The Singapore International Monetary Exchange (Simex)
announced on 27 April 1998 that it would launch in August a
stock index futures contract based on the Singapore stock
market. In addition, it also plans to come up with two more
stock index futures contracts, one on the Thai stock market,
and the other on the Malaysian stock market. This means, very
soon, small investors who have a view on the broad movements
of these three markets will be able to put their money where
their beliefs are.
Quite a number of people would still remember the collapse
of Barings Group in the hands of rogue futures trader Nick
Leeson. Some of them may associate words such as "speculation",
"futures", "Leeson" more with gambling than with financial
centres. While such a view may be difficult to change, we should
quickly point out that a financial derivative that can be used
for speculation can also be effective hedging tools.
To make a point, let me repeat a known fact about the
German tennis player Steffi Graf. When Graf was in the final
rounds of major tournaments, her father was known to bet against
her. Some sports journalists speculated that the senior Graf
was superstitious. But I believe that he was simply hedging.
The winning from the bet would definitely dull the anxiety when
Graf was on the verge of being defeated. Of course, the joy of
victory would also be dampened by the loss on the bet. But then
how often do we hear people who have survived a term insurance
say: "I should not have bought the insurance!"
This series aims to enhance small investors' understanding
of the stock index futures in general and the Simex MSCI
Singapore Stock Index Futures contract in particular. Selected
issues related to stock index futures will be discussed. They
are outlined below and will appear in the following sequence:
*Speculating with Stock Index Futures
*Hedging Using Stock Index Futures
*Arbitrage Using Stock Index Futures
*MSCI Singapore Free Index
*The History and Development of Stock Index Futures
*Simex and Investor Protection
*Simex MSCI Singapore Stock Index Futures Contract
Stock Index Futures (SIF) contracts have been around for
over 15 years. Institutional investors are familiar with such a
product. The targeted readership of this series is the small
investor.
We will illustrate in the next article how an investor with
a view on the broad market movement can use SIF to profit from
his belief if it turns out to be correct. The risks and advantages
of SIF as a speculative instrument will be highlighted.
The third article of the series explains how a stock investor
can use SIF to hedge against anticipated market corrections.
We then present in the following article an actual example of
program trading where handsome, riskless profit was made through
arbitraging between the spot market (i.e. the stock portfolio)
and the futures market using S&P500 SIF contracts. The example
serves to demonstrate how arbitrage activities help to correct
the mis-pricing in the market place.
Many investors must have many questions following after
the Simex announcement. What is this index called MSCI Singapore
Free Index? What stocks are included? How is it compiled? By whom?
Why is it chosen over the far more familiar (at least to the local
investors) Straits Times Industrial Index? Will it be susceptible
to manipulation? The fifth article offers some answers.
Since the Kansas City Board of Trade introduced the first SIF
in 1982, many SIF contracts have been traded on various exchanges
with various degrees of success. Our sixth article will provide
the historical development of this very innovative financial
derivative. Hopefully we can draw on the experiences of other
exchanges and make the Simex MSCI Singapore SIF a successful one.
Small investors will naturally be concerned about the measures
taken by Simex to safeguard their interest against unfair practices.
We will describe the risk management mechanisms of Simex in our
second last article.
Finally, we will conclude the series with a thorough explanation
of the
