Mon, 06 Sep 2004

JSX ready to launch stock contract options in November

Tony Hotland, The Jakarta Post, Jakarta

The Jakarta Stock Exchange (JSX) expects to officially launch a stock contract option as a new trading instrument by November, and hopes that it will help make the bourse more stable if major shocks occur.

Edison Hulu, a senior researcher at the JSX and the coordinator of the stock contract option, said that the Capital Market Supervisory Board (Bapepam) was planning to issue a regulation on the new instrument this week.

"We already discussed the final form of the regulation with Bapepam last week and we hope it will be issued this week. Then we could launch the instrument in the next two months," Edison said on Saturday.

He said that it would take another couple of months to familiarize members of the bourse with the new stock contract, although the JSX management has been doing simulations for it over the past year.

Currently, there are five bluechip stocks, which will be traded under the new instrument. They were picked based on specific conditions and their performance at the bourse. The stocks are Telkom, Astra, BCA, Sampoerna and Indofood.

Edison added that there were already 40 securities firms (JSX members) that had expressed an interest in applying for the new stock contract option.

"We're sure that the familiarization process won't take very long. The system is ready and the 40 interested members have also sent representatives to participate in training programs," he said.

Edison explained that the stock contract option had many benefits compared to the current trading method used by the JSX, the common daily transaction of stock.

"With a stock contract option, you can protect the value of your investments because the instrument allows you to hedge and also get bigger capital gains since the control of when you want to buy or sell is more flexible due to the longer contract period," said Edison.

The stock contract option is a contract that confers the right, but not the obligation, to buy (call option) or sell (put option) a particular stock for a specified price (strike price) agreed upon by both parties on or before a specified date. Each contract represents 10,000 shares.

If over a specified period of time the market price of the stock rises above the agreed upon price, the buyers will earn handsome gains since they only pay the agreed upon price. Likewise, if the market price falls below the agreed price, the seller still gets the agreed upon price.

Therefore, the instrument requires broad knowledge and sharp analysis of future projections about the traded stocks in order to earn profit.

Edison also said that the instrument could minimize the possibility of panic stock selling or buying, which could adversely affect the index.

"For example, Wall Street (New York Stock Exchange) did not have unbearable pressure on it and quickly recovered even after the Sept. 11 attacks, because most of the trading is done through similar stock contract options. The stockholders didn't hurry to sell their portfolios because they already had contracts under an agreed price," he explained.

For the JSX this will be new, but the Surabaya Stock Exchange (SSX) has been using a similar instrument for the past several years, such as the LQ45 Futures and Dow Jones Industrial Average (DW Futures).

The SSX also plans to launch the Hangseng Index, Bond Futures Index, and Interest Rate Futures Index in 2005.