Futures Trading Guide
Content
OSK GUIDE TO
TRADING FUTURES.
Introduction to Trading Futures.
Welcome to the exciting world of Futures. This booklet serves as an
introductory guide for those wishing to start trading futures
contracts.
What are Futures Contracts?
A futures contract is an agreement between buyer and seller of an
underlying commodity / financial instrument / asset at a price set
today for delivery in the future. They are standardised contracts
traded on Exchanges around the world. Example:
Underlying
Commodity/Asset
Futures Contract
Exchange
Crude Palm Oil
Crude Palm Oil
Futures
Bursa Malaysia
Derivatives (BMD)
Gold
Gold Futures
Chicago Mercantile
Exchange (CME)
Hang Seng Index
Hang Seng Index
Futures
Hong Kong
Exchange (HKeX)
The History of the Futures market
Forward contracts, a predecessor of futures trading, originated as
early as ancient Greece, where merchants traded contracts for olive
produce.
In Japan, during the 17th Century, there existed the Dojima Rice
Market in Osaka which was probably the earliest version of the
modern day organised futures exchanges.
The 19th century saw standardised grain futures contracts being
traded on the Chicago Board Of Trade (CBOT).
Currently, futures contracts are traded on more than 80 Exchanges
all around the world with diverse contracts such as indices, interest
rates, energy and metals, besides the traditional agricultural
commodities.
Who are the players?
Participants in the futures market can be chiefly divided into two
groups depending on the rationale behind trading the market.
The first group comprises Hedgers; these are mainly corporations,
businesses or individuals who enter the futures markets to remove
or hedge their price risk.
These are people normally holding the underlying commodity or
asset. For example, producers of crude palm oil or gold; asset
managers who hold equity portfolios; and banks with loan portfolios.
Their main rationale in using the futures market is to reduce or
eliminate price risk.
The second group comprises Speculators; these are institutions or
individuals whose main rationale is to profit from movements in the
prices of futures contracts. They are largely bank proprietary or
treasury desks, hedge funds, arbitrageurs and individual traders.
Speculators assume the risk that Hedgers seek to offset, with a view
to profit from it.
1
Structure of the Futures Market.
Different bodies or participants make up the structure of a futures
market and this usually comprises the following:
The Exchange
The Clearing House
Regulators
Brokers
The Exchange
The Exchange aims to provide an efficient, transparent and orderly
trading environment where futures contracts are bought and sold.
The Exchange creates
and
designs
the
standardised futures
contracts and offers
them to the market
for trading.
The Clearing House
The Clearing House plays the critical role as the counterparties to all
buyers and sellers in a futures market. The Clearing House, in
effect, acts to guarantee the performance of all futures contracts in
the market.
In order to do that, buyers and sellers of futures contracts are
required to put up sufficient deposits, called margin, to back the
position that they have in the market.
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 investor’s 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.
2
Why trade the Futures Market?
The futures market has many distinct advantages for investors and
traders. Here are the main advantages of trading futures:
Leverage
Leverage enables an investor to hold a larger sized investment using
a smaller capital outlay.
This is an inherent feature of the futures market as brokers and the
clearing house require the investor to put up a margin deposit which
is always much less than the notional value of the futures contract.
For example, in order to trade one contract of Bursa Malaysia FTSE
Kuala Lumpur Index Futures (FKLI) contract, one would need to put
a margin deposit of, say, RM4,000.
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.
The notional value of a FKLI contract is valued at RM50 multiplied
by the Kuala Lumpur Index. If an investor bought one FKLI contract
at 1,600, he would, in notional terms, have bought RM50 x 1,600,
or RM80,000 worth of Kuala Lumpur Index Stocks.
Essentially with a deposit of RM4,000 he now holds RM80,000 worth
of stock. He is said to have employed RM80,000 / 4,000 or 20x
leverage for his position.
If the Kuala Lumpur Index rises by 10%, the investor would stand
to gain RM8,000 or 200% on his initial deposit. The 20x leverage
enables him to realise a 200% gain rather than just 10% if he had
put up RM80,000 to buy the same stocks. That is the power of
leverage.
3
Why trade the Futures market?
Volatility
The more volatile a particular futures contract, the greater the
possibility for profitable trading opportunities. The futures market has
strong price moves and this volatility create many opportunities for
investors to profit.
The global futures market offer a multitude of different contracts all
going through bear or bull cycles with abundance of trading
opportunities.
