash-Derived World Index CFDSTI: 3115.56

STI: 3115.6

Bid: 3113.8 Ask: 3117.4

Bid: 3114.6 Ask:3118.2Bid: 3112 Ask: 3115.6

Naturally rounded

+1.8-1.8

OR OR

+0-3.6 +2.6-1



Cash-Correlating Index CFD

Product Correlates With

Singapore Index SGD20 CFD MSCI Singapore

Hong Kong 40 Index HKD5 CFD Hang Seng Index

H Shares Index HKD5 CFD China Enterprise Index (H-shares)

Japan 225 Index JPY100 CFD Nikkei 225

Tokyo Index JPY1000 CFD TOPIX

Taiwan Index USD20 CFD MSCI Taiwan

Wall Street Index USD1 CFD Dow Jones Industrial Average

US SP500 Index USD5 CFD S&P 500

US Tech 100 Index USD5 CFD NASDAQ 100

US Rus2000 USD10 CFD Russell 2000

List of World Indices CFDs



Cash-Correlating World Indices CFD Vs Cash Index

US SP 500 Index CFD

S&P 500



Cash-Correlating World Indices CFD Vs Cash Index

H Shares Index CFD

China Enterprise Index (H-shares)



Who Would Trade the World Indices CFDs?

Traders and investors who want to:• participate in market movements of

certain indices without need to stock pick

• hedge against market sentiment without selling their stocks

• trade on a derivative instrument which has no expiry

• trade a product that caters for dividends



In Summary, World Indices CFD

• Is a form of CFD allowing clients to trade the underlying index

• It tracks the level of the index, although the prices may differ from the actual index levels

ProfitProfit / / LossLoss

2100

2200

2300

2400

2500

2600

2700

Investor may take a bearish view and Sell (Short) a STI CFD contract on Index at 2450

When the index level increases to 2600, investor can Buy back his STI CFD contract and incur a loss

2100

2200

2300

2400

2500

2600

2700

When the index level increases to 2600, investor can Sell off his STI CFD contract and receive the profit

Investor may take a bullish view and Buy (Long) a STI CFD contract on Index at 2350



Contract Specifications



World Indices Offered Under Phillip CFD

Hong Kong 40 HKD5 Index CFD

Product Name Traded Currency Index point value

Contract Size = Price of Index x HK$5 x Qty

How to interpret the product names



Straits Times Index SGD5 CFD (Cash-Derived)

Index

Value of 1 Index Point

Contract Size

*Target Spreads

Initial Margin

(IM)

Mainte-nance Margin (MM)

CFD Trading Hours (Singapore time)

Straits Times Index SGD5 CFD

S$5

S$5 x Price of Index x

Qty

3.6 5% 5%9:01 am – 4:59

pm

For example: Assume STI is currently at 3000.8 pts

CFD Bid CFD Ask

Straits Times Index SGD5 CFD 2999 3002.6

*Target spread -1.8 +1.8

*Target spreads are subject to variation, especially in volatile market conditions and may widen during out-of-trading hours



Features of Straits Times Index SGD5 CFD

Low margin requirements

Trade Singapore blue chip counters from as low as…

5%(20 times leverage)

Example:Long 1 lot of Straits Times Index SGD5 CFD @ 3000Contract size = 3000 x S$5 x 1 = S$15,000Margin requirement = 5% x S$15,000 = S$750.00



Order Execution for Straits Times Index SGD5 CFD?

Golden Rule: Buy on Ask, Sell on Bid

2997 3003

BID ASK



Singapore Index SGD20 CFD (Cash-Correlating)

Index

Value of 1

Index Point

Contract Size

*Target Spreads

Initial Margin

(IM)



Singapore Index

SGD20 CFD

S$20

S$20 x Price of Index x

Qty

0.3 5% 5% 8:31am – 5:09pm




Wall Street Index USD1 CFD (Cash-Correlating)

Index


Contract Size

*Target Spreads

Initial Margin

(IM)



Wall Street Index USD1 CFD

US$1 US$1 x Price of Index x

Qty

4 5% 5%

7:00 am – 4.00 am (DS) or 7:00 am – 5.00 am

(Non-DS)




US SP 500 Index USD5 CFD (Cash-Correlating)

Index


Contract Size

*Target Spreads

Initial Margin

(IM)



US SP 500

Index USD5 CFD

US$5 US$5 x Price of Index X

Qty

0.5 5% 5%

7:00 am – 4.00 am (DS) or 7:00 am – 5.00 am (Non-DS)




US Tech 100 Index USD5 CFD (Cash-Correlating)

Index


Contract Size

*Target Spreads

Initial Margin

(IM)



US Tech 100

Index USD5 CFD

US$5 US$5 x Price of Index x

Qty

1 20% 20%





US Rus2000 Index USD10 CFD (Cash-Correlating)

Index


Min Contract Size

Contract Size

*Target Spreads

Initial Margin

(IM)


CFD Trading Hours

(Singapore time)

US Rus2000

Index USD10

CFD

US$10 1US$10 x Price of

Index x Qty0.5 20% 20%





Corporate actions

Participate in corporate actions

When a World Index CFD that caters for corporate actions announces dividends:

- Long positions to receive cash adjustment in World Index CFD Contract- Short positions to pay cash adjustment in World Index CFD Contract- Cash adjustment is done on Ex-Date

Formula for dividend adjustment

Step 1: Equivalent number shares =

[Qty of Index Contract x Settlement Price of Index CFD x Value of 1 Index Point] x Stock Weighting on the Index / Settlement Price of Component Stock

Step 2: Dividend adjustment = Equivalent number of shares x dividend issued per share



Corporate Actions

Contract DividendsWall Street Index USD1 CFD Yes

US SP 500 Index USD5 CFD Yes

US Tech 100 Index USD5 CFD Yes

Japan 225 Index JPY100 CFD Yes

Tokyo Index JPY1000 CFD Yes

Hong Kong 40 Index HKD5 CFD Yes

H Shares Index HKD5 CFD Yes

Taiwan Index USD20 CFD Yes

Straits Times Index SGD5 CFD Yes

Singapore Index SGD20 CFD Yes



Using Equities CFD & World Indices CFD as hedging tools

Assuming Client A bought 1 lot of ABC

component shares at $15.43 on 15 Apr, but the price came

tumbling down soon after. What options

does Client A have at this point? Assume bearish conditions.




