Introduction to future contracts

What is futures trading? Futures trading is an agreement between two parties to buy or sell a specified asset at a specified future date at a price agreed today.

Hang Seng Index is calculated by capitalization weighted formula and is the main indicator of the overall market performance in Hong Kong. Currently, the Index is consisted of 50 constituents stocks.

Hang Seng Index futures (HSI futures) is a derivative based on the expected future price movements of Hang Seng Index as the underlying asset or instrument. The HSI futures had been launched in May 1986 and since then, it has become the most actively traded derivative product in Hong Kong Futures Exchange (floor trading).

Key features of futures contracts:

Generally speaking, futures contracts are financial products with the following features provided to the hedgers, speculators and arbitragers etc.

Leverage / capital efficiency:

When you open a futures contract, you must deposit the initial margin into your account, ie you must first make the minimum initial margin deposit into the designated bank account before you execute any trade. Buyer and / or seller need only necessary commit a little money to post a fraction of the underlying value of the worth of the underlying contract. In other words, with leverage effect, futures contract is a cost-efficient financial derivative which serves as a tool for hedging, speculation and arbitrage.

Cost-efficiency: The cost is much lower for a futures contract comparing to the commission rate of the specified amount of the underlying asset.

Guaranteed settlement:

As transactions are executed on a futures exchange, under the obligation agreement transactions executed by exchange will be deemed to honor the futures trade settlement obligation. Once confirmation on the transactions completed, clearing house will act as a counterparty for both buyer and seller. By removing the obligations from buyer and seller and transferring the same to clearing house, counterparty risk will be limited to the clearing, and therefore guaranteed settlement could be honored.

Directional trading: Giving more flexibility to the investors, with reference to the investors’ different market expectations, investors would generate profits nevertheless the ups and downs of the markets.