Thai PM urged to seek extradition of Tak Bai Massacre suspect from Japan at ASEAN Summits

[webfact]

GURU SPEAK

A safe bet? Weighing up the new 10-Baht Gold Futures

By Rinjai Chaiyasut

The Thailand Futures Exchange (TFEX) will begin trading 10-baht gold futures contracts on Monday. The mini-contracts are targeted at current stock market investors who want lower risk and an alternative to gold trading.

The contract specifications are very similar to those of the 50-baht gold futures currently traded. Both contracts are based on gold bullion with a purity of 96.5 per cent and are cash-settled. Bids and offers are quoted for gold bullion weighing one baht (15.244 grams). The main difference is the contract size: the mini-contract is worth approximately Bt185,000 while the 50-baht gold futures is worth five times more at Bt925,000.

What are the implications of the smaller contract? First, even though the minimum price movement of each contract (the "tick size") is Bt10 in both cases, the resulting profit/loss differs five-fold. For 10-baht gold futures, each move represents a profit/loss of Bt100, for 50-baht contracts that figure is Bt500. Therefore, the mini-contract is probably a more prudent choice for novices or cautious investors.

The second implication concerns margins, which is the collateral required from the buyer and seller of futures to ensure that each will perform their contractual obligations. The amount of margin required depends on the volatility of the futures. Put simply, if the historical price of gold futures fluctuates greatly, volatility will be high and vice versa.

For 10-baht gold futures, data for 50-baht gold futures has been used to calculate margins. As a result, the announced margin for 10-baht gold futures is currently Bt11,400 per contract, five times lower than that of 50-baht gold futures. That margin could change, however, if the volatility of the lower-value contracts proves to be higher than that of the 50-baht gold futures. So why has the TFEX launched two contracts using the same underlying asset? Listing different sizes of contracts caters to the needs of different customer groups. Hedgers or big investors who use futures to hedge their commercial needs may prefer the bigger contract, while smaller investors will probably prefer the smaller contract.

This listing of different contract sizes is common in exchanges around the world and is a feature of the TOCOM in Japan, the NYMEX in the US, and the MCX in India. The MCX lists a total of four gold futures contract sizes, ranging from 100 grams to 3 kilograms (6.5-baht to 196-baht).

In conclusion, the 10-baht gold futures contract is very attractive for investors looking for alternatives to trade or hedge movements in gold prices. The new instrument requires a relatively small amount of initial investment while providing the opportunity to profit from both market ups and downs. Of course, this only works if investors understand the products and are aware of the risks they are taking.

Rinjai Chaiyasut is head of product development at the Stock Exchange of Thailand.

-- The Nation 2010-07-30