Low Transaction Costs
Futures contracts are relatively cheaper to trade than the underlying
commodity of financial instruments.
Diversification to Alternative Investment
Adding alternative investments into your portfolio can help to reduce
your portfolio volatility as well as enhance your portfolio returns.
Studies have shown that investments into alternative investment
products especially ones that are non-correlated to traditional bond
and equity markets tend to give that effect.
Futures, especially commodity futures, are pure alternative
instruments that can help you achieve this diversification.
Trade Bull and Bear markets
The futures market allows an investor to take a bullish view of the
market as well a bearish position. Unlike, say a pure equity investor,
who can only profit from a rising stock market, a futures investor can
make money when stocks are rising as well as falling.
4
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.
These daily profit and loss movements in margins are referred to as
variation margin.
Margin Calls
Margin calls occur when the variation margin losses reduce the
trading account balance to the point that they are below the margin
required by the Clearing House.
In this case, the broker will inform the client of the margin call. The
client can then choose to add more funds into the account, reduce
his position or liquidate the position entirely.
Example of Margin Calculations:
Say a client bought a position of 10 contracts in CME Gold Futures
Contract. If the initial margin of Gold Futures is US$10,000, the
client has to have a minimum of US$100,000 for his 10 contracts.
Assuming if gold prices dropped on the same day and the client’s
loss was US$25,000, his account balance would be reduced to
US$75,000.
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.
5
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:
Table 1: Margin call tabulation
At start of day
Margin requirement per contract
US$10,000
Margin requirement for 10 lots
US$100,000
Initial Margin in clients account
US$100,000
At end of day (EOD)
Variation Margin Loss EOD
US$25,000
Balance in clients account EOD
US$75,000
Margin call on clients account
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.
Examples of contract sizes:
Gold Futures (COMEX/CME) - 100 oz
Crude Palm Oil (BMD) - 25 metric tons
Hang Seng Index - HK$50 x Hang Seng Index
Contract Months – Specify the months available for trading.
Normally you would choose an active contract month to trade to
take advantage of the liquidity. You would normally not trade the
Spot Month of a physically deliverable contract unless you are
commercially involved in buying or selling the physical underlying.
Minimum Price Fluctuation – Defines the minimum price
movement of the contract in terms of index point, dollar per oz,
Ringgit per etc.
Delivery Method – Specifies how the contract is settled during
the expiry of the particular month. If it is a physically delivered
contract, buyers will need to take delivery of the underlying asset
or commodity. Otherwise, most futures contracts are cash settled
Trading Hours – Defines when the contract opens and closes for
daily trading.
Last Trading Day – Defines the last day and time where all
trading of a particular futures contract ceases.
6
What Futures to trade?
Over 12 billion futures contracts are traded annually in over 80
Exchanges around the world. The futures market offers an array of
diversified products, be it stock indices, agricultural commodities,
metals or energy products. This opens the door to new and exciting
investment choices for you.
Futures contracts can be widely divided into the following categories: Equity Indices
Individual Equities
Interest Rates
Agricultural Commodities
Non Precious Metals
Precious Metals
Energy
Equity Indices
Futures on equity indices are one of the most popular futures contracts
traded around the globe. These contracts are usually based on popular
or benchmark stock market indices for example Dow Jones & Nasdaq
Indices of US, Nikkei 225 index of Japan or Hang Seng Index of Hong
Kong.
Equity Index Futures are designed to reference the movements of the
underlying Indices. So a Dow Jones Index Futures contract has its
underlying in the Dow Jones Industrial Average (DJIA), an index of the
top 30 large capitalisation blue chip stocks traded on the New York
Stock Exchange.
The notional value of an index futures contract is calculated by
multiplying the contract multiplier with the current value/pricing of
the index. For example, if the E Mini Dow Jones Futures Index
Futures of a particular month is trading at 12,000 and the contract
multiplier is US$5 per index point, then the notional value equals
US$60,000.
Example:
Equity Index
Futures Contract
Contract
Multiplier
Value /
Price of
Index
Notional
Value
Hang Seng Index
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
E Mini Dow Jones
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.
7
What Futures to trade?
The notional value of a SSF contract is usually derived by multiplying
the stock price with the contract multiplier. For example, Air Asia has a
multiplier of 1000. If Air Asia is now trading at RM3.60 then the
notional value of the Air Asia SSF is RM3600.
