Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Asia’s leading multi-asset exchange

SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Equity Bottom-Up

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SiMSCI Futures are based on the MSCI Singapore Free Index which is made up of 19 constituents, maintaining a significant 98% correlation to the STI over the past 5 years. The five largest constituents of the MSCI Singapore Free Index are DBS, OCBC, UOB, Singtel &amp; A-REIT. 
	 </li>
	<li>
Investors that sold 17 SiMSCI Futures to hedge a S$500k portfolio consisting of DBS, OCBC, UOB, Singtel &amp; A-REIT weightages paralleling the MSCI Singapore Index on the close of 24 Nov were able to hedge 99% of the moves in the portfolio value over the ensuing two sessions. 
	 </li>
	<li>Each SiMSCI Futures Contract has a current notional value of S$32,500 (based on a 325.0 contract level). Investors can apply portfolio values and comparative portfolio risk to determine the number of Futures Contracts required to hedging one or more of the 19 constituents that make up the MSCI Singapore Free Index.</li>
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The Straits Times Index (“STI”) and MSCI Singapore Free Index have both genertated comparative strong gains of 16% for the month. The Singapore stock market also saw significant turnover of S$1.3 billion on the close of today’s session attributed to the latest MSCI Singapore Free Index semi-annual rebalance. Changes are effective the close today and Yangzijiang Shipbuilding Holdings and Jardine Cycle &amp; Carriage have been omitted from the MSCI Singapore Free Index, bringing the number of constituents to 19. Nevertheless, for both Indices, November is their strongest performing month since May 2009. Global rotation from the Technology and Healthcare Sectors (with momentum in the first 10 months of 2020), to Cyclical Sectors seen to be trading at value at the end of October, has seen measured moves in global indices. Hence, for the November month through to 27 November, the STI and MSCI Singapore Free Index had doubled the gains of the Technology &amp; Healthcare Sector heavy S&amp;P 500 Index. The highest closing price for both the STI and MSCI Singapore Free Index during November was on 24 November. 
The MSCI Singapore Free Index is the underlying index for the SGX MSCI Singapore Index Futures Contracts (“SiMSCI Futures”). One Long or Short position at a price of 325.00 provides equivalent exposure to a S$32,500 position in the underlying Index, with minimim move/tick size of 0.05 (S$5) and a current initial margin requirement of S$2,200. Hedging Application of SiMSCI Futures 
With the significant 98% correlation of the MSCI Singapore Free Index to the STI over the past 5 years, the SiMSCI Futures can provide a hedging instrument for stock portfolios that include MSCI Singapore Free Index constituents. On 24 November, Investors who maintained a S$500,000 portfolio consisting of DBS Group Holdings, Oversea-Chinese Banking Corporation, United Overseas Bank, Singapore Telecommunications and Ascendas REIT (with relative weightages paralleling the MSCI Singapore Index weightages) were able to hedge 99% of the moves in the portfolio value over the following two sessions. The educative example below is based on closing prices on 24 November and 26 November.

<table class="table table-striped"><tbody>
<tr>
<td>
			Five Largest Stocks of MSCI Singapore Free Index
			</td>
			<td>
			MSCI SG Index Weight
			</td>
			<td>
			Five Basket Portfolio Weight 
			</td>
			<td>
			6M Raw Beta to Index
			</td>
			<td>
			Portfolio Beta Weight
			</td>
			<td>
			Allocation in S$500k Portfolio
			</td>
			<td>
			Number of Shares (rounded for Board Lots)
			</td>
			<td>
			24 Nov Close
			</td>
			<td>
			24 Nov Position Value
			</td>
			<td>
			26 Nov Close
			</td>
			<td>
			26 Nov Position Value
			</td>
			<td>
			Note Div. on 26 Nov (ex-date)
			</td>
		</tr>
<tr>
<td>
			DBS
			</td>
			<td>
			21%
			</td>
			<td>
			34%
			</td>
			<td>
			1.33
			</td>
			<td>
			0.45
			</td>
			<td>
			$168,863
			</td>
			<td>
			6,600
			</td>
			<td>
			$25.60
			</td>
			<td>
			$168,960
			</td>
			<td>
			$25.50
			</td>
			<td>
			$168,300
			</td>
			<td> </td>
		</tr>
<tr>
<td>
			OCBC
			</td>
			<td>
			15%
			</td>
			<td>
			25%
			</td>
			<td>
			1.07
			</td>
			<td>
			0.26
			</td>
			<td>
			$122,735
			</td>
			<td>
			11,900
			</td>
			<td>
			$10.28
			</td>
			<td>
			$122,332
			</td>
			<td>
			$10.07
			</td>
			<td>
			$119,833
			</td>
			<td>
			 
