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TRADING FUTURES.
Futures Contract
Exchange
Bursa Malaysia
Derivatives (BMD)
Gold
Gold Futures
Chicago Mercantile
Exchange (CME)
Hong Kong
Exchange (HKeX)
The Exchange
Regulators
Brokers
The Exchange
The Exchange aims to provide an efficient, transparent and orderly
trading environment where futures contracts are bought and sold.
Regulators
The role of the regulating authority is to supervise the Exchange,
the Clearing House as well as the Brokers. The Regulator also has
investigative as well as enforcement powers to ensure compliance to
the Rules and governing laws in order to maintain fair and orderly
markets.
In most jurisdictions it is the role of the Regulator to conduct
licensing for the intermediaries in the market as well. Ultimately, the
role of the Regulator is to ensure investors interests are protected.
In Malaysia, the regulating body for the futures market is the
Securities Commission of Malaysia.
Brokers
Brokers act as intermediaries to provide their clients, who may be
both hedgers and speculators, access to the Exchange to buy or sell
futures contracts. Brokers charge brokerage commissions for the
execution services as well as other services which may include
advice, voice or online trading platforms, market research or
analysis.
In most countries, brokers and their representatives are required to
be licensed before they can offer their services to clients. In
Malaysia, all Futures brokers and representatives are required to
pass licensing examinations and obtain a license to deal with clients.
Liquidity
Liquidity is how actively a particular futures contract is trading in
terms of volume and frequency. The more liquid the futures
contract is, the more buyers and sellers are in the market to
transact.
It is very important to trade liquid contracts too, as they enable the
investor to easily enter and exit the market.
A very liquid futures contract also allows an investor to trade larger
positions knowing that he can choose to exit the market at any
time.
How it works?
Opening a Trading Account
In order to start trading futures you need to open a futures trading
account with a broker. You are normally required to sign a Risk
Disclosure Statement to declare that you are aware of the potential loss
in trading futures.
The trading account documents will set out the terms and conditions for
trading including brokerage commission charges and well as other
services provided.
Initial Margin
After the trading account is approved, you would be required to put up
an initial margin deposit into your trading account in order to be able to
start trading. The minimum initial margin is usually determined by your
broker.
The initial margin deposited will determine how many futures contracts
you can trade. Margins per contract are determined by the Clearing
House but may differ depending on your broker. The Clearing House
normally determines margins according to the risk and volatility of a
particular futures contract.
Variation Margin
Daily movements in the pricing of futures contracts create profits or
losses for a position in that futures contract. At the end of the trading
day, all profits and losses against a settlement or closing price are
credited or debited respectively into the account of the client who has a
position in the futures contract. This process is called marked to
market.
How it works?
Since the client is required to have at least US$100,000 in his account,
the broker will request for additional deposits to be made until that is
achieved. This request for additional funds is called a margin call which,
in this case, is US$25,000, as illustrated in the table below:
US$10,000
US$100,000
US$100,000
US$25,000
US$75,000
US$25,000
Contract Specifications
Contract specifications are important for the investor to understand as
it spells out the how, what, where and when of trading a particular
futures contract. Here are the essential features of a futures contract
that need to be understood:
Contract Size This states the size in weight, dollar value, quantity or
in the case of indices, the contract multiplier for the Index.
Contract
Multiplier
Value /
Price of
Index
Notional
Value
HK$50
19,000
HK$950,000
Nikkei 225
Yen 500
9,000
Yen4.5 mil
Bursa Malaysia
KL Index
RM50
1,600
RM80,000
US$5
12,000
US$60,000
Individual Equities
Individual Equity Futures are contracts based on the individual stock
or securities and are commonly called Single Stock Futures (SSF).
For example, Genting SSF or Air Asia SSF are SSF contracts traded
on Bursa Malaysia Derivatives Exchange.
Example:
Agricultural Commodities
Single Stocks
Futures Contract
Contract
Multiplier
(Shares)
Value/
Price of
Stock
Notional
Value
Genting
1000
RM8.80
RM8,800
Air Asia
1000
RM3.60
RM3,600
Interest Rates
Interest rate futures are another active contract mainly traded by banks
and financial institutions that are exposed to global interest rates and
money supply dynamics.
One of the most actively traded interest rate futures contracts in the
world are the CME Eurodollar Futures as well as the CBOT 10 Year
Treasury Note Futures.
Interest rate futures usually have their contract sized fixed to specific
face values of the underlying debt instrument or fixed dollar values.