For example, one contract of CBOT 10 Year Treasury Note Futures
is based on face value at maturity of US$100,000 whereas the CME
Eurodollar Futures is based on a principal value of US$1million
worth of Eurodollar Time Deposit of 3 month maturity.
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.
Agricultural commodities futures
comprise a major group of
futures contracts actively traded
globally. Traditionally, most
futures
markets
had
its
beginnings
from
physical
agricultural commodities
Some of the most actively
traded agricultural commodities
futures in the world are cotton,
sugar, rubber, soyabean oil and
corn. The most actively traded
futures contract on Bursa
Malaysia Derivatives is the
Crude Palm Oil futures contract
since Malaysia is a major
producer of Crude Palm Oil.
8
What Futures to trade?
Agricultural commodities are a great alternative investment since
they are not well correlated to equity or bond markets. Agricultural
commodity prices tend to be volatile due to the susceptibility of
crops to weather uncertainty as well as global demand trends.
Agricultural commodities futures contract sizes are usually specified
by standard weight or volume per contract.
Example:
Commodity Futures Contract0
Contract Size
Rubber (TOCOM)
5,000 kg
Corn (CBOT)
5,000 bushels
Soybean Oil (CBOT)
60,000 lbs
Crude Palm Oil (BMD)
25 metric tonnes
Non Precious Metals
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.
Non precious metal futures are mainly contracts on metals mined
mainly for industrial usage. They have surged in interest to
speculators and traders due to large price movements in 2005-2007.
The main non precious metal contracts traded around the world are
copper, zinc and aluminium. Much like agricultural commodities
futures, non precious metals futures contracts are quoted in weight.
9
What Futures to trade?
The London Metal Exchange (LME) is also a major Exchange for
trading the metal.
Gold and silver futures contracts are quoted in weight per contract
as in the example below:
Metal Futures Contract
Contract Size
Gold (COMEX)
100 troy oz
Silver (COMEX)
5,000 troy oz
Copper Futures (COMEX)
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
WTI Light Sweet Crude (NYMEX)
1,000 barrels
Brent Crude (ICE Europe)
1,000 barrels
RBOB Gasoline (NYMEX)
42,000 gallons
Natural Gas (NYMEX)
10,000 mmBtu
Both hedgers and speculators participate in the energy futures
markets due to the volatile nature of energy prices which are
extremely sensitive to geopolitical changes in the global economy.
10
Basic Futures trading strategy.
Buying gold to profit from expected rise in gold prices
If a trader believes the price of gold is going to increase in the near
future, he could profit by BUYING (Go LONG) a Gold Futures
Contract.
If his forecast is correct and prices rise, he can then SELL it later at a
higher price and make a profit.
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
Buy 1 Sep Gold
Futures Contract
1,580
158,000
August
Sell 1 Sep Gold
Futures Contract
1,650
165,000
Profit
70
7,000
June
August
Buy 1 Sep Gold
Futures Contract
Sell 1 Sep Gold
Futures Contract
Profit
Price per oz
US$
Value of Contract
US$ (100 oz)
1,580
158,000
1,550
155,000
-30
-3,000
Selling Hang Seng Index Futures to profit from an expected
drop in equity prices
If a trader forecasts that Asian equity prices are going to drop in the
near future, he could profit from this by SELLING (Go SHORT) the
Mini Hang Seng Index Futures.
If his forecast is correct, he can profit by BUYING back the Mini
Hang Seng Index Futures later.
11
Basic Futures trading strategy.
Assume the trader went SHORT one June Month Mini HSI Futures in
April at 20,000 points. He pays the broker say, HKD13,000, as margin
to hold one contract of Mini HSI Futures.
Example: Going SHORT on Mini HSI Futures Contract – Loss if index
rises
Margin requirements for going SHORT are the same as initiating a
LONG futures contract.
Example: Going SHORT on Mini HSI Futures Contract – Profit if index
drops
Index
Level
Value of Contract
(Index x HKD 10)
April
Sell 1 June Mini HSI
Futures Contract
20,000
200,000
May
Buy 1 June Mini HSI
Futures Contract
19,000
190,000
Profit
1,000
10,000
Index
Level
Value of Contract
(Index x HKD 10)
April
Sell 1 June Mini HSI
Futures Contract
20,000
200,000
May
Buy 1 June Mini HSI
Futures Contract
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 trader’s 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.
12
How to place an order with your broker?
