Frequently Asked Quesions

• What is NZFOX?
• Who regulates futures and options advisors/dealers in New Zealand?
• Why does NZX want to have derivative products covering NZX listed securities?
• We've had derivatives products in NZ before and they weren't successful. Why does NZX believe NZFOX will be successful?
• What is the NZFOE?
• Isn't this just another form of gambling?
• How are option premiums priced?

What is NZFOX?

NZFOX is the brand name for the set of New Zealand equity-based derivatives products to be made available to New Zealand investors by NZX. NZFOX products are developed and marketed in New Zealand by NZX but listed, traded, settled and cleared on the SFE’s infrastructure.

Who regulates the futures and options advisors/dealers in New Zealand?

To deal in futures contracts in New Zealand on behalf of clients you must be authorised under the Securities Markets Act 1988. The NZX Futures and Options Rules provide an avenue for anyone who wishes to provide advice to, and/or hold client funds for, New Zealand clients to trade futures and options contracts in any market worldwide to be authorised.

However, the SFE regulates all trading activity in the NZFOX products traded on its exchange.

Why does NZX want to have derivative products covering NZX listed securities?

For some time, New Zealand investors have been disadvantaged by the lack of liquid futures and options in New Zealand. They are a prerequisite for any sophisticated financial market because they allow investors to hedge their positions and, for relatively little cost, gain exposure to potential profit through future price movements. They have also proved a very popular retail product globally.

NZX believes there is a real opportunity to grow both demand and popularity for NZFOX products in New Zealand.

We've had derivatives products in NZ before and they weren't successful. Why does NZX believe NZFOX will be successful?

The makeup of the New Zealand capital market is substantially different now from the 1980s when futures and options were last popular in New Zealand. During the '80s, derivatives were very much the domain of institutional firms and did not receive broad support from retail brokers and this retail segment is a critical component of a successful derivatives market.

Many New Zealand investors now trade futures and options in international markets and research suggests the appetite for these types of products is healthy in our domestic retail market.

NZX is working closely with both NZX Futures and Options Participants and market makers to ensure that investors tradeing NZFOX Products have consistent access to fair pricing. This is to increase liquidity and make it easier and more efficient for New Zealand investors to buy and sell New Zealand derivatives. In order to provide better pricing (ie tighter spreads on derivative products), NZX is facilitating the participation of market makers that specialise in providing two way prices.

NZX is also working with NZX Futures and Options Participants to promote NZFOX futures and options products and help educate retail investors.

What is the NZFOE?

NZFOE is the New Zealand Futures and Options Exchange Limited, a wholly owned subsidiary of SFE which will cease operations in New Zealand in the latter part of 2004.

Isn't this just another form of gambling?

Not really. Like investment in any other types of securities, investing in futures and options is not without risk. Investors should be educated about the potential benefits as well as all potential risks and should make an informed decision based on their individual risk profile and their portfolio objectives. Your NZX Futures and Options Advisor must explain the risks associated with investing in derivative products and you must sign a Client Acknowledgement and Risk Disclosure Statement, and a Client Agreement before you buy or sell any futures and options product.

When used correctly, futures and options provide investors with a cost effective mechanism for hedging their positions, minimising investment risk and gaining exposure to potential profit.

How are option premiums priced?

Option premiums (prices) are determined in the marketplace, just as share prices themselves are. The price of an option is a function of supply and demand. All other things being equal, strong demand will tend to lift the price.

The premium of an option can be made up of intrinsic value and extrinsic (time) value. Most options have extrinsic value until they expire. Intrinsic value is the positive difference between the strike price of the option and the market price of the underlying security. If this difference is not positive, the option has no intrinsic value.