A futures is an agreement between 2 parties to buy/sell a certain asset on a future date. It is typically used by people dealing in that commodity to hedge their position.

For example, oil might be trading at US$100/barrel now.

In the futures market, a company that uses oil in its daily operation might want to buy a 1-month futures at US$105/barrel if they think the price of oil is going up. Similarly, a company that produces oil can sell the futures to lock in their future selling price. The price of the futures will be higher than the current rate if people are bullish and vice versa.

This means that no matter what happens to the price of oil in a month, the company can (and have to) transact at the agreed price. Unlike options, for futures you are required to exercise your right when settlement comes.

The way the futures market work is that no actual exchange of product takes place. Rather, the price difference is used to determine the profit or loss.

In my example above whereby the company bought a $105/barrel futures, if price of oil goes up to $110, the company will be better off by $5/barrel than if it would have if it didn’t buy the futures.

If it drops to $95, it will be worse off by $10/barrel.

Futures are traded in contracts. Each contract will be equal to a certain quantity of the underlying asset.

There are futures for all sorts of things, from commodities to prices of financial products. It is also a leveraged product, which means you can lose your pants if you are using it for speculative trading and your trade goes against you.

CFDs would be another instrument which is very similar to futures.

I received an email from IG Markets today with the subject heading “Important information about your IG Markets account“. Opening the email, this is what I saw:

We have recently reviewed our Customer Agreement and have made a number of amendments.

The new Customer Agreement comes into effect on 23 April 2008, and you can view it now at:

Click on this link to read the new customer agreement.

This Agreement will govern all positions entered into from, or still open on, 23 April 2008.

I opened the pdf document to see a 19-page document staring at me.

What exactly are the changes? Well, there’s only one way to find out. I sent IG Markets an email (at 11pm) and within minutes, the reply came:

Thank you for your email. The main changes are:

• Inclusion of new conflicts of interests clause disclosing conflicts that may exist and setting out our policy for managing such conflicts (Term 3);
• Incorporation of new electronic trading terms (Term allowing seamless sign up for new L2 users;
• Inclusion of extra information regarding currency balances on account (Term 15(3));
• Some general tidy up of drafting.

Please do not hesitate to contact us if you have any further enquiries.

Now, that’s more useful.

It’s Good Friday today so I will be taking a break. Nevertheless, just thought I will share this email that I received from IG Markets yesterday.

It seems that they have increased the margin requirements for some counters in view of current market volatility. Seems that institutions are doing as much as they can to reduce their exposure in line with the current credit crisis.

Trade with care!

In light of current market volatility, it has become necessary to review the margin rates on a number of markets. The changes will be made in two phases:

* Tuesday 25 March – Banking Stocks
Banks will be margined at a minimum of 10% with some more volatile stocks either 15% or 25%

For a full list of affected instruments, please visit the following link:
http://www.igmarkets.com.sg/cfd/banks-margin-changes.html

* Tuesday 1 April – Indices
Margins on Asian and Australian indices are set to rise but many, including the France 40 and US Tech100, will fall

For a full list of affected instruments, please visit the following link:
http://www.igmarkets.com.sg/cfd/indices-margin-changes.html

It will usually be possible to reduce any margin by placing stop losses on open positions. Please be advised that, should these changes create a shortfall on your account, it remains your obligation to fund the shortfall or reduce the size of your positions.

For full details of impending margin changes, please contact the helpdesk on (65) 6390 5118 and we will be happy to help.