In futures trading, there are many
different types of orders that can
be placed with your broker
depending on what you intend to
do.
There are orders for initiating an
entry into the market; orders to
exit a current position as well as
contingency orders to limit losses
after you have a position in the
futures market.
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.
Limit orders – This is an order to buy or sell at a designated price.
Limit orders to BUY are placed below the market while limit orders to
SELL are placed above the market.
Since the market may never get high enough or low enough to trigger a
limit order, a trader may miss the market if he uses a limit order.
Stop orders - A buy stop order is placed above the market and a sell
stop order is placed below the market. Once the stop price is touched,
the order is treated like a market order and will be filled at the best
possible price.
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.
13
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.
Know how much funds to risk
It is advisable to have an idea of how much funds you will allocate for your
futures trading account. This is determined by how much risk capital you
are willing to fork out. Futures trading entails some risk and one is well
advised to only trade with risk capital you can afford.
Work with your broker / dealer
When you first start out in trading futures, it is important to communicate
with your dealer / broker to determine your trading needs and as well as
what sort of requirements you will need for support such as research,
trading ideas, news updates and trading platforms.
14
Why trade Futures with us?
OSK Investment Bank Berhad (OSKIB) is a regional investment bank
with presence in Malaysia, Singapore, Indonesia, Thailand,
Cambodia, Hong Kong and China.
They are trained professionally and have a good understanding of
the markets. Their experience and knowledge can certainly help
improve your trading performance.
OSKIB is proud to be one of Malaysia’s top futures broker providing
access to futures trading in Malaysia as well as in major futures
markets around the world. Whether you are trading equity indices
like the Hang Seng Index or the e-Mini Dow; commodities like Gold,
Crude Oil or Crude Palm Oil, we provide fast and convenient access
to these markets.
In order to serve your needs for trading futures in different time
zones, we also have a night desk dedicated to support your queries
and trading needs.
To find out more, visit us at www.osk188.com
Our online trading platform allows you to trade global futures
contracts on your laptops wherever you are connected to the
internet. With real time quotes and charts, you would be able to
plan your investments even more effectively.
OSKIB has an experienced team of Futures Broker Representatives
and Dual Licensed Holders who can cater to your diverse needs
based on your suitability to certain futures products.
15
TRADING FUTURES.
Introduction to Trading Futures.
Welcome to the exciting world of Futures. This booklet serves as an
introductory guide for those wishing to start trading futures
contracts.
What are Futures Contracts?
A futures contract is an agreement between buyer and seller of an
underlying commodity / financial instrument / asset at a price set
today for delivery in the future. They are standardised contracts
traded on Exchanges around the world. Example:
Underlying
Commodity/Asset
Futures Contract
Exchange
Crude Palm Oil
Crude Palm Oil
Futures
Bursa Malaysia
Derivatives (BMD)
Gold
Gold Futures
Chicago Mercantile
Exchange (CME)
Hang Seng Index
Hang Seng Index
Futures
Hong Kong
Exchange (HKeX)
The History of the Futures market
Forward contracts, a predecessor of futures trading, originated as
early as ancient Greece, where merchants traded contracts for olive
produce.
In Japan, during the 17th Century, there existed the Dojima Rice
Market in Osaka which was probably the earliest version of the
modern day organised futures exchanges.
The 19th century saw standardised grain futures contracts being
traded on the Chicago Board Of Trade (CBOT).
Currently, futures contracts are traded on more than 80 Exchanges
all around the world with diverse contracts such as indices, interest
rates, energy and metals, besides the traditional agricultural
commodities.
Who are the players?
Participants in the futures market can be chiefly divided into two
groups depending on the rationale behind trading the market.
The first group comprises Hedgers; these are mainly corporations,
businesses or individuals who enter the futures markets to remove
or hedge their price risk.
These are people normally holding the underlying commodity or
asset. For example, producers of crude palm oil or gold; asset
managers who hold equity portfolios; and banks with loan portfolios.
Their main rationale in using the futures market is to reduce or
eliminate price risk.
The second group comprises Speculators; these are institutions or
individuals whose main rationale is to profit from movements in the
prices of futures contracts. They are largely bank proprietary or
treasury desks, hedge funds, arbitrageurs and individual traders.
Speculators assume the risk that Hedgers seek to offset, with a view
to profit from it.
1
Structure of the Futures Market.
