Getting Started In Futures Trading

Derivatives are instruments whose value depends on some other more basic underlying asset or commodity. It includes a broad class of instruments that include Forwards, Futures, Options and Swaps. Derivatives markets enable corporations and individuals to manage and reduce risk and control exposure to adverse price movements associated with holding an underlying asset or commodity. Derivatives markets also provide tremendous opportunities for investors to profit from the price movements in the underlying markets.

A Futures Contract is a legally binding agreement made between two parties to buy or sell a commodity or financial instrument, at an agreed price, on a specified date in the future. The quality and quantity of each contract is standardised, hence, the price at which the contract is established is the only variable and is determined between the buyer and seller at the time when the contract is traded. Futures Contracts are listed on Exchanges and the performance and obligations under the contract are guaranteed by the Exchange's Clearing House.

Futures offer unique profit opportunities in bull or bear markets since players can initiate buy or sell positions. Investors can profit from any price volatility as a result of global developments that will impact the financial and commodity markets. Futures also allow investors to take advantage of leverage factor by holding a larger investment value with a smaller capital outlay and returns greater than the same value equity investment. Futures also provides a mechanism for hedging adverse price movements associated with holding an underlying portfolio of equities, financial instrument or commodity.

Institutional Players - as fund managers, insurance companies, financial institutional, commodity trading house and refineries are among the most active players in the market. Futures contract allow them in managing their portfolios and diversification of risks. Hedgers - market participants who use their strategies in derivatives market to minimize their risk exposure in the underlying market. Local Participations and Retail Investors - individual investors or traders who assume risk in return for trading profits.

Stock Index futures are derivatives instrument whose value depends on the value of the Underlying Stock Market Index. The underlying index for the FKLI is the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) which is a market capitalization-weighted index of top 30 blue-chip stocks of Bursa Malaysia.

Commodity Futures are derivatives instrument whose value depends on the value of the Underlying commodity. Crude Palm Oil Futures (FCPO) is derived from the underlying physical Crude Palm Oil prices where a contract is made between a buyer and seller to take and make delivery respectively of CPO at a future date. It is a physical-settled contract, upon expiry of the contract, the buyer has to take delivery of the physical CPO. FCPO prices are determined by market supply and demand with Bursa Malaysia Derivatives Berhad providing the marketplace for players to trade.

Futures contracts provides leverage through margin where an investor needs only put up a marginal sum of the contract value instead of the full amount of the contract value. This sum of money is often referred to as the Initial Margin.

It is a form of good faith deposit which ensures that counter-parties to the transaction can pay the cash difference when the trade is settled. Margins are required to be deposited with the Futures broker to start trading.

A case study on FKLI product margin calculation. Assumptions made on the current margin requirements for FKLI futures contract is:

This table below illustrated the day-today account balance for Investor A

Trading Day Futures Index Level Profit / Loss(RM) Equity Balance (RM)
1 1270.0 - 2,500
2 1280.0 500 (10x50) 3,000
3 1265.0 750 (15x50) 2,250 (Top up 250 to 2500)
4 1290.0 1,000 (20x50) 3,500

This glossary was compiled by HLIB from a number of sources. The purpose of this compilation is to promote a better understanding of the futures market. The definitions are not intended to state or suggest the correct legal significance of any word or phrase.


The price that the market participants are willing to sell.


The price that the market participants are willing to pay.

Bear Market

A market in which prices are declining.

Bull Market

A market in which prices are rising.

Cash Price

Market price of the underlying contract. Also called spot price.

Final Settlement

Final disposition of open positions on the last trading day of a contract month. Occurs in markets where there is no actual delivery.

Contract Month

A specific month in which delivery or cash settlement may take place under the terms of a futures contract. Also called delivery month.


A term referring to cash and futures prices merging as the futures contract nears expiration, that is, the basis approaches zero.


The purchase or sale of a futures contract as a temporary substitute for a cash market transaction to be made at a later date. It involves having opposite positions in the cash market and futures market at the same time.


A person or firm who uses the futures market to hedge.


The use of a small amount of assets to control a greater amount of assets.


Funds or collaterals that must be deposited by a customer with his broker, by a broker with a clearing member or by a clearing member with the clearing house. The margin helps to ensure the financial integrity of brokers, clearing members and the exchange as a whole.

Margin Call

A call from a clearing house to a clearing member, or from a brokerage firm to a customer, to bring margin deposits up to a required minimum level.


The daily adjustment of margin accounts to reflect profits and losses.

Open Interest

Total number of futures contracts that have not yet been offset or fulfilled for delivery.


The excess of one futures contract price over the cash market price.


Margin Futures positions are revalued daily at the closing price, and variation margin is the payment (receipt) of losses (profits) reflected in the customer's account based on the daily revaluation.

The trading phases and market timing for the different products are set out below.

Trading Phases Index Futures (FKLI) Commodity Futures (FCPO)
Pre Opening 8.15 am 10.00 am
Continuous Trading 8.45 am 10.30 am
Close 12.45 pm 12.30 pm
Lunch Lunch Lunch
Pre Opening 2.00 pm 2.30 pm
Continuous Trading 2.30 pm 3.00 pm
Close 5.15 pm 6.00 pm