Futures – What Am I Trading?
Most people think trading futures means you are trading physical commodities such as gold, oil and soybean. However, there are a lot of other underlying assets being traded in the futures market.
According to Wikipedia, in many cases, the underlying asset to a futures contract may not be traditional commodities at all – that is, for financial futures the underlying asset or item can be currencies, securities or financial instruments and intangible assets or referenced items such as stock indexes and interest rates. We look at some of the popular underlying assets that are traded in the futures market.
In the futures market, the widely traded commodities are categorized as:
- Precious metals such as gold, platinum and silver
- Metals such as aluminum, copper and steel
- Agricultural products such as rice, corn, soybean oil, palm oil, cotton and wheat
- Soft commodities such as cocoa, coffee, tea and sugar
- Livestock such as live cattle, feeder cattle and pork bellies
- Energy commodities such as crude oil, gas and heating oil
Equity Index Futures
As the name suggests, this futures contract is based on an underlying equity index such as FBM KLCI, STI and DJIA. Equity index futures has the same performance of the underlying equity index. In Malaysia, the FBM KLCI is the underlying of FTSE Bursa Malaysia KLCI Futures (FKLI).
Unlike the equity index futures above, single stock futures is based on an individual underlying stock rather than a stock index. The performance is the same as its underlying equity but traded with greater leverage. In Malaysia, among local companies that offer single stock futures are Bursa Malaysia Bhd, Air Asia Bhd, Berjaya Sports Toto Bhd, Genting Bhd and Telekom Malaysia Bhd.
Forex or Currency Futures
A type of futures contract that uses currency as underlying value. Like the exchange rate, US dollar is typically used to set the price of the other currency.
Interest Rate and Bond Futures
These futures contracts have an interest-bearing instrument like government debts and bonds as the underlying asset. For example, Treasury-bill futures, Treasury-bond futures and Eurodollar futures are interest rate futures that are traded on the Chicago Mercantile Exchange (CME). In Malaysia, these include Kuala Lumpur Interbank Offered Rate (KLIBOR) and Malaysian Government Securities (MGS) futures but both are not actively traded on Bursa Malaysia.
Now that you know the types of futures contracts, the key to a successful (and most importantly, profitable) trade is to always trade the financial instruments that you have knowledge of. Choose one and try to master it by studying the factors that affect its movements. Know what you are trading, and you will find yourself on the winning side more often.
Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.
Oriental Pacific Futures articles published on the Corporate Website (www.opf.com.my) may be reprinted, reposted or distributed free for educational purposes only on the condition that Oriental Pacific Futures and the Corporate Website link information http://www.opf.com.my are included. However, other organizations are invited to link to articles that are available in the public area of the Oriental Pacific Futures’ Learning Resources website. No additional permission is needed for such a link.
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