Different bodies or participants make up the structure of a futures
market and this usually comprises the following:
The Exchange
The Clearing House
Regulators
Brokers
The Exchange
The Exchange aims to provide an efficient, transparent and orderly
trading environment where futures contracts are bought and sold.
The Exchange creates
and
designs
the
standardised futures
contracts and offers
them to the market
for trading.
The Clearing House
The Clearing House plays the critical role as the counterparties to all
buyers and sellers in a futures market. The Clearing House, in
effect, acts to guarantee the performance of all futures contracts in
the market.
In order to do that, buyers and sellers of futures contracts are
required to put up sufficient deposits, called margin, to back the
position that they have in the market.
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 investor’s 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.
2
Why trade the Futures Market?
The futures market has many distinct advantages for investors and
traders. Here are the main advantages of trading futures:
Leverage
Leverage enables an investor to hold a larger sized investment using
a smaller capital outlay.
This is an inherent feature of the futures market as brokers and the
clearing house require the investor to put up a margin deposit which
is always much less than the notional value of the futures contract.
For example, in order to trade one contract of Bursa Malaysia FTSE
Kuala Lumpur Index Futures (FKLI) contract, one would need to put
a margin deposit of, say, RM4,000.
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.
The notional value of a FKLI contract is valued at RM50 multiplied
by the Kuala Lumpur Index. If an investor bought one FKLI contract
at 1,600, he would, in notional terms, have bought RM50 x 1,600,
or RM80,000 worth of Kuala Lumpur Index Stocks.
Essentially with a deposit of RM4,000 he now holds RM80,000 worth
of stock. He is said to have employed RM80,000 / 4,000 or 20x
leverage for his position.
If the Kuala Lumpur Index rises by 10%, the investor would stand
to gain RM8,000 or 200% on his initial deposit. The 20x leverage
enables him to realise a 200% gain rather than just 10% if he had
put up RM80,000 to buy the same stocks. That is the power of
leverage.
3
Why trade the Futures market?
Volatility
The more volatile a particular futures contract, the greater the
possibility for profitable trading opportunities. The futures market has
strong price moves and this volatility create many opportunities for
investors to profit.
The global futures market offer a multitude of different contracts all
going through bear or bull cycles with abundance of trading
opportunities.
Low Transaction Costs
Futures contracts are relatively cheaper to trade than the underlying
commodity of financial instruments.
Diversification to Alternative Investment
Adding alternative investments into your portfolio can help to reduce
your portfolio volatility as well as enhance your portfolio returns.
Studies have shown that investments into alternative investment
products especially ones that are non-correlated to traditional bond
and equity markets tend to give that effect.
Futures, especially commodity futures, are pure alternative
instruments that can help you achieve this diversification.
Trade Bull and Bear markets
The futures market allows an investor to take a bullish view of the
market as well a bearish position. Unlike, say a pure equity investor,
who can only profit from a rising stock market, a futures investor can
make money when stocks are rising as well as falling.
4
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.
These daily profit and loss movements in margins are referred to as
variation margin.
Margin Calls
Margin calls occur when the variation margin losses reduce the
trading account balance to the point that they are below the margin
required by the Clearing House.
In this case, the broker will inform the client of the margin call. The
client can then choose to add more funds into the account, reduce
his position or liquidate the position entirely.
Example of Margin Calculations:
Say a client bought a position of 10 contracts in CME Gold Futures
Contract. If the initial margin of Gold Futures is US$10,000, the
client has to have a minimum of US$100,000 for his 10 contracts.
Assuming if gold prices dropped on the same day and the client’s
loss was US$25,000, his account balance would be reduced to
US$75,000.
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.
5
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:
Table 1: Margin call tabulation
At start of day
Margin requirement per contract
US$10,000
Margin requirement for 10 lots
US$100,000
Initial Margin in clients account
US$100,000
At end of day (EOD)
Variation Margin Loss EOD
US$25,000
Balance in clients account EOD
US$75,000
Margin call on clients account
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.
Examples of contract sizes:
Gold Futures (COMEX/CME) - 100 oz
Crude Palm Oil (BMD) - 25 metric tons
Hang Seng Index - HK$50 x Hang Seng Index
Contract Months – Specify the months available for trading.
Normally you would choose an active contract month to trade to
take advantage of the liquidity. You would normally not trade the
Spot Month of a physically deliverable contract unless you are
commercially involved in buying or selling the physical underlying.
