SET50 INDEX FUTURES
Are you ready for derivatives?
New vehicles will start trading late this month
Because nobody knows the future no one can beat the market all of the time. But to decrease the risk of losses, derivative products were born, and they will be traded on the Thailand Futures Exchange (TFEX) from April 28. The first derivatives to be traded will SET50 index futures.
Futures are not a new product in developed markets, but they are here.
But newcomers like Thai investors could end up being bait for the big fish if they jump into the fray without sufficient knowledge.
What are they?
Futures are financial contracts obligating the buyer to buy an underlying asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset.
Thais may have heard about futures from the Agricultural Futures Exchange of Thailand (AFET). Those futures contracts eventually call for physical delivery of the underlying commodity, like rubber.
Why trade SET50-index futures?
The TFEX's first product is SET50-index futures because investors are familiar with the Stock Exchange of Thailand's index of the 50 largest stocks.
Trading SET50 index futures is akin to buying or selling all of the 50 blue-chip stocks at the one time.
Investors don't need to analyse each stock in the SET50; all they need to do is to analyse the overall market. The SET50 index has always moved in relation with the stock market.
The SET50-index futures can be used either to hedge or to speculate on the price movement of the index. For example, a fund-manager could use futures to lock in a certain price and reduce risk (hedge). But, anybody can speculate on the price movement of the SET50 index by going long (buy) or short-selling using futures.
What are the characteristics of SET50-index futures?
l The SET50-index futures is the underlying asset. Each contract will mature on a quarterly basis, at the end of March, June, September and December.
l The last trading day of each contract is the day that the contract matures.
l The price-change limit is no more or less than 30 per cent of the closing price on the day before trading.
l The position limit is capped at 10,000 contracts per month.
l The trading period is divided into four intervals, before the market opens (9.15am-9.45am), morning (9.45am-12.30pm), before the market reopens (2pm-2.30pm) and afternoon (2.30pm-4.55pm).
l The price of payment at maturity is the average of the SET50 trading minute by minute between 4pm and 4.30pm on the last day.
l The closing time for the last trading day is 4.30pm.
How does one trade SET50-index futures?
1. Investors can trade SET50 index futures through 20 derivative-brokerage firms that have been granted licences by the Securities and Exchange Commission. Investors make orders to buy or sell the futures at certain price, quantity and time.
2. Investors need to put up Bt50,000 for the initial margin.
3. If the investors' losses exceed the maintenance margin, which brokers will generally set at Bt35,000, the broker will make a margin call, telling the investor to pony up more money.
4. Investors don't need to hold the contract until it matures. They can close it out at any time before the contract matures.
Here's an example: if on April 28 you buy the SET50-index futures at 730 for the contract that matures on June 30, your contract value will be Bt730,000 [730 (index) x 1,000 (multiplier)].
You have to place Bt50,000 for the initial margin with your broker. Then on May 2 the SET50 index rises to 740 and you gain Bt10,000. You can lock in profit by selling your contract or hold on to it longer.
But, if the SET50 index declines to 720, you'll lose Bt10,000. If the SET50 index drops to 710, you'll lose Bt20,000. Then your broker will call you to increase the money to meet the initial margin.
When trading futures, you can short (sell) before you long (buy). That means, if you think that the index will decline, you can short it at 740. In that case you essentially borrow the futures certificate at today's price and actually buy them in the future when they have dropped to 740. You pocket the Bt10,000 difference.
If you are still confused, you'd better initially invest with mutual funds that invest in derivatives. After you learn more you can try it yourself.