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FUTURES CONTRACTS (FC)

What is the FC? A futures contract is a asset purchase agreement in the present and delivered at a specified date in the future.

 

Underlying assets: can be anything, usually commodities and financial instruments:

  • Stocks, stock indices
  • Bonds and interest rate instruments in the currency market
  • Foreign currency
  • Agricultural goods, metals, energy,
    1.  

Terms of the Contract

The FC is only traded on the Derivatives Exchange, not on the OTC market. The Derivatives Exchange regulates and standardizes the terms of a contract, including:

  • Underlying asset class
  • Contract size (multiplier)
  • Time of maturity
  • Trading principles
  • Payment method

Trading mechanism:

Order execution Buy/Sell orders of the same type of futures contracts are put into order execution in a continuous, periodic or agreed auction method (as in the underlying market). When executing the buy/sell price and the volume of the goods are determined. Since the delivery and payment will be made in the future and the transaction is just a commitment to buy/sell, the buyer does not need to have the money ready and the seller does not need to have the goods before the transaction.

Margin To ensure that when maturity, the contractual obligations must be made, i.e. the seller deliveres the assets and the buyer pays the money, both parties must make a deposit before the transaction.

The margin amount is transferred in advance to the margin account at the Clearing Member of the Clearing House (CCP). The minimum margin requirement before the transaction is called the Initial Margin, and is calculated as a percentage of the value to be traded.

 Delivery is made in the future, immediately after the contract expires. There are two modes of delivery: money transfer or material transfer.

  • For the form of money transfer: the seller and the buyer will pay each other the difference between the contract price and the final payment price of the contract. The final payment price is usually determined by the price in the spot market on the contract maturity date.
  • For the form of material transfer: the seller will deliver the underlying goods, the buyer delivers the money.

 

Market structure

The Stock Exchange provides an order matching trading system and sets out the terms of the CONTRACT.

The Clearing House (CCP) manages trading positions, receives and manages margins from clearing Members and ensures that the trading parties fulfill their payment obligations.

The Payment Bank performs the function of receiving and making payments for transactions in the derivatives market as required by the CCP.

The trading member receives an order from the buyer/seller, then transfers the order to the Exchange and notifies the trading results to the Investors.

The clearing member receives the margin from the buyer/seller, after which the margin will be transferred to the Clearing House (CCP).

The investor places a trading order at the Trading Member and submits the margin at the Clearing Member. Normally, The securities companies will be both trading members and clearing members.

 

Valuation of THE Contract

The trading price of the CONTRACT is determined by the supply and demand of the asset generated by the orders of buyers and sellers in the market. Orders are matched through continuous auctions on the Exchange.

However, it should be noted not to set the price too far from the fair value of the contract, since the transaction price is often pulled back to fair value.

The price of the contract is determined according to the principle of cost balance, in which the price of the CONTRACT will be equal to the spot price plus the cost of holding from the present to the time in the future.

 

Specifically, at the time of t, the seller, if the delivery is made immediately, will be entitled to the St price (Spot Price). If the seller holds the goods to the time of T in the future for delivery to the buyer, it is subject to the additional cost of keeping goods C from the time of t to the time of T (Holding Cost). Therefore, the seller should sign the delivery contract around the fair value Ft as follows: Ft = St + C(t, T).

INDEX FUTURES CONTRACTSA type of futures contract whose underlying assets/instruments are a stock index. Similar to other types of futures contracts, stock index futures contracts are instruments traded on a centralized exchange with standardized terms.

Some stock index futures contracts around the world

Tool name Exchange
S&P 500 index futures Contract Chicago Mercentile Exchange - CME (USA)
DAX Index Futures Contract Eurex Derivatives Exchange (Germany)
Nikkei 225 index futures Contract Osaka Derivatives Exchange - OSE (Japan)
KOSPI 200 index futures contract Korea Stock Exchange - KRX
ASX SPI 200 index futures contract Australian Stock Exchange - ASX
VN30 Index Futures Contract Hanoi Stock Exchange - HNX

 

For example, the Futures Contract on VN30 Index:

 

VN30 Index  Futures Contract

Underlying assets

VN30 Index

List price

900 index points

Price step

0.1 index point
  • multiplier

100,000 VND

Maturity month

July 2018

Payment method
  •  
 

The contract multiplier is the value corresponding to 1 point of the index. 

The contract size is the value of the contract that is calculated as (Base Index Point x Contract Multiplier Coefficient). 

Valuation is determined according to the principle of cost balance.

In it:

S: base price

e: constant = 2.71

r: loan interest rate

d: average dividend yield of the index

T: holding time to maturity

The contract maturityThe HNX Exchange stipulates that the maturity months of the index contract are the nearest month, the next month and the last month of the next 2 quarters. The due date is the third Thursday of the month of maturity.

Cash payment methodOn the maturity date of the contract, if the position remains open, the seller will receive a daily payment chain in cash with a total value equal to the difference between the contract price and the final payment price.

The final payment price is regulated by the Clearing House, which will normally be determined from the base index price on the last trading day.After the last trading day, the corresponding CONTRACT will be delisted. The positions of this contract on the investor account will no longer be available.

  • EXAMPLES

VN30 Index Futures Contract

Asset

VN30 Index Futures Contract

Ticker

VN30F1808

Exchange

HNX

Base index

VN30 Index

List price

950 index points

Price step

0.1 index point

Contract multiplier

100,000 VND

Maturity month

August 2018

Payment method

Cash

Transactions

Derivatives Exchange

HNX

Product

VN30 August Futures Contract

Open a short position

Sold 10 August Futures contract, priced at 950

Close position

Buy 10 August Futures contract, price 930

Position

Initial

0

Short 10 contracts in July

- 10 contracts (short position)

Cover 10 contracts in July

+10 contracts (closed position)

Final position

0

Margin account

Initial margin ratio

14%

Initial margin amount

133,000,000 VND

Difference (selling price – buying price)

(950 - 930) = 20 (index points)

Contract multiplier

100,000 VND

Profit for the transaction of 1 contract

20*100,000 = 2,000,000 (VND/contract)

Profit for the transaction of 10 contracts

10*2,000,000 = 20,000,000 (VND)

The final total amount on the account

133,000,000 + 20,000,000 = 153,000,000 (VND)

Profit margin (PM%)

PM% of margin account

20,000,000/133,000,000 = 15%

PM% of the index

20/950 = 2.1%

Leverage factor

15%/2.1% = 7.1 (times)