After the decline in January, the bulls in the Singapore futures market gradually calmed down. Some went short, some cut their losses and exited, and others observed the situation. The bears, due to the lack of sufficient counterparties, reduced the scale of their positions, but most of them still held the same view about the future trend after the Japanese stock market crash.
The real drama has yet to unfold!
During this period, the Nikkei index once surged to nearly 38,000 points, reigniting the bulls' hope for a rise. This also sparked the expectations of some people, and funds returned to the market. However, this was not comparable to the疯狂的时期 at the end of 1989, as it was only about 70-80% of the total funds at that time.
The futures market is a zero-sum game from start to finish. Either you win, or someone else wins. Money constantly shifts between two different directions. There are winners and losers in the market every day, and even more people are preparing to enter the market, tempted by the prospect of sudden wealth.
This is especially true for the index futures market. Unlike regular commodity futures, the underlying asset is intangible and cannot be delivered. It can only be forcibly liquidated.
On February 21, 1990, the Japanese stock market opened, and the index was the same as the closing number of the previous trading day. Everything seemed fine at first, but the situation quickly took a sharp turn for the worse.
A large number of component stocks suddenly appeared on the market, the quantity of which was so overwhelming that it left people stunned and at a loss. Affected by this, the stock market plummeted, falling from 36,865 points at the opening to 35,704 points, a drop of 1,161 points in a single day, with a decline of 3.15%, all due to an unverified news report that the U.S. exchange would launch Nikkei index futures.
The market's reaction to this news was clearly slow. On the second trading day, the index slightly rose, but in the following two trading days, there was a continuous flood of selling of component stocks, which again caused a significant drop in the index. On the third trading day, it fell by 935 points, and by the opening of the market on Monday, February 26, the index fell by 1,569 points, a decline of 4.5%, reaching a low of 32,443 points during the day and closing at 33,321 points.
From the time the news about the U.S. launching Nikkei index futures spread to this day, only four trading days had passed, and the Japanese index had already fallen by 3,544 points, a decline of nearly 10%.
In other words, 10% of Japan's total market value had vanished, and hundreds of billions of dollars had disappeared.
Where did this money go?
First, it must be noted that this money is not all real cash, but rather numbers on paper. Second, a portion of this money is indeed real, and it was earned by those who sold their stocks at high prices.
For example, a stock with 100 million circulating shares (fully tradable) was bought at 10 yuan per share, giving it a total market value of 1 billion yuan. When the price rose to 12 yuan per share, the total market value was 1.2 billion yuan (assuming the shareholder structure did not change). When a shareholder holding 10% of the circulating shares felt the price had reached its peak and successfully sold the shares at 12 yuan and 11 yuan, the stock price fell from 12 yuan to 11 yuan (assuming other shareholders were optimistic about the future and did not want to sell). The profit of this shareholder did not exceed 20 million yuan (since the price fluctuated, not all shares were sold at 12 yuan), and the market value of the stock decreased by 100 million yuan.
In fact, the stock market index is formed by the decisions of millions of investors, just like the example above. If someone bought the stock at 12 or 13 yuan, the price might rise, and the total market value would also expand.
How can the stock index be influenced? First, there must be a very large amount of capital, and second, the ability to influence the volatility of component stocks.
It is well known that the stock index is derived from the weighted prices of certain companies in the market during a specific period, not a composite of all stock prices. These selected companies' stocks are called component stocks.
These selected companies cover various aspects of economic life, including real estate, steel, aviation, shipping, electronics, machinery, finance, and high technology, and are all leaders in their respective industries. This is why the composite index can truly reflect a country's economic condition.
Now, with a large number of these companies' stocks being sold, it reflects some investors' views on Japan's economic future.
Of course, this could also be a short-term behavior. High selling and low buying is one of the most common methods of manipulating stock prices in the market.
Regardless, the index is indeed falling.
This is absolutely great news for the bears in the futures market.
Due to entering the market relatively late, Jim and his team only had a total position of about 100,000 contracts in the March futures. With the help of the recent stock market decline, they again made a profit of over 1 billion dollars.
