A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price.
A futures contract gives the holder the obligation to buy or sell, which differs from an options contract, which gives the holder the right, but not the obligation. In other words, the owner of an options contract may exercise the contract, but both parties of a “futures contract” must fulfill the contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-settled future, then cash is transferred from the futures trader who sustained a loss to the one who made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has to offset his/her position by either selling a long position or buying back a short position, effectively closing out the futures position and its contract obligations.
Futures contracts, or simply futures, are exchange traded derivatives. The exchange’s clearinghouse acts as counterparty on all contracts, sets margin requirements, and crucially also provides a mechanism for settlement.[1]
The two most famous futures products in Malaysia are shown below:-(source taken from:-www.bursamalaysia.com)
Derivatives
Crude Palm Oil (FCPO) Futures
| Contract Code | FCPO |
|---|---|
| Underlying Instrument | Crude Palm Oil |
| Contract Size | 25 metric tons |
| Minimum Price Fluctuation | RM1 per metric ton |
| Daily Price Limits |
With the exception of trades in the spot month, trades for future delivery of Crude Palm Oil in any month shall not be made, during any one Business Day, at prices varying more than 10% above or below the settlement prices of the preceding Business Day (“the 10% Limit”) except as provided below. When at least 3 non-spot month contracts are trading at the 10% Limit, the Exchange shall announce a 10-minute cooling off period (“the Cooling Off Period”) for all contract months (except the spot month) during which trading shall only take place within the 10% Limit. Following the Cooling Off Period, all contract months shall be specified as interrupted for a period of 5 minutes, after which the prices traded for all contract months (except the spot month) shall not vary more than 15% above or below the settlement prices of the preceding Business Day (“the 15% Limit”). If the 10% Limit is triggered less than 30 minutes before the end of the first trading session, the following shall apply:-
If the 10% Limit is triggered less than 30 minutes before the end of the second trading session, the 10% Limit shall be applied to all contract months (except the spot month) for the rest of the Business Day. |
| Contract Months |
Spot month and the next 5 succeeding months, and thereafter, alternate months up to 24 months ahead |
| Trading Hours |
First trading session: Malaysian time: 10:30 a.m. to 12:30 p.m. Second trading session: Malaysian time: 3:00 p.m. to 6:00 p.m. |
|
Speculative Position Limits |
500 contracts net long or net short for the spot month 5,000 contracts for any single delivery month except for the spot month 8,000 contracts for all contract months combined |
| Final Trading Day and Maturity Date |
Contract expires at noon on the 15th day of the delivery month, or if the 15th is a non-market day, the preceding Business Day. |
| Tender Period |
1st Business Day to the 20th Business Day of the delivery month, or if the 20th is a non-market day, the preceding Business Day. |
| Contract Grade and Delivery Points |
Crude Palm Oil of good merchantable quality, in bulk, unbleached, in Port Tank Installations approved by the Exchange located at the option of the seller at Port Kelang, Penang/Butterworth and Pasir Gudang (Johor). Free Fatty Acids (FFA) of palm oil delivered into Port Tank Installations shall not exceed 4% and from Port Tank Installations shall not exceed 5%. Moisture and impurities shall not exceed 0.25%. Deterioration of Bleachability Index (DOBI) value of palm oil delivered into Port Tank Installations shall be at a minimum of 2.5 and of palm oil delivered from Port Tank Installations shall be at a minimum of 2.31. |
| Deliverable Unit |
25 metric tons, plus or minus not more than 2%. Settlement of weight differences shall be based on the simple average of the daily Settlement Prices of the delivery month from:
|
Derivatives
KLCI (FKLI) Futures
| Contract Code | FKLI |
|---|---|
| Underlying Instrument | Kuala Lumpur Composite Index (KLCI) |
| Contract Size | KLCI multiplied by RM50 |
| Minimum Price Fluctuation | 0.5 index point valued at RM25 |
| Daily Price Limits | 20% per trading session for the respective contract months except the spot month contract. There shall be no price limits for the spot month contract. There will be no price limit for the second month contract for the final five Business Days before expiration. |
| Contract Months | Spot month, the next month and the next two calendar quarterly months. The calendar quarterly months are March, June, September and December. |
| Trading Hours | First trading session: Malaysian 8:45 a.m. to 12:45 p.m. Second trading session: Malaysian 2:30 p.m. to 5:15 p.m. |
| Final Trading Day | The last Business Day of the contract month. |
| Final Settlement | Cash Settlement based on the Final Settlement Value. |
| Final Settlement Value | The Final Settlement Value shall be the average value, rounded to the nearest 0.5 of an index point (values of 0.25 or 0.75 and above being rounded upwards) of the KLCI for the last half hour of trading on the Exchange on the Final Trading Day excepting the highest and lowest value. |
| Speculative Position Limit | 10,000 contracts, net gross open position. |
