Futures

What Is Futures Trading?

  • A Futures Contract is an agreement to Buy/Sell a certain underlying instrument at a pre-determined price for delivery at a future date
  • Used as hedging tool to protect the value of physical holdings
  • Futures trading is carried out in an organised exchange
  • Trading can be conducted through either the trading platforms or call-ins

Advantages of Trading Futures

  • All exchange-traded futures contracts are standardised instruments
  • Requires only a fraction of the contract value to initiate a trade (Initial Margin)
  • Enables participation in broad market moves with one trading decision
  • Lower transaction costs in relation to buying/selling the total underlying
  • One can decide to go either ways of the market
  • It is usually fairer in the Futures markets than other markets because it is harder to get ‘insider information’

Who Trades Futures?

  1. Arbitrageur
    • Seeking to make risk-less profit from disequilibrium between the cash and futures market
    • Do not take directional bets on market
    • Taking advantage of out-pricings between cash and futures market
  2. Portfolio Manager
    • Professionals who manage a portfolio of investments
    • Main focus is to identify investment that will optimise returns for investors who place money with them
    • Work in banks, hedge funds and asset management companies
  3. Hedger
    • Agriculture producers who want to protect themselves from future price fluctuations - e.g. farmers, oil companies, mining companies, etc
    • Financial Institution – e.g. banks, funds managers, broking firms, etc
  4. Speculator
    1. includes almost any investor. For e.g. individual retail investors. Usually, they don’t have any connection with the cash commodity and simply try to make a profit by
      1. buying a futures contract if they expect a rise in price
      2. sell a futures contract if they expect a fall in price

Understanding Futures Trading

Points to note about futures contract

Contract Specifications

  • Contract size
  • Contract months
  • Trading hours
  • Minimum price fluctuation
  • Daily price limits
  • Last trading day
  • Settlement basis
  • Final settlement price

Understanding the Contract Specifications
Illustration using MSCI Singapore Free Index or SIMSCI

  • Contract size: S$200 x SiMSCI Futures price
  • Contract months: 2 nearest serial months and 4 quarterly contract months
  • Trading Hours : 8.30 am – 5.15 pm (T session)
                                  6.15 pm – 10.55 pm (T + 1 session)
  • Minimum price fluctuation (per tick): 0.1 index point (S$20)
  • Daily price limits: Whenever the price moves by 15% in either direction from the previous day’s settlement price, trading at or within the price limit of +/-15% is not allowed for the next 10 min. After this cooling-off period has elapsed, there shall be no price limits for the remaining of the trading day. There shall be no price limits on the last trading day of the expiring contract.
  • Last trading day: The second last business day of the contract month (Note: A business day is defined as a day on which the Singapore stock market is open for trading)
  • Settlement basis: Cash settlement
  • Final settlement price (FSP): The final settlement price shall be the value of SiMSCI computed based on the Special Quotation methodology applied on each component stock of SiMSCI on the day following the last trading day(“FSP Day”).
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Calculating Profit and Loss

Illustration using SiMSCI,

Bought 1 SiMSCI at 367.8 points & sold it at 369.4points (i.e. 16 ticks)

(369.4 - 367.8) x S$200

 

Bought 1 SiMSCI at 366.7 points & sold it at 365.5 points (i.e 12 ticks)

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Bid & Offer Price

  • Bid price: Price at which market is willing to buy the product
  • Offer / ask price: Price at which market is willing to sell the product

    Example:
    To trade at the market price, you:
    - sell at 378.9
    - buy at 379.2
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Order types

Market Order

  • No price specified, order to be filled at best available price

Limit Order

  • Price is specified, the customer has better control of the fill

  • No guarantee on fill

Stop Order

  • Becomes a market order when stop price is triggered [stop price is traded or bid (buy stop) / offer
    (sell stop)]

Stop-Limit Order

  •  Becomes a limit order when stop price is triggered (two prices will be placed i.e. stop and limit \price)
  • No guarantee on fill

Illustration of Limit Order

If market trading at:

  • Buy Limit Order will be placed at a level equals or smaller than 378.9
  • Sell Limit Order will be placed at a level equals or bigger than 379.2

Illustration of Stop Order

  • With a Long position at 379.1, you might want to place a Sell Stop at 378.2 (below the existing market)
  • With a Short position at 378.9, you might want to place a Buy Stop Order at 380.1 (above the existing market)

Illustration of Stop-Limit Order

  • With a Long position at 379.5 and market currently trading at 378.9, you might want to place a Sell Stop-Limit order:
  • Stop at 378.0 and Limit at 377.5

Note: In the of certain events, there might be situations of 'gaps', client might end up with market triggering the stop level but penetrating the limit level without filling your order.

Placing Orders through Phone

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First Notice Day (FND) and Last Trading Day (LTD)

Only applies to deliverable futures/

First Notice Day (FND)

Clients of LONG positions in Deliverable Products will have to close out before the FND. Long positions unclosed before FND expiration will lead to Phillip Futures force-closure of the positions for the client (at the risk to the client).

Last Trading Day (LTD)

All futures-contracts (either in Long or Short Positions) which were not closed by the end of the last trading day will be force-closed by Phillip Futures to avoid physical delivery of the products. ( at the risk to the client)

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What to note when you trade

Fundamental Analysis

  • A study of basic factors economic, political or social, which affect demand and supply for a commodity or financial instrument
  • E.g. Indicators, Central Bank Operation and Policy, etc

Technical Analysis

  • Trying to forecast future price movements by studying the price patterns, volume and open interest. It tries to estimate the relative strength of buying and selling, determining what to buy and sell, entry and exit points
  • E.g. Price chart, MACD, RSI, etc
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Phillip Futures’ Products

Derivatives

  1. Stock Index
    Indices of more than 10 global exchanges
  2. Currency
    Euro, Sterling, Yen and etc
  3. Interest Rates
    T-Bonds, T-Notes, Government Bonds

Commodities

  1. Metal
    Gold, Silver, Palladium, Platinum, Aluminium
  2. Agriculture
    Corn, Coffee, Crude Palm Oil, Soyabean, Wheats
  3. Energy
     Crude Oil, Heating Oil and Gasoline
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Product Information

Stock Index Futures

  1. Involves buying/selling of contracts related to the market value of index
  2. Offers investors opportunities to capitalise from movements in the market
  3. Helps investors protect against stock market fluctuations without changing your actual dollar investment in stocks
  4. Cash settled when contract expires
  5. Basket of stocks representing a market or a sector

Currency Futures

  1. A contract to exchange one currency for another (usually USD) at a specific date in the future at a price that is fixed on the purchase date
  2. Offers investors opportunities to capitalise from movements in the currencies market
  3. Examples: Euro-Dollar, Japanese Yen, Aussie Dollar, Sterling Dollar, Canadian Dollar, Swiss Franc, Mexico Pesos
  4. Physical Delivery

Interest Rate Futures

  1. A contract with an interest-bearing instrument as the underlying asset
  2. Examples: T-Bill, T-Bond, Euro-Dollar Interest Rate and Euro-Yen Interest Rate
  3. Offers investors opportunities to capitalise from movements in the interest rate market
  4. Cash settled when contract expires

Commodity Futures

  • Involves buying/selling of contracts related to the price of commodities
  • Offers investors opportunities to capitalise from movements in the prices of commodities
  • Commodities tend to bear a low to negative correlation to traditional asset classes like stocks and bonds, thus making it a good inflation hedge.
  • By adding commodities to a portfolio of assets that are less volatile, you actually decrease the overall portfolio risk due to the negative correlation.
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