Similarly, Zhongshi's funds also made a profit of 100 million dollars. Unlike the heavily positioned bears, Zhongshi, due to a smaller position, was more flexible and quickly cleared the March contracts on the 26th, then heavily positioned in the April contracts.
After several days of sharp declines, the Japanese stock market finally reacted strongly. In the following few trading days, the Nikkei index rose strongly, finally reaching 34,519 points on the last trading day of February.
The news that the Chicago Mercantile Exchange (CME) in the U.S. would launch Nikkei index futures was finally confirmed. The announcement that the CME would launch Nikkei index futures and options in September again caused panic in the market.
It should be said that after the previous rumors, the market was already well-prepared for this news. Logically, the Japanese stock market should not have experienced significant volatility, but the opposite happened.
After 20 trading days of minor fluctuations in February, the Nikkei index turned downward again. This time, it was not due to rumors but rather the activation of a large number of Nikkei index options.
Two or three years ago, international investment banks began to promote these Nikkei index options in the Japanese market. These options were not based on an intangible index but on index futures with agreed prices.
In January, these options began to sell well in the OTC market, specifically operated by Goodman & Co., which enhanced their credit rating with the backing of European royalty.
How did they operate?
Excluding Stanley's put options, in fact, during the rapid rise in the stock market, many Japanese companies raised capital in the capital market (not limited to the stock market, but also in the bond market). They promised that if the Nikkei index fell at the time of loan maturity, the company would compensate for the corresponding losses.
This compensation was to make up for the opportunity cost of not investing the funds elsewhere.
In essence, these Japanese companies issued bonds with embedded put options. The bonds had to repay principal and interest, while the put options would be exercised based on the performance of the Nikkei index.
However, at the time, the Nikkei index was soaring, and few believed it would fall. Therefore, these put options were very cheap, even to the point of being absurdly low.
In this situation, international investment banks purchased large amounts of these products, i.e., Nikkei index put options. What were they planning to do? Were they planning to bet against Japanese companies?
No, international investment banks generally do not put themselves in a dangerous position, especially against the massive Japanese market. These Ivy League-educated bankers designed financial products based on the characteristics of these Nikkei index put options and then sold them.
This way, they hedged the risk and made substantial profits from the price difference and fees.
Moreover, the international investment banks operated in two different markets, using different currencies. One was a Nikkei index put option denominated in yen, and the other was a Nikkei index put option denominated in dollars. Their plan was that if the Japanese market fell, the yen would likely depreciate due to economic pressure. In this case, the international investment banks would receive yen from Japanese companies and pay it in dollars to investors in the other market.
This way, the profits of the international investment banks might be forced to be returned, or they might even have to pay a lot more.
Therefore, when designing the put options, they had to include a clause that the gains from these warrants must be converted to dollars at a pre-set exchange rate.
After everything was set, Goodman & Co. paid an additional fee to the Danish National Bank, which guaranteed that these warrants would be honored at maturity. These options would expire in early 1993, with a term of two years.
There was indeed a possibility that the Japanese market would crash, leaving the Japanese companies that raised funds unable to fulfill their previous commitments. In such a case, the Danish National Bank would have to step in.
The international investment bankers used the different views in two markets to transform the low-priced put options they acquired from the Japanese market into Nikkei index put options and then sold them at a higher price in the U.S. market.
In this situation, the more of these financial derivatives, the better.
The only remaining risk was that the international investment banks might suffer from the depreciation of the yen, which would reduce the funds they received from Japanese companies. Since they had already agreed on a specific exchange rate with the U.S. market participants, they could hedge this risk in the currency futures or options market, which was not difficult for them.
Other investment banks were not fools and quickly understood the principle, copying and replicating it. Soon, these Nikkei put options flooded the market.
In addition to Goodman & Co.'s options, there were also put options promoted by Stanley, Salomon Brothers, and others directly in Japanese companies. Although these options were different from Goodman & Co.'s, they essentially set up betting agreements between foreign investors and Japanese companies.
Besides these variant options, there was also pressure in the futures market and selling in the Japanese stock market.
Especially in the foreign capital seats at the Osaka Exchange, they financed long positions when the market rose and shorted when it fell, accelerating the rapid changes in the market.
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