Index Futures and Options Contract Information Toronto Stock Exchange | TSX Venture Exchange | Montréal Exchange | Natural Gas Exchange | Montréal Climate Exchange | Boston Options Exchange Canadian Derivatives Clearing Corporation | TMX Datalinx | Equicom | PC Bond | Shorcan Table of Contents Overview of Index Products . 1 S&P/TSX Composite TM Index Mini Futures (SCF) . 2 S&P/TSX 60 TM Index Futures (SXF) . 2 Sectorial Index Futures (SXA, SXB, SXH, SXY) . 3 S&P/TSX 60 TM Index Options (SXO) . 4 Settlement of Index Derivatives . 4 SCF Contract Specifications . 5 SXF Contract Specifications . 6 SXA, SXB, SXH, SXY - Contract Specifications . 7 SXO Contract Specifications . 8 The Montréal Exchange is Canada's financial exchange thereby minimizing counterparty risk. It also offers for trading futures and options. Part of TMX Group, the market protection mechanisms, such as margin Exchange offers a wide range of derivatives products requirements using the Standard Portfolio Analysis covering major market segments such as equities, of Risk (SPAN ®) system and customer protection indices, currencies and interest rates. requirements. Financial resources are available to cover the unlikely possibility a potential clearing member Clearing, settlement and risk management services are default. provided by the Standard and Poor's AA-rated Canadian Derivatives Clearing Corporation (CDCC). As a clearing house, the CDCC provides stability to the marketplace by assuming the derivatives-related obligations Overview of Index Products In September 1999, the Montréal Exchange listed its Sectorial indices first index futures and options contracts on the TM S&P/TSX 60 TM Index. The offering has since evolved to • S&P/TSX Global Gold Index Futures include major Canadian indices. • S&P/TSX Capped Financials TM Index Futures Index futures and options are contracts whose value • S&P/TSX Capped Energy TM Index Futures closely follows the price level of their underlying indices -providing management of equity market risks • S&P/TSX Capped Information Technology TM Index and trading opportunities for both institutional and Futures retail investors. In partnership with Standard & Poor's , In addition to providing the cost-effectiveness and a global leader in index construction and maintenance, leverage common to all derivatives, index futures and the Montréal Exchange's index offering includes: options enable investors to execute efficiently a trade Broad-based indices on the Exchange's SAM trading system, comprising multiple shares simultaneously, simplifying trading • S&P/TSX Composite TM Index Mini Futures and investment strategies while providing the security • S&P/TSX 60 TM Index Futures and risk reduction of diversification. SAM offers the additional advantage of a strict first-in-first-out TM • S&P/TSX 60 Index Options methodology. This platform has proven itself in providing derivative investors with a transparent, liquid, and easy-to-access marketplace for all options and futures listed on the Montréal Exchange. 1 S&P/TSX Composite TM Index Mini Futures (SCF) SCF futures are based on the S&P/TSX Composite TM • Speculators, proprietary traders and hedge funds Index, the headline indicator of market activity and could trade SCF futures to manage directional trading principal broad market measure for Canadian equity and to execute spread trades against other bench - markets since 1977. The index covers nearly 95% of the mark broad based stock indices and sectorial indices. market capitalization for Canadian-based, Toronto • Market participants could arbitrage the market by Stock Exchange listed companies. trading the spread between the S&P/TSX 60 TM Index How can I use these futures? futures and the SCF futures. • Portfolio managers benchmarked to the index and • Institutional investors could effect exchange-for- currently using OTC index derivatives based on the physical (EFP) transactions by exchanging a portion of index could hedge their risk exposure with SCF their stock holdings against SCF futures, or vice versa. futures. These transactions free up capital to benefit from other opportunities while maintaining equity market • An individual investor with reduced capital and with a exposure. diversied stock portfolio that is highly correlated to the index could protect his or her portfolio against the impact of a short-term bearish market by selling the low-cost SCF futures. S&P/TSX 60 TM Index Futures (SXF) SXF is a futures contract on the S&P/TSX 60 TM equity allocated towards equities, as compared to bonds or index, which is a benchmark capitalization-weighted cash, SXF futures could be sold to bring the portfolio index of the 60 largest companies in Canada that have in line with its target allocation. The alternative would the most liquid stocks. be a costly liquidation and rebalancing of assets, which may entail unfavourable tax consequences. How can I use these futures? • Institutional investors will sometimes receive a one- • An investor who anticipates a rise in stock prices and time windfall of cash. This amount could be “parked” wishes to