Minimum Price Fluctuation – Defines the minimum price
movement of the contract in terms of index point, dollar per oz,
Ringgit per etc.
Delivery Method – Specifies how the contract is settled during
the expiry of the particular month. If it is a physically delivered
contract, buyers will need to take delivery of the underlying asset
or commodity. Otherwise, most futures contracts are cash settled
Trading Hours – Defines when the contract opens and closes for
daily trading.
Last Trading Day – Defines the last day and time where all
trading of a particular futures contract ceases.
6
What Futures to trade?
Over 12 billion futures contracts are traded annually in over 80
Exchanges around the world. The futures market offers an array of
diversified products, be it stock indices, agricultural commodities,
metals or energy products. This opens the door to new and exciting
investment choices for you.
Futures contracts can be widely divided into the following categories: Equity Indices
Individual Equities
Interest Rates
Agricultural Commodities
Non Precious Metals
Precious Metals
Energy
Equity Indices
Futures on equity indices are one of the most popular futures contracts
traded around the globe. These contracts are usually based on popular
or benchmark stock market indices for example Dow Jones & Nasdaq
Indices of US, Nikkei 225 index of Japan or Hang Seng Index of Hong
Kong.
Equity Index Futures are designed to reference the movements of the
underlying Indices. So a Dow Jones Index Futures contract has its
underlying in the Dow Jones Industrial Average (DJIA), an index of the
top 30 large capitalisation blue chip stocks traded on the New York
Stock Exchange.
The notional value of an index futures contract is calculated by
multiplying the contract multiplier with the current value/pricing of
the index. For example, if the E Mini Dow Jones Futures Index
Futures of a particular month is trading at 12,000 and the contract
multiplier is US$5 per index point, then the notional value equals
US$60,000.
Example:
Equity Index
Futures Contract
Contract
Multiplier
Value /
Price of
Index
Notional
Value
Hang Seng Index
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
E Mini Dow Jones
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.
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What Futures to trade?
The notional value of a SSF contract is usually derived by multiplying
the stock price with the contract multiplier. For example, Air Asia has a
multiplier of 1000. If Air Asia is now trading at RM3.60 then the
notional value of the Air Asia SSF is RM3600.
For example, one contract of CBOT 10 Year Treasury Note Futures
is based on face value at maturity of US$100,000 whereas the CME
Eurodollar Futures is based on a principal value of US$1million
worth of Eurodollar Time Deposit of 3 month maturity.
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.
Agricultural commodities futures
comprise a major group of
futures contracts actively traded
globally. Traditionally, most
futures
markets
had
its
beginnings
from
physical
agricultural commodities
Some of the most actively
traded agricultural commodities
futures in the world are cotton,
sugar, rubber, soyabean oil and
corn. The most actively traded
futures contract on Bursa
Malaysia Derivatives is the
Crude Palm Oil futures contract
since Malaysia is a major
producer of Crude Palm Oil.
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What Futures to trade?
Agricultural commodities are a great alternative investment since
they are not well correlated to equity or bond markets. Agricultural
commodity prices tend to be volatile due to the susceptibility of
crops to weather uncertainty as well as global demand trends.
Agricultural commodities futures contract sizes are usually specified
by standard weight or volume per contract.
Example:
Commodity Futures Contract0
Contract Size
Rubber (TOCOM)
5,000 kg
Corn (CBOT)
5,000 bushels
Soybean Oil (CBOT)
60,000 lbs
Crude Palm Oil (BMD)
25 metric tonnes
Non Precious Metals
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.
Non precious metal futures are mainly contracts on metals mined
mainly for industrial usage. They have surged in interest to
speculators and traders due to large price movements in 2005-2007.
The main non precious metal contracts traded around the world are
copper, zinc and aluminium. Much like agricultural commodities
futures, non precious metals futures contracts are quoted in weight.
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What Futures to trade?
The London Metal Exchange (LME) is also a major Exchange for
trading the metal.
Gold and silver futures contracts are quoted in weight per contract
as in the example below:
Metal Futures Contract
Contract Size
Gold (COMEX)
100 troy oz
Silver (COMEX)
5,000 troy oz
Copper Futures (COMEX)
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
WTI Light Sweet Crude (NYMEX)
1,000 barrels
Brent Crude (ICE Europe)
1,000 barrels
RBOB Gasoline (NYMEX)
42,000 gallons
Natural Gas (NYMEX)
10,000 mmBtu
Both hedgers and speculators participate in the energy futures
markets due to the volatile nature of energy prices which are
extremely sensitive to geopolitical changes in the global economy.
