Pre- School The Basic

Ever think about why you wanted to trade in the first place, most answer will likely turn out to be financially free, quick money, secondary income, and so forth. What would you do to be able to achieve what you desire and become part of the successful trader in the world that manage their portfolio day in and out. If you have only two choices to earn a living, which one would you choose, to kill or to lie. In financial market, where every penny is made is another loss from another person, it is a zero sum game especially in the futures market. It is your duty to "take" or "kill" another person's wallet or life savings and being able to see thru most of the "lies" or "noise" in the market. A market is a place where a Buyers and Sellers came and fulfil their purpose. Buyers would like to Buy as cheap as possible while Sellers will always want to Sell as high as possible. For a right prices, both Buyers and Sellers will be able to transact. That is market in a very generic concept, nothing else. If you are not good at playing the role of Buyers and Sellers, you are going to have tough time manoeuvring in the market.

What is futures market ? In finance, a futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed today (the futures price) with delivery and payment occurring at a specified future date, the delivery date. The contracts are negotiated at a futures exchange, which acts as an intermediary between the two parties. The party agreeing to buy the underlying asset in the future, the "Buyer" of the contract, is said to be "long", and the party agreeing to sell the asset in the future, the "Seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties—the buyer hopes or expects that the asset price is going to increase, while the seller hopes or expects that it will decrease in near future.
In many cases, the underlying asset to a futures contract may not be traditional commodities only. 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.
For Malaysia futures, the bodies that responsible for all financial governing, policies, operations, risk management and enforcing rules and regulation was Bursa Derivative exchange. As a official regulator, all contracts that were traded in the exchange will be deem as legal. Traders who transacted or traded the contracts will incur an obligation to Sell or to Buy at the specified price until the contract expired. 

The core bodies of an exchange will be its clearing house, without it there would be no obligation enforce and no one would honor their contract. Each exchange uses a futures clearing house. Clearing house ensure that the traders will honor their obligations (solves issues of trust). Each trader has obligations only to the clearing house, not to other traders. The function of clearing is clearly illustrated below. 
Function of a clearing house

Major Futures Clearing Organizations


Affiliated Exchanges

The Clearing Corporation (CCorp)

US Futures Exchange and the
Merchants Exchange of St. Louis

Chicago Mercantile Exchange Clearinghouse

Chicago Mercantile exchange
With clearing link to CBOT

Kansas City Board of Trade Clearing Corporation

Kansas City Board of Trade

Energy Clear Corporation

Exempt Commercial Markets

MGE Clearinghouse

Minneapolis Grain Exchange

NYMEX Clearinghouse

New York Mercantile Exchange

New York Clearing Corporation

The Options Clearing Corporation

The London Clearinghouse

New York Board of Trade

OneChicago, NQLX, & option exchanges

Exempt Commercial Markets and OTC markets

Sources: The CFTC web site,

Trading in futures market involve margin and you will came across this words more frequent than your breath. Margin is a good-faith deposit (or performance bond) made by a prospective trader with a broker because the total underlying value for any futures contract is always high. I.e: Underlying value or contract value of FKLI = 1,620 (current price) x RM50 (one tick value) = RM81,000.00
Fortunately, a trader need not have to fork up RM81,000 in order to trade one lot FKLI, but small percentage of the contract value known as margin. With small amount of money you can control a larger asset in the financial market, this is known as leverage. All the price movement in the market will results profit and losses in your equity balance and it is calculated each every seconds the price's tick (marked-to-market). Any profit will immediately calculated into your trading account and deduct if there is any losses from your trading account, these are also known as unrealized profit and losses. Realized profit or losses happen when you have offset your positions in the market. Further profit and losses calculation will be demonstrate later. 

 The variation of margin used by common futures market was maintenance margin and initial margin. Initial margin is the minimum sum that required to trade a specific futures contract. When margin reaches a minimum maintenance level, the trader is required to bring the margin back to its initial level, this is also known as maintenance margin. The maintenance margin is generally about 75% of the initial margin. For Bursa Derivative, the maintenance margin and initial margin is identical.

These are commonly traded futures in the world. Commodities futures are second widely widely traded instrument after equity futures. Example commodities futures are NYMEX crude oil, Soya Bean futures, corn, wheat and lumber futures are offered at CME, palm oil futures on Bursa Derivative.

Currencies futures or some FOREX are the biggest over-the-counter financial market in the world. Sample currencies futures are Dollar/ Japan currencies pair (USD/JPY), Euro/Dollar pair (EUR/USD), Canadian Dollar/Pound Sterling and so fourth. Currencies futures are offered on CME.

Equity futures is the most widely traded financial instrument, mainly because it is popular. Equity futures is commonly based on certain stock indexed.  Sample of equity futures is Dow Jones futures, S&P futures, KOSPI, Nikkei 225, Hang Seng Index futures, German DAX,Malaysia index futures FKLI and so fourth. 

Settlement Method 

There are two main settlement method in futures market, cash settled or physical delivery.  

Cash Settled - When the contract reach its expirymost financial or equity futures contracts allow completion through cash settlement. In cash settlement, traders make payments at the expiration of the contract to settle any gains or losses, instead of making physical delivery. 