			</td>
		</tr>
<tr>
<td>
			UOB
			</td>
			<td>
			12%
			</td>
			<td>
			20%
			</td>
			<td>
			1.12
			</td>
			<td>
			0.22
			</td>
			<td>
			$98,847
			</td>
			<td>
			4,200
			</td>
			<td>
			$23.60
			</td>
			<td>
			$99,120
			</td>
			<td>
			$23.07
			</td>
			<td>
			$96,894
			</td>
			<td>
			 
			</td>
		</tr>
<tr>
<td>
			Singtel
			</td>
			<td>
			9%
			</td>
			<td>
			15%
			</td>
			<td>
			0.83
			</td>
			<td>
			0.12
			</td>
			<td>
			$74,135
			</td>
			<td>
			29,500
			</td>
			<td>
			$2.51
			</td>
			<td>
			$74,045
			</td>
			<td>
			$2.43
			</td>
			<td>
			$71,685
			</td>
			<td>
			$1,505
			</td>
		</tr>
<tr>
<td>
			AREIT
			</td>
			<td>
			4%
			</td>
			<td>
			7%
			</td>
			<td>
			0.70
			</td>
			<td>
			0.05
			</td>
			<td>
			$35,420
			</td>
			<td>
			11,600
			</td>
			<td>
			$3.04
			</td>
			<td>
			$35,264
			</td>
			<td>
			$3.04
			</td>
			<td>
			$35,264
			</td>
			<td> </td>
		</tr>
<tr>
<td>
			Total 
			</td>
			<td>
			61%
			</td>
			<td>
			100%
			</td>
			<td>
			 
			</td>
			<td>
			1.11
			</td>
			<td>
			$500,000
			</td>
			<td>
			 
			</td>
			<td>
			 
			</td>
			<td>
			$499,721
			</td>
			<td>
			 
			</td>
			<td>
			$491,976
			</td>
			<td>
			$493,481
			</td>
		</tr>
</tbody></table>
Source: SGX, MSCI (click <a href="https://app2.msci.com/eqb/custom_indexes/sg_performance.html?fireglass_rsn=true#fireglass_params&amp;tabid=abead90bcbedb2da&amp;start_with_session_counter=9&amp;application_server_address=isolation-sgx3.wss.prod.fire.glass">here</a> for more) - portfolio and weights as of 24 Nov.

 

