New Investment Strategy - a new trading benchmark for Japanese equity markets
The Russell/Nomura Prime Index (RN Prime) employs the following characteristics which establish the RN Prime as an idea benchmark for Japanese equity markets.
- Stocks listed on all markets in Japan are eligible for inclusion in RN Prime.
- Japan’s top 1,000 stocks, determined by free-float adjusted market capitalization, are represented
OSE provides investors with the RN Prime futures, a new investment strategy and trading benchmark for Japanese equity markets.
Hedging Strategy - hedge your own Japanese equities portfolios
Short Hedge Strategy
When an investor anticipates a fall in the market, the investor will hold short positions in the futures to protect his portfolio against major decline. If the market falls, the profits from the investor’s short position in the futures will partially offset major losses in his portfolio.
Long Hedge Strategy
When an investor plans to purchase a stock in the days ahead and anticipates a rise in the market, the investor will hold long position in the futures. If the market rises, the profits from resale of the futures may be used for the purchase of a stock and offset opportunity cost caused by a market increase.
The transaction cost of the futures is relatively low and provides investors with a useful hedge strategy.
The RN Prime futures are available as a tool for arbitrage trading between two futures on two different underlying assets, as well as between equity and futures or two different contracts months.
Generally, an investor uses arbitrage trading to seek profits from a price difference between two assets, which have a high correlation of price movements.
With the RN Prime futures, OSE provides a futures market with high liquidity and lists the futures with relatively high correlation. An investor, therefore, is given the opportunity to use the RN Prime futures as arbitraging tool with other OSE products.
Offsetting margin requirements
OSE has been adopting SPAN® to calculate Margin Requirements. Under SPAN®, when an exchange deems it appropriate to permit offsetting the risk of positions partially among products of different underlying assets, Margin Requirements will be partially reduced.
For example, if an investor has been keeping a long position for the Nikkei 225 futures and sells the RN Prime futures short, his/her SPAN requirement will be partially reduced according to the offset risk of positions between these two futures.
Assume that an investor holds a portfolio which consists of 40 units of long positions for the March Nikkei 225 futures and 40 units of short positions for the March RN Prime futures.
|Nikkei 225 Futures
|RN Prime Futures
If the SPAN Parameter is set up as follows, how much will the Margin Requirement be for this portfolio?
|Price Scan Range
- Nikkei 225 futures = ¥350,000
- RN Prime futures = ¥270,000
|Delta per Spread Ratio (Nikkei : RNP)
|| 1 : 1.35
|Spread Credit Rate
Calculating each required margin before deducting Inter-Commodity Spread Credit
- Margin requirement for the Nikkei 225 futures = ( ¥350,000 × 40 units) = ¥14 mil
- Margin Requirement for the RN Prime Index futures = (¥270,000 × 40 units) = ¥10.80 mil
Calculating Inter-Commodity Spread Credit
Under SPAN®, the short and long positions among different commodities can be partially netted.
First, calculate how many numbers of units can be netted. Since the “Delta per Spread Ratio”, or one SPAN Parameter, is “Nikkei 225: RNP = 1 : 1.35”. (see SPAN Parameter above), 1 unit of the RN Prime Index futures shall be deemed equal to 0.74 units of Nikkei 225 futures.
This means, 40 units of the RN Prime futures are considered to be equivalent to approximately 29 units of Nikkei 225 futures.
- The Number of deductible positions for Nikkei 225 futures = 40 units × 0.74 ≈ 29 units
And approximately 29 units of the Nikkei 225 futures are considered to be equivalent to 40 units of RN Prime Index futures.
- The Number of deductible positions for RN Prime Index futures = 40 units
Although we calculated each number of deductible positions ((3), (4)), not all part of these positions are permitted for margin deduction, because the Nikkei 225 futures and the RN Prime Index futures has different underlying assets. The risk of 29 units for the Nikkei 225 futures is not totally equivalent to that of RN Prime Index futures.
Now, calculate how many parts of each deductible position can offset the risk of each commodities by using “Spread Credit Rate”, which is one SPAN Parameter. Since Spread Credit Rate is set up at 0.8611, approximately 86% of the Inter-Commodity Spread can be offset. The deduction for each futures contract will be as follows. (This deduction is called “Inter-Commodity Spread Credit”.)
- Inter-Commodity Spread Credit for the Nikkei 225 futures = ¥350,000 × （3）× 0.8611 = ¥8.92 mil
- Inter-Commodity Spread Credit for the RN Prime futures = ¥270,000 × （4） × 0.8611 = ¥9.29 mil
Each margin requirement is added up to calculate the Margin Requirement
- Margin Requirement for the Nikkei 225 futures (with deduction) = (1) – (5) = ¥5.08 mil
- Margin Requirement for the RN Prime Index futures (with deduction) = (2) – (6) = ¥1.51 mil
- Margin Requirement = (7) + (8) = ¥6.6 mil
|Total margin requirement without deduction
||Amount of total deductions
||Percentage of deductions
- ･OSE conducts weekly review concerning SPAN Parameter. Please be advised that SPAN Parameter is subject to change depending on market conditions. Also there is no guarantee the margin requirement will be the same as above examples.