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PB601 Investment Management

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Futures contract & forward contract

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PB601 Investment Management

  1. 1. Futures Contract & Forward Contract
  2. 2. Definition of futures ContractA futures contract is a standardizedcontract, traded on a futures exchange,to buy or sell a certain underlyinginstrument at a certain date in the future,at a specified price.
  3. 3. A forward contract is an agreementbetween two parties to buy or sell anasset (which can be of any kind) at a pre-agreed future point in time.Definition of forward Contract
  4. 4. Hedging : Techniques that attempts to reduce risk.Speculators : Use futures & forward contract toacquire risk.Market Makers: company or an individual, thatquotes both a buy & sell price in afinancial instrument, hoping tomake a profit on the bid-offerspread.Function of futures & forward contract
  5. 5. Commodity Futures :Crude Palm Oil Futures (FCPO)USD Crude Palm Oil Futures (FUPO)Crude Palm Kernel Oil Futures (FPKO)Options on Crude Palm Oil Futures (OCPO)Equity Futures :FTSE Bursa Malaysia KLCI Futures (FKLI)Single Stock Futures (SSFs)Types of futures contract
  6. 6. Financial Futures3 Month Kuala Lumpur Interbank Offered Rate Futures(FKB3) 3-Year Malaysian Government Securities Futures(FMG3) Year Malaysian Government Securities Futures (FMG5)Types of futures contract
  7. 7. Currencies Futures United States Dollar (USD) Japanese Yen (JPY) Etc.Metals Futures Gold Silver Copper Etc.Types of futures contract
  8. 8. Differences between futures & forward contractFutures Contract Forward ContractNo default risk. Rare default risk Exist.Daily settlement of profit andloss, which is known as mark tomarket.The profit or loss is accumulatedtill the expiry of contract.Publically traded. Privately traded.Product issued by BursaMalaysia.Product issued by individual &firms.Quoted and traded on the Bursa Negotiated directly by the buyer

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