Contract Size
Rubber (TOCOM)
5,000 kg
Corn (CBOT)
5,000 bushels
60,000 lbs
25 metric tonnes
Precious Metals
Precious metals like gold
and silver caught the
attention of traders after
a long and major bull
market since early 2000
and have remained one
of the most actively
traded futures contracts
in the world.
Many Futures Exchanges
around the world offer
Gold Futures but the
main Futures contract
for gold and silver is
traded on COMEX in the
US where it sets the
benchmark for global
gold and silver prices.
Contract Size
Gold (COMEX)
100 troy oz
Silver (COMEX)
5,000 troy oz
25,000 lbs
Energy
Energy Futures is an active and vibrant market due to the
importance of energy products to the world economy. The energy
markets today play a major role in global economic and political
developments.
The most followed energy futures contract globally is the Crude Oil
futures contract traded on two major Exchanges, NYMEX and ICE.
The WTI Light Sweet Crude Oil and Futures Brent Crude Oil are
traded on NYMEX in the US and ICE in Europe respectively.
Other popular energy futures are Natural Gas, Gasoline and Heating
Oil. Here are some contract sizes for the main energy futures
contracts:
Energy Futures Contract
Contract Size
1,000 barrels
1,000 barrels
42,000 gallons
10,000 mmBtu
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Conversely, if his forecast was incorrect, the trader will make a loss
instead. From the same example below, if he had bought a
September Gold Futures Contract in June at $1,580 and
subsequently closed out at $1,550 in August, he would make a loss
of $3,000.
Example: Going LONG on Gold Futures Contract Loss if price drops
Assume that in June, the trader bought one September Month COMEX
Gold Futures Contract at $1,580 per oz.
He pays a margin of approximately $10,000 to the broker to hold one
gold futures contract.
If his forecast is correct and by August, the September Gold Futures
rises to $1,650, he can then sell the gold futures contract for a profit of
$7,000 on the trade. The table below illustrates the example.
Example: Going LONG on Gold Futures Contract Profit if price rises
Price per oz
US$
Value of Contract
US$ (100 oz)
June
1,580
158,000
August
1,650
165,000
Profit
70
7,000
June
August
Price per oz
US$
Value of Contract
US$ (100 oz)
1,580
158,000
1,550
155,000
-30
-3,000
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Value of Contract
(Index x HKD 10)
April
20,000
200,000
May
19,000
190,000
Profit
1,000
10,000
Index
Level
Value of Contract
(Index x HKD 10)
April
20,000
200,000
May
21,000
210,000
Loss
-1,000
-10,000
If in the month of May, the June Mini HSI Futures contract drops to
19,000, the trader would make a profit of HKD10,000 if he BUYS back
the futures contract at 19,000.
However, if the traders forecast is incorrect then he would make a loss.
Assuming the Mini HSI Futures rises to 21,000, the trader would have
made a loss of HKD10,000.
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Types of orders
Here are some common order types you are likely to use:
Market orders This is an order to buy or sell which is executed at
the best possible price obtainable immediately.
Stop orders are usually used as a stop loss order to limit losses to a
position. For example, an investor with a long position in Crude
Palm Oil Futures at 2500 may put the sell stop order at 2450. When
the price of 2450 is traded, this will trigger a Sell Market Order. It
can, however, also be used as a way to enter a new position if a
certain target price is reached.
Stop limit orders - A stop limit order lists two prices and is an
attempt to gain more control over the price at which your stop is
filled. The first part of the order is written like a stop order. The
second part of the order specifies a limit price. This indicates that
once your stop is triggered, you do not wish to be filled beyond the
limit price.
Stop limit orders can be used similarly as stop loss order or as an
entry into a new position. However, do note that if used as a stop
loss order, it may not be filled within the specified limit and your
position will not be stopped out. An investor with a long Crude Palm
Oil Futures contract at 2500 who places a Sell Stop Order at 2450
with a limit of 2430 would result in a Sell Limit Order of 2430 if 2450
is traded. However note that if prices gap below 2430, his Sell Limit
Order may not be filled if the market continues to move lower.
Good Until Canceled Order (GTC) A GTC order is used in
conjunction with a Limit or Stop order. Orders will remain valid and
worked until the client cancels order, or if it is filled, or if the
contract expires.
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Getting started.
Knowing what to trade
Getting to know what you are trading is an important step when starting
out to trade futures. Read as much as possible or get advice from
professionals in the business. There are many resources on futures trading
that you can use. You should be able to find ample resources online that
are free, which provide a great deal of information.
With the correct knowledge, you now need to decide on a trading plan,
what to trade and what trading style is suitable for your investment
requirements.
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