Hedging the Big Cap Portfolio on 24 Nov 
The three banks have maintained relatively high beta (measure of comparative risk) over the past six months, and with their comparatively high index and portfolio weightings, brought the overall beta of the portfolio to 1.11 as of 24 November. With the propensity for the portfolio to be more volatile than the Index over the past six months, investors attempting to fully hedge the portfolio could have added more futures contracts, beyond the equivalent portfolio value. 
By multiplying the weighted portfolio beta (1.11) by the portfolio value (S$499,721), and then dividing the adjusted portfolio value (S$552,640) by the notional value per SiMSCI futures contract (S$32,905), investors could deduce that 17 contracts would be required to attempt to fully hedge the portfolio on 24 November. If the portfolio weighted beta co-efficient was less than 1.00, say 0.80, investors would have only needed to use 12 SiMSCI contracts, as the lower beta co-efficient indicated that the portfolio had a recent history of less volatility than the Index and associated futures contracts. 
At 5:10pm, on 24 November the December 2020 SiMSCI Futures (“SGPZ0”) contract was trading at 329.05, and then two days later at 5:10pm on 26 November, the SGPZ0 was trading at 325.35. 
When the 17 SGPZ0 contracts were sold at 329.05, the notional value of the hedge was S$559,385. By the 26 November close, the 17 SGPZ0 contracts were trading at 325.35, with a notional value of S$553,095. This means the 17 SGPZ0 contracts had returned S$6,290, whilst the five stock portfolio had seen a S$6,241 decline in portfolio value. Hence 99% of the portfolio losses over the two sessions were hedged. Note this educative example does not take into consideration transaction costs.  
Please note all investors need to be Specified Investment Products (“SIP”) qualified to trade Futures Contracts – click <a href="https://onlineeducation.sgx.com/specifiedinvestmentproducts/?fireglass_rsn=true#fireglass_params&amp;tabid=a00e33ac1ad7fe25&amp;start_with_session_counter=4&amp;application_server_address=isolation-sgx1.wss.prod.fire.glass">here</a> for course details. 
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SiMSCI Futures are based on the MSCI Singapore Free Index which is made up of 19 constituents, maintaining a significant 98% correlation to the STI over the past 5 years. The five largest constituents of the MSCI Singapore Free Index are DBS, OCBC, UOB, Singtel &amp; A-REIT. 
	 
	
Investors that sold 17 SiMSCI Futures to hedge a S$500k portfolio consisting of DBS, OCBC, UOB, Singtel &amp; A-REIT weightages paralleling the MSCI Singapore Index on the close of 24 Nov were able to hedge 99% of the moves in the portfolio value over the ensuing two sessions. 
	 
	Each SiMSCI Futures Contract has a current notional value of S$32,500 (based on a 325.0 contract level). Investors can apply portfolio values and comparative portfolio risk to determine the number of Futures Contracts required to hedging one or more of the 19 constituents that make up the MSCI Singapore Free Index.

 

The Straits Times Index (“STI”) and MSCI Singapore Free Index have both genertated comparative strong gains of 16% for the month. The Singapore stock market also saw significant turnover of S$1.3 billion on the close of today’s session attributed to the latest MSCI Singapore Free Index semi-annual rebalance. Changes are effective the close today and Yangzijiang Shipbuilding Holdings and Jardine Cycle &amp; Carriage have been omitted from the MSCI Singapore Free Index, bringing the number of constituents to 19.  Nevertheless, for both Indices, November is their strongest performing month since May 2009. Global rotation from the Technology and Healthcare Sectors (with momentum in the first 10 months of 2020), to Cyclical Sectors seen to be trading at value at the end of October, has seen measured moves in global indices. Hence, for the November month through to 27 November, the STI and MSCI Singapore Free Index had doubled the gains of the Technology &amp; Healthcare Sector heavy S&amp;P 500 Index. The highest closing price for both the STI and MSCI Singapore Free Index during November was on 24 November.  
The MSCI Singapore Free Index is the underlying index for the SGX MSCI Singapore Index Futures Contracts (“SiMSCI Futures”). One Long or Short position at a price of 325.00 provides equivalent exposure to a S$32,500 position in the underlying Index, with minimim move/tick size of 0.05 (S$5) and a current initial margin requirement of S$2,200.  Hedging Application of SiMSCI Futures  
With the significant 98% correlation of the MSCI Singapore Free Index to the STI over the past 5 years, the SiMSCI Futures can provide a hedging instrument for stock portfolios that include MSCI Singapore Free Index constituents. On 24 November, Investors who maintained a S$500,000 portfolio consisting of DBS Group Holdings, Oversea-Chinese Banking Corporation, United Overseas Bank, Singapore Telecommunications and Ascendas REIT (with relative weightages paralleling the MSCI Singapore Index weightages) were able to hedge 99% of the moves in the portfolio value over the following two sessions. The educative example below is based on closing prices on 24 November and 26 November.




