Friday, March 29, 2024

Derivatives steer for futures market

Avatar photo
NZX’s dairy derivatives market has cemented itself as the leading derivatives market for globally traded dairy commodities and is increasingly used as a gauge by analysts looking at where markets are heading.
Reading Time: 3 minutes

The New Zealand stock exchange operator’s dairy futures market was launched in 2010 and last year more than doubled the number of futures and options contracts traded compared with 2014.

NZX head of derivatives Kathryn Jaggard said across 2015 there were 213,677 contracts traded with August proving to be the most active with 35,761 contracts changing hands.

On the record single trading day, August 12, 5994 contracts were traded.

Jaggard said August and September were typically peak trading months as they closely preceded New Zealand’s peak milk production.

The forward price curve generated by looking at the prices futures contracts trade at many months ahead is a reflection of the market view on price direction on any given day. These prices update daily according to supply and demand factors and market sentiment. Analysts were increasingly using it when looking at market outlooks and NZX’s milk price calculator used the information as one of the inputs to set its price which has proven to be quite accurate.

NZX dairy futures were cash-settled to Fonterra’s GlobalDairyTrade (GDT) auction with near-term contracts trading at close to the auction prices. The February 2 GDT auction price dropped further than the market had anticipated, therefore fell below the near-term futures contract price.

Jaggard said most industry participants appeared to share the view that dairy prices would remain low for several more months this year. Given the near-term view for prices remained flat.

Jaggard said it was pleasing to still see a good increase in contracts traded of 26% from January 2015 to January 2016, and once there was a more firm direction in prices that would translate into even greater increases in trading in the futures market.

Futures market activity would be an early indicator of volatility returning which, given prices have been languishing for some time, should mean a sharp upward tick.

Jaggard said NZX had added other commodities to the dairy futures trading platform since it launched so it now included WMP, skim milk powder (SMP), anhydrous milkfat (AMF) and butter.

WMP was still the most actively traded with 129,000 WMP futures contracts traded last year compared with 23,776 SMP contracts, 3010 butter contracts and 5526 AMF contracts.

WMP options were also increasingly being traded on the NZX derivatives market with 52,313 traded last year.

Options differ from futures in that they are more like an insurance policy.

A future is a contract agreeing a price now for a trade that will happen in the future.

An option is where a premium is paid now that gives the purchaser the right to make the trade at a future time at an agreed price. If the purchaser doesn’t want to complete the trade at the future time the seller keeps the premium and the purchaser isn’t under any obligation to complete the trade.

Because the products traded on the dairy commodity futures market were priced in USD and were not liquid milk farmers were unlikely to trade on it but NZX was looking at developing a futures product more specifically designed for farm gate milk price risk management, Jaggard said.

Several new accredited market participants joined the NZX dairy derivatives market, she said, including United States-based Straits Financial and INTL FC Stone’s US entity which joined the company’s Australian entity which had previously been accredited. Macquarie Bank and OM Financial also became accredited trading participants with US company HighGround Trading Group offering NZ Derivatives Market access via an accredited market participant.

Jaggard said the addition of new market participants added to the market’s liquidity and made it easier for firms globally to access NZX’s futures and options markets.

Total
0
Shares
People are also reading