increase his or her exposure to the Canadian by buying SXF futures and risk-free instruments, equity market, but lacks the funds for an outright thereby keeping a certain exposure to the equity purchase of the shares, could take a long position in market while waiting for a suitable opportunity to use SXF futures. the funds. • A holder of a stock portfolio may feel that the market • Same as for the SCF contract, institutional investors is overvalued with a correction looming. The holder could effect exchange-for-physical (EFP) transactions could sell SXF futures in order to protect the portfolio by exchanging a portion of their stock holdings from market risk. against SXF futures, or vice versa. • Futures can be used to rebalance a portfolio. If the stock market has risen and assets are now over- 2 Sectorial Index Futures (SXA, SXB, SXH, SXY) Sectorial index futures are contracts that closely follow • While portfolio managers will generally seek an the level of S&P/TSX indices on select sectors of the optimal asset allocation between equity, bonds and Canadian economy, namely: cash, and will spend a great deal of resources on rebalancing their holdings, they must also seek an • S&P/TSX Capped Information Technology TM Index optimal allocation of assets within their equity • S&P/TSX Capped Financials TM Index holdings. Sectorial index futures could accomplish these goals as managers could easily sell one market TM • S&P/TSX Capped Energy Index sector while buying another. TM • S&P/TSX Global Gold Index • Futures contracts based on Canadian sectorial indices provide asset managers and hedgers with a simple, Each of these indices tracks a particular basket of efficient and cost-effective way of implementing stocks of companies whose primary activities are in trading strategies based upon select sectors of the index's specific economic sector. Capped indices the Canadian economy. Index overlay strategies are covering sectors are calculated from the S&P/TSX increasingly popular as a means of adding value to Composite TM Index. core portfolios. Sector rotation strategies, as well How can I use these futures? as position neutral hedge strategies based upon sector selection, also favour the use of index-related • To individual investors holding portfolios reflecting an investment products. Sectorial futures could also exposure to the overall market, selling a sectorial complement cash-based investment strategies using index futures allows for protection against a down - exchange-traded funds, cash baskets and asset turn in a given market sector. swaps. • Sectorial index futures offer opportunities to individual investors wishing to target one sector against another. While it is quite onerous to purchase sufficient stocks to represent an entire sector, sectorial index futures could be purchased and sold quite efficiently and cheaply. 3 S&P/TSX 60 TM Index Options (SXO) How can I use these options? SXOs give investors a wide array of alternatives to • Holders of stock portfolios could also generate funds protect their equity portfolios and to generate a profit. and improve yields by writing SXO calls. • The holder of a stock portfolio could minimize his or • Investors could profit from changes in the volatility her exposure to the market by buying SXO puts, which of options prices by trading the expected (implied) will act as an insurance policy to compensate him or volatility against the realized volatility. her for any drop in stock prices. • Investors could also wish to trade options in • Institutional portfolio managers may find that anticipation of future directional changes in stock continuously buying puts to reduce their risk is too prices instead of the shares themselves (use of expensive over the long term as they must offer leverage). competitive returns to their clients. To offset this cost, they could sell SXO calls while buying SXO puts, essentially creating a “collar”. The advantage of this strategy is the reduction of the cost of buying puts by keeping the premium received by selling calls. Settlement of Index Derivatives For index futures, the accounts of the buyer and the the contract at the expiration and the in-the-money seller are credited and debited every day according to option's strike price will be delivered by the seller of the the variation between the current day's settlement contract (the short position holder) to the buyer of the price and the previous day's settlement price (or the contract (the long position holder). original trade price in the case of the first day's Furthermore, all trades are cleared by a central entity, settlement). If the current day's settlement price is the Canadian Derivatives Clearing Corporation (CDCC). higher than the previous day's, the buyer of the futures The CDCC is a financially solid institution, which takes will see his or her account credited with the amount of on the responsibility of buying from sellers and selling the variation times the multiplier of the futures, and to buyers of index futures and options traded on the seller's account will be debited this amount.