Physical Delivery Most commodity futures contracts are written for completion of the futures contract through the physical delivery of a particular good when the contract reach its expiry. Trader will need to arrange their own logistic and carry their goods to the specified ware house, port or installation location for the physical delivery to take place. All goods that have been delivered will be inspected by exchanged elected appraiser. Even though most commodities futures involve physical delivery, only less than 1% of the contract expires and made it to delivery, almost all of the commodities futures contract is closed off before the expiry date. 

Financial Futures Specification 
Two most actively traded financial futures in Bursa Derivative

FKLI Contract Specification

Contract Specification

Contract CodeFKLI
Underlying InstrumentFTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI)
Contract SizeFBM KLCI multiplied by RM50
Minimum Price Fluctuation0.5 index point valued at RM25
Daily Price Limits20% per trading session for the respective contract months except the spot month contract. There shall be no price limits for the spot month contract. There will be no price limit for the second month contract for the final five Business Days before expiration.
Contract MonthsSpot month, the next month and the next two calendar quarterly months. The calendar quarterly months are March, June, September and December.
Trading Hours
  • First trading session: Malaysian time 8:45 a.m. to 12:45 p.m.
  • Second trading session: Malaysian time 2:30 p.m. to 5:15 p.m.
Final Trading DayThe last Business Day of the contract month.
Final SettlementCash Settlement based on the Final Settlement Value.
Final Settlement ValueThe Final Settlement Value shall be the average value, rounded to the nearest 0.5 of an index point (values of 0.25 or 0.75 and above being rounded upwards), taken at every 15 seconds or at such intervals as may be determined by the Exchange from time to time from 3.45:30 p.m. to 4.45:15 p.m. plus one value after 5.00pm of the FBM KLCI on the Final Trading Day excepting the 3 highest and 3 lowest values.
Speculative Position LimitMaximum number of net long or net short positions to be held:
  • 10,000 contracts for all months combined
Product brochure
FCPO Contract Specification

Contract Specification

Contract CodeFCPO
Underlying InstrumentCrude Palm Oil
Contract Size25 metric tons
Minimum Price FluctuationRM1 per metric ton
Daily Price LimitsWith the exception of trades in the spot month, trades for future delivery of Crude Palm Oil in any month shall not be made, during any one Business Day, at prices varying more than 10% above or below the settlement prices of the preceding Business Day ("the 10% Limit") except as provided below.
When at least 3 non-spot month contracts are trading at the 10% Limit, the Exchange shall announce a 10-minute cooling off period ("the Cooling Off Period") for all contract months (except the spot month) during which trading shall only take place within the 10% Limit. Following the Cooling Off Period, all contract months shall be specified as interrupted for a period of 5 minutes, after which the prices traded for all contract months (except the spot month) shall not vary more than 15% above or below the settlement prices of the preceding Business Day ("the 15% Limit").
If the 10% Limit is triggered less than 30 minutes before the end of the first trading session, the following shall apply:-
  1. the contract months shall not be specified as interrupted;
  2. the 10% Limit shall be applied to all contract months (except the spot month) for the rest of the first trading session; and
  3. the 15% Limit shall be applied for all contract months (except the spot month) during the second trading session.
If the 10% Limit is triggered less than 30 minutes before the end of the second trading session, the 10% Limit shall be applied to all contract months (except the spot month) for the rest of the Business Day.
Contract MonthsSpot month and the next 5 succeeding months, and thereafter, alternate months up to 24 months ahead
Trading Hours
  • First trading session: Malaysian time 10:30 a.m. to 12:30 p.m.
  • Second trading session: Malaysian time 3:00 p.m. to 6:00 p.m.
Speculative Position LimitsThe maximum number of net long or net short positions which a client or a participant may hold or control is:
  • 800 contracts for the spot month
  • 10,000 contracts for any one contract month except for spot month
  • 15,000 contracts for all months combined
The above position limit will be a combined limit for Crude Palm Oil Futures Contracts and Options on Crude Palm Oil Futures. (Please note that spot month futures limit will not be applicable to the options)
Final Trading Day and Maturity DateContract expires at noon on the 15th day of the delivery month, or if the 15th is a non-market day, the preceding Business Day.
Tender Period1st Business Day to the 20th Business Day of the delivery month, or if the 20th is a non-market day, the preceding Business Day.
Contract Grade and Delivery PointsCrude Palm Oil of good merchantable quality, in bulk, unbleached, in Port Tank Installations approved by the Exchange located at the option of the seller at Port Kelang, Penang/Butterworth and Pasir Gudang (Johor).
Free Fatty Acids (FFA) of palm oil delivered into Port Tank Installations shall not exceed 4% and from Port Tank Installations shall not exceed 5%.
Moisture and impurities shall not exceed 0.25%.
Deterioration of Bleachability Index (DOBI) value of palm oil delivered into Port Tank Installations shall be at a minimum of 2.5 and of palm oil delivered from Port Tank Installations shall be at a minimum of 2.31.
Deliverable Unit25 metric tons, plus or minus not more than 2%.
Settlement of weight differences shall be based on the simple average of the daily Settlement Prices of the delivery month from:
  1. the 1st Business Day of the delivery month to the day of tender, if the tