OPINION: Cash-settled futures |
Pakistan Stock Exchange (PSX) is launching Cash-Settled Futures (CSF), giving investors a simpler way to take a view on future share prices without worrying about the physical delivery of shares.
In this market, investors enter into a contract today based on their expectations about where a share’s price will be in the future and, at the end, only the difference in price is paid or received in cash, along with the daily Mark-to-Market (MtM) settlement.
A futures contract that settles only in cash
In a CSF contract, an investor agrees to buy or sell eligible shares at a future date at an agreed “futures price”. There is no exchange of the actual shares against the complete transaction amount at expiry. Instead, on the last day, the contract is settled in cash: the futures price is compared with the final settlement price (the closing price in the Ready market), and the difference is credited or debited to the investor’s account.
For example, if the CSF Futures price was Rs 150 and, at expiry, the underlying share closes at Rs 160, the buyer receives Rs 10 / share in cash from the seller (or Rs 5,000 = 10 x 500, as each contract represents 500 shares). If the price closes below Rs 150, the seller gains and loss is paid by buyer in cash instead.
What is the edge of Cash-Settled Futures (CSF)?
The CSF market has been designed to be lighter on capital and smoother in operations. First, settlement is purely in cash, which reduces the operational and settlement risks linked with arranging physical delivery of shares.
Second, CSF uses the globally recognized Ratio-based method to handle corporate actions (such as dividends, bonus, and right issues). Instead of breaking contracts into A and B series, contract prices and contract multipliers are adjusted so that the investor’s overall exposure remains broadly the same before and after the corporate action event (excluding any tax effects).
Third, Unlike DFC, the MtM profit is fully distributed to the account holder by NCCPL on T 1, which the account holder can withdraw completely.
Moreover, the basic deposit requirement has........