A friend of mine had attended the ‘Jacky Cheung: A Classic Tour’ concert which was held last Saturday at the Axiata Arena, Bukit Jalil. I believe, it was a treat to many who love Cantopop music.
Supposedly, Jacky Cheung plans to have another concert in Kuala Lumpur – let’s say: ‘Jacky Cheung – The Reunion’ in 2020, two years from now. The ticket price has yet to be finalized. But, its organizer is authorized to begin its promotion by allowing the public to book its tickets at an early bird price of RM 250 per pax.
Now, if you are a fan of Jacky’s music, would you book the ticket?
Most likely, you would. Why? This is because you believe the price of the same ticket would rise as we move closer to the actual date of Jacky’s next concert in 2020. Fast forward to 2020, the full ticket price of Jacky’s concert in 2020 is RM 500 per pax. Thus, you ‘saved’ RM 250 as you had booked your ticket at a price of RM 250 for a ticket that is now worth RM 500.
The above is fundamental to understanding what a futures contract is. In other words, if you understand the example above, chances are, you would grasp the concept and mechanics of a futures contract much easier. It is not complicated, trust me. Here, I have compiled a list of basic questions which act as a guide to help you learn about a futures contract. Let’s begin.
#1: What is a Derivative?
The root word for a ‘derivative’ comes from the word – ‘derive’. For example, a concert ticket is a form of derivative as its value is derived from Jacky Cheung.
#2: What is a Futures Contract?
A futures contract is a derivative. It allows you to lock-in a fixed price today for a product to be bought or sold at a latter date. For example, you are offered a chance to book (lock-in) your ticket to Jacky’s concert (product) in 2020 (latter date) at RM 250 (fixed price) today in year 2018.
#3: Popular Futures Contracts in Malaysia
Presently, there are 15 futures contracts that are being actively traded in Bursa Malaysia. Out of which, the three popular contracts are:
Jacky’s Concert Tickets
FTSE Bursa Malaysia KLCI Futures (FKLI)
FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI)
Crude Palm Oil Futures (FCPO)
Crude Palm Oil (in RM)
|3||Gold Futures (FGLD)|
London Gold Market
#5: Contract Specifications of a Futures Contract
Source: Bursa Malaysia
Underlying Instrument –
It allows you to trade the FTSE Bursa Malaysia Kuala Lumpur Composite Index – FBM KLCI.
Contract Size –
Presently, the KLCI is trading at 1,777 points. Thus, the size for each contract is worth RM 88,850.
Minimum Price Fluctuation –
It is set at 0.5 index points which is worth RM 25.
Daily Price Limits –
It refers to the maximum up or down a stock exchange (Bursa Malaysia) allows the price of FBM KLCI to fluctuate in a trading day.
Contract Months –
I’m writing this article or webinar note on 7 October 2018. Hence, the available contract months would be spot month (October), the next month (November), and the next two calendar quarter months (December 2018 & March 2019).
#6: Benefits of Trading Futures
There are several reasons why a person would trade futures. They are:
Profit from a Downturn –
A stock trader can only ‘buy low, sell high’ if he trades stocks listed in Malaysia. However, a futures trader can ‘sell high’ first and subsequently, ‘buy low’ later in the market with futures, thus, profiting from a downturn in the market.
A futures trader may control a larger position in his trade with small capital via margins.
Less Complicated –
Today, there are 900+ stocks listed on Bursa Malaysia. Most do not know what stocks to trade first due to having a boutique of choices. However, there are 15 futures products in Bursa Malaysia. Thus, it is less complicated as there are less choices for traders to choose from.
#7: Profit or Loss Calculation
With futures, you can either ‘buy low, sell high’ or ‘sell high, buy low’. As I write today, the FBM KLCI is trading at RM 1,777. Let us say,
You Anticipate It to Rise in the Future
You Long or ‘Buy’ a contract at 1,777. At a future date, it has increased to 1,797 or by 20 index points. Thus, your profit is RM 1,000 (20 index points x RM 50).
You Anticipate it to Drop in the Future
You Short or ‘Sell’ a contract at 1,777. At a future date, it has dropped to 1,757 or by 20 index points. Thus, your loss is RM 1,000 (20 index points x RM 50).
Obviously, there are much more to be learnt about futures before you start to trade them. Here, I had just covered the broad strokes. If you are interested in learning more, I had recorded an 1-Hour live webinar session with Ms. Choong Ty’ng Ty’ng, Managing Director of Axcelearn Sdn Bhd where she has presented a much in-depth session on futures.