Buy 1 lot of ABC component share,

If the client held on to the position till 10 Jun and sold it off at $13.24,

Losses = ($13.24 - $15.43) * 1,000 = $2,190

Commission = ($15,430 * 0.28%) + ($13,240* 0.28%)

= $43.20 +$37.07

= $80.27 ($85.89 with GST)

Exchange fees = $7.84 + $6.73

= $14.57

Net Loss = ($2,284.84)

What can client A do? (Assuming client does not trade CFDs)




To hedge his positions, Client A can short-sell 1

contract of STI SGD5 CFD at 3,037 on 15 Apr and buy back at 2,750

on 10 Jun. Assume bearish conditions.




Gross Profit/Loss = (3,037 – 2,750) * $5 = $1,435

Commission = $20 ($21.40 with GST)

Interest = $85.86

Profit = $1,329.14

Client A profits $1,329.14 from this hedging position

Net Loss = ($955.70)

Hedging with Straits Times Index SGD5 CFD



STI CFD STI Warrants

Margin requirement / Capital outlay (%) 5% of contract value Varies, low

Margin requirement / Capital outlay ($)

About $500-700, with STI between 2000-2800 pts

Typically $200-500(for front month warrants^)

Factors affecting priceTransparent, tracks the

actual STI point by point

Time to expiry, implied volatility, strike price, price of underlying,

risk-free rate, etc

Expiry30 days, with perpetual

auto-renewal functionTypically within 1 to 4 months, upon

which warrant expires worthless

“Short-sell” functionJust a mouse click or trade

call away!Yes, subject to availability

of Put Warrants

Commission(before GST) $3 per side/lot

About 0.28% (before SGX clearing & access fees)

Finance interest

5.5% p.a. (Long)3.0% p.a. (Short)

on 100% marked-to-market contract value

None. However, theta (time decay) is significantly large and accelerates

exponentially as warrant approaches expiration

*Dollar value for Contract value and Margin requirements are used for illustrations only, assuming the underlying asset trades at a certain level.

^For contract month with an expiration date closest to the current date/month.

Comparing Straits Times Index SGD5 CFD to STI Warrants



STI CFD STI Futures SIMSCI Futures

Contract value$5 x Traded Price

of STI CFD$10 x STI Futures

Price$200 x SIMSCI

Futures Price

Contract value ($)$12,500

(if STI at 2500)$25,000

(if STI Futures at 2500)$60,000

(if SIMSCI at 300)

MR (%) 5% Between 5-10% Between 5-15%

MR ($) Low, ~$600 Mid, ~$1125 High, ~$4375

Volatility

Tracks the actual STI

point by point Tracks the STI closely More volatile than STI

Liquidity & Typical Spread

Highly liquid, target spread

of 3.6 pts

Illiquid, low volume, potentially large spread

of 6 to 30 pts

Highly liquid, tight spread of

0.1 to 0.4 pts (1 - 4 STI pts)

“Short-sell” Yes Yes Yes

Commission $3 per side/lot $10 per side/lot $12 per side/lot*Dollar value for Contract value and Margin requirements are used for illustrations only, assuming the underlying asset trades at a certain level.

Comparing Straits Times Index SGD5 CFD to STI Futures & SIMSCI Futures



Working Examples, Example 1: ‘BUY’ (Long) Straits Times Index SGD5 CFD

.Client is bullish on Straits Times Index and decides to buy (LONG) 1 contracts of

Straits Times Index SGD5 CFD at 2943. Assuming margin requirement for XYZ is 5% with leverage of 20 times.

Bought at 2943

Sell off at 3173

The listed example is for illustration purpose only.

Past performance not indicative of future

performance




Quantity 1 contract

Initial Capital $735.75

Opening @ 2943:

Contract Value $14,715

Commission (w 7% GST) ($10.70)

Position closed on Day 21

Finance Charges* ($46.44)

Closing @ 3173:



Net Profit / (Loss) $1,082.16

Return on Equity (%) 147.08%

Scenario 1: Client closed his position 21 days later and sold off Straits Times Index SGD5 CFD at 3173.

*Finance charge is calculated based on contract opening price, assuming it remains unchanged.




Quantity 1 contract

Initial Capital $735.75

Opening @ 2943:



Position closed on Day 21

Finance Charges* ($46.44)

Closing @ 3173:



Net Profit / (Loss) ($1,262.84)

Return on Equity (%) (171.64%)

Scenario 2: Client closed his position 21 days later and sold off Straits Times Index SGD5 CFD at 2704.

*Finance charge is calculated based on contract opening price, assuming it remains unchanged.



Phillip Securities CFD Team

Why ?




Results from Investment Trends 2012 Singapore CFD & FX Report, based on ratings given by 12,200

investors




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enhance your enhance your trading trading



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Economy & Finance

Opportunities in Trading World Indices with CFDs