1+

Wednesday, October 27, 2010

Index Futures with Bursa Malaysia Derivatives Berhad/Malaysia Derivative Exchange(MDEX)

I.      Definition
         FUTURE CONTRACT IS AN AGREEMENT TO BUY OR SELL A SPECIFIED QUANTITY OF AN UNDERLYING ASSET AT A SPECIFIED PRICE DETERMINED TODAY AND TO BE DELIVERED AT A SPECIFIED TIME AND PLACE IN SOME FIXED FUTURE DATE.
On FKLI Contract Specifications/Features:
1. One(1) index point is equivalent to RM50-00.

2. Every tick is at half(0.5) point, up or down. Investor can long(bullish outlook) or short(bearish outlook) the index, depending on investors expectation of the market trend and the investor will gain if he/she is in the right trend with the market and hence otherwise. 

3. Trading Months: Spot month(current month), Next Month, 3rd month and 6th month into the future with higher volume and volatility in spot and next month. Investors can trade on short term, mid term and long term depending on the investors' own preference.

4. Initial Margin: RM6000-00 per contract
Maintenance Margin: RM5000-00 per contract (when reached will subject to margin call and top up to and greater than initial margin is required).

Margins are subject to change from time to time.

Clients normally are advised to deposit more than required when volatility is considered. RM10k is a good start to trade in index futures for moderate risk trader. For active and volume traders, higher margin is required.

5. Mark to Market on daily basis(unrealized profit/loss are computed on the daily basis).

6. Last trading day of the contract is last trading day of MDEX of the contract relative month. However, investors can liquidate the position any time where applicable to his/her investment objective(s) after the contract is entered. If the investor do not liquidate the position when expire, the system will liquidate the contract upon expiry and the nett proceed will be credited/debited from client's account accordingly.

7. FKLI is a highly volatile investment and hence the associated risk nature is high.

8. Clients will be able to receive e statement on the trading done at the end of the trading day if they apply one when open the account.

9. Note that the cash market and spot month future contract may/may not be moving in parallel but they mill merge at the expiry.

II.     Trading on index futures.
For example,
Joan has a MYR100,000 which is a gift from her parents and is now looking for investment opportunity in the future market.

So she approaches a future broker representative (FBR) to open a trading a/c. Upon successful registration, she pledge the amount into her trading account.

On a day, she anticipated the market will go up and hence she long five(5) spot month future contract at 1350 points. At 1045am, the index went up to 1355 and she decided to take profit.

Profit = (Exit level – Enter level) x Rate per index point x number of contract.

            So, the profit is
                      = (1355 -1350) x MYR50 x 5
                      = 5 x MYR50 x 5
                      = MYR1,250*

·         *this computation is calculated without considering transaction cost. In normal case, the transaction cost is MYR25 per contract per entry, meaning to say MYR50 per round trip(entry and exist on per contract basis)

So, after considering the cost, the return is MYR1250 – MYR250
                                                                 =  MYR1000.

Now, one of the beauty of the future market instruments is that it allows investor not only to long(buy and anticipate the market to go up to gain) but also enable the investor to short ( buy and anticipate the market to go down to gain) the index/market.

            Conversely, the profit on shorting the index is as follow:

On a day, she anticipated the market will go down and hence she short five(5) spot month future contract at 1340 points. At 1100am, the index really went down to 1333 and she decided to take profit, i.e. to liquidate the position.

Profit = - (Exit level – Enter level) x Rate per index point x number of contract.
            So, the profit is
                      = (1340 -1333) x MYR50 x 5
                      = 7 x MYR50 x 5
                      = MYR1750*
·         *this computation is calculated without considering transaction cost. In normal case, the transaction cost is MYR25 per contract per entry, meaning to say MYR50 per round trip(entry and exist on per contract basis)

So, after considering the cost, the return is MYR1750 – MYR250
                                                                 =  MYR1500.
Note from the above examples, the break even point is always the value of one index point per contract, i.e. MYR50. Thus, the more the number of contracts, the more is the charges, but it is always MYR50 x number of contract. This applies for both long and short positions. However, the commission rates is always negotiable subject to volume of transactions.

Before I proceed further, I would like to introduce different contracting months for the Malaysia index futures, namely
1.      spot month, i.e. Current month
2.      next month
3.      third month from current month
4.      6th month from current month

For expiring period is always the last trading day of the contracting month. At this date, the investor must liquidate their positions expiring on this month or else the position will be offset by the system at the end of last trading day. However, those positions which are not current month’s contract will remain alive till the next expiring period.

Hence investors can choose their own investment horizon according to their own taste and investment preference.




Friday, July 2, 2010

New to Forex Trading

The investor believes the Canadian dollar will strengthen against the US dollar. It is a long term view, so he takes a small position to allow for wider swings in the rate:
He asks Saxo Bank for a quote in USD 1,000,000 against the Canadian dollar. The dealer quotes 1.5390-95 and the investor sells USD at 1.5390. Selling USD is the equivalent of buying the Canadian dollar.
Day 1: Sell USD 1,000,000 vs. CAD 1.5390. He swaps the position out for two months receiving a forward rate of CAD 1.5357 = Buy CAD 1,535,700 for Day 61 due to the interest rate differential.
After a month, the desired move has occurred. The investor buys back the US dollars at 1.4880. He has to swap the position forward for a month to match the original sale. The forward rate is agreed at 1.4865.
Day 31: Buy USD 1,000,000 vs. CAD 1.4865 = Sell CAD 1,486,500 for Day 61.
Day 61: The two trades are settled and the trades go off the books. The profit secured on Day 31 can be used for margin purposes before Day 61.
The USD account receives a credit and debit of USD 1,000,000 and shows no change on the account. The CAD account is credited CAD 1,535,700 and debited CAD 1,486,500 for a profit of CAD 49,200 = approx. USD 33,100 = profit of 33.1% on the original deposit of USD 100,000.