			Five Largest Stocks of MSCI Singapore Free Index
			
			
			MSCI SG Index Weight
			
			
			Five Basket Portfolio Weight 
			
			
			6M Raw Beta to Index
			
			
			Portfolio Beta Weight
			
			
			Allocation in S$500k Portfolio
			
			
			Number of Shares (rounded for Board Lots)
			
			
			24 Nov Close
			
			
			24 Nov Position Value
			
			
			26 Nov Close
			
			
			26 Nov Position Value
			
			
			Note Div. on 26 Nov (ex-date)
			
		


			DBS
			
			
			21%
			
			
			34%
			
			
			1.33
			
			
			0.45
			
			
			$168,863
			
			
			6,600
			
			
			$25.60
			
			
			$168,960
			
			
			$25.50
			
			
			$168,300
			
			 
		


			OCBC
			
			
			15%
			
			
			25%
			
			
			1.07
			
			
			0.26
			
			
			$122,735
			
			
			11,900
			
			
			$10.28
			
			
			$122,332
			
			
			$10.07
			
			
			$119,833
			
			
			 
			
		


			UOB
			
			
			12%
			
			
			20%
			
			
			1.12
			
			
			0.22
			
			
			$98,847
			
			
			4,200
			
			
			$23.60
			
			
			$99,120
			
			
			$23.07
			
			
			$96,894
			
			
			 
			
		


			Singtel
			
			
			9%
			
			
			15%
			
			
			0.83
			
			
			0.12
			
			
			$74,135
			
			
			29,500
			
			
			$2.51
			
			
			$74,045
			
			
			$2.43
			
			
			$71,685
			
			
			$1,505
			
		


			AREIT
			
			
			4%
			
			
			7%
			
			
			0.70
			
			
			0.05
			
			
			$35,420
			
			
			11,600
			
			
			$3.04
			
			
			$35,264
			
			
			$3.04
			
			
			$35,264
			
			 
		


			Total 
			
			
			61%
			
			
			100%
			
			
			 
			
			
			1.11
			
			
			$500,000
			
			
			 
			
			
			 
			
			
			$499,721
			
			
			 
			
			
			$491,976
			
			
			$493,481
			
		

Source: SGX, MSCI (click here for more) - portfolio and weights as of 24 Nov.

 

Hedging the Big Cap Portfolio on 24 Nov   
The three banks have maintained relatively high beta (measure of comparative risk) over the past six months, and with their comparatively high index and portfolio weightings, brought the overall beta of the portfolio to 1.11 as of 24 November. With the propensity for the portfolio to be more volatile than the Index over the past six months, investors attempting to fully hedge the portfolio could have added more futures contracts, beyond the equivalent portfolio value.  
By multiplying the weighted portfolio beta (1.11) by the portfolio value (S$499,721), and then dividing the adjusted portfolio value (S$552,640) by the notional value per SiMSCI futures contract (S$32,905), investors could deduce that 17 contracts would be required to attempt to fully hedge the portfolio on 24 November. If the portfolio weighted beta co-efficient was less than 1.00, say 0.80, investors would have only needed to use 12 SiMSCI contracts, as the lower beta co-efficient indicated that the portfolio had a recent history of less volatility than the Index and associated futures contracts.  
At 5:10pm, on 24 November the December 2020 SiMSCI Futures (“SGPZ0”) contract was trading at 329.05, and then two days later at 5:10pm on 26 November, the SGPZ0 was trading at 325.35.  
When the 17 SGPZ0 contracts were sold at 329.05, the notional value of the hedge was S$559,385. By the 26 November close, the 17 SGPZ0 contracts were trading at 325.35, with a notional value of S$553,095. This means the 17 SGPZ0 contracts had returned S$6,290, whilst the five stock portfolio had seen a S$6,241 decline in portfolio value. Hence 99% of the portfolio losses over the two sessions were hedged. Note this educative example does not take into consideration transaction costs.   
Please note all investors need to be Specified Investment Products (“SIP”) qualified to trade Futures Contracts – click here for course details. 



Kwang Hee Development Oriented Self Adm (140910 KS)

SiMSCI Futures Provided Efficient Mid-Week Hedge on Big Caps