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Basic Futures trading strategy.
Buying gold to profit from expected rise in gold prices
If a trader believes the price of gold is going to increase in the near
future, he could profit by BUYING (Go LONG) a Gold Futures
Contract.
If his forecast is correct and prices rise, he can then SELL it later at a
higher price and make a profit.
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
Buy 1 Sep Gold
Futures Contract
1,580
158,000
August
Sell 1 Sep Gold
Futures Contract
1,650
165,000
Profit
70
7,000
June
August
Buy 1 Sep Gold
Futures Contract
Sell 1 Sep Gold
Futures Contract
Profit
Price per oz
US$
Value of Contract
US$ (100 oz)
1,580
158,000
1,550
155,000
-30
-3,000
Selling Hang Seng Index Futures to profit from an expected
drop in equity prices
If a trader forecasts that Asian equity prices are going to drop in the
near future, he could profit from this by SELLING (Go SHORT) the
Mini Hang Seng Index Futures.
If his forecast is correct, he can profit by BUYING back the Mini
Hang Seng Index Futures later.
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Basic Futures trading strategy.
Assume the trader went SHORT one June Month Mini HSI Futures in
April at 20,000 points. He pays the broker say, HKD13,000, as margin
to hold one contract of Mini HSI Futures.
Example: Going SHORT on Mini HSI Futures Contract – Loss if index
rises
Margin requirements for going SHORT are the same as initiating a
LONG futures contract.
Example: Going SHORT on Mini HSI Futures Contract – Profit if index
drops
Index
Level
Value of Contract
(Index x HKD 10)
April
Sell 1 June Mini HSI
Futures Contract
20,000
200,000
May
Buy 1 June Mini HSI
Futures Contract
19,000
190,000
Profit
1,000
10,000
Index
Level
Value of Contract
(Index x HKD 10)
April
Sell 1 June Mini HSI
Futures Contract
20,000
200,000
May
Buy 1 June Mini HSI
Futures Contract
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 trader’s 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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How to place an order with your broker?
In futures trading, there are many
different types of orders that can
be placed with your broker
depending on what you intend to
do.
There are orders for initiating an
entry into the market; orders to
exit a current position as well as
contingency orders to limit losses
after you have a position in the
futures market.
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.
Limit orders – This is an order to buy or sell at a designated price.
Limit orders to BUY are placed below the market while limit orders to
SELL are placed above the market.
Since the market may never get high enough or low enough to trigger a
limit order, a trader may miss the market if he uses a limit order.
Stop orders - A buy stop order is placed above the market and a sell
stop order is placed below the market. Once the stop price is touched,
the order is treated like a market order and will be filled at the best
possible price.
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.
13
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.
Know how much funds to risk
It is advisable to have an idea of how much funds you will allocate for your
futures trading account. This is determined by how much risk capital you
are willing to fork out. Futures trading entails some risk and one is well
advised to only trade with risk capital you can afford.
Work with your broker / dealer
When you first start out in trading futures, it is important to communicate
with your dealer / broker to determine your trading needs and as well as
what sort of requirements you will need for support such as research,
trading ideas, news updates and trading platforms.
14
Why trade Futures with us?
OSK Investment Bank Berhad (OSKIB) is a regional investment bank
with presence in Malaysia, Singapore, Indonesia, Thailand,
Cambodia, Hong Kong and China.
They are trained professionally and have a good understanding of
the markets. Their experience and knowledge can certainly help
improve your trading performance.
OSKIB is proud to be one of Malaysia’s top futures broker providing
access to futures trading in Malaysia as well as in major futures
markets around the world. Whether you are trading equity indices
like the Hang Seng Index or the e-Mini Dow; commodities like Gold,
Crude Oil or Crude Palm Oil, we provide fast and convenient access
to these markets.
In order to serve your needs for trading futures in different time
zones, we also have a night desk dedicated to support your queries
and trading needs.
To find out more, visit us at www.osk188.com
Our online trading platform allows you to trade global futures
contracts on your laptops wherever you are connected to the
internet. With real time quotes and charts, you would be able to
plan your investments even more effectively.
OSKIB has an experienced team of Futures Broker Representatives
and Dual Licensed Holders who can cater to your diverse needs
based on your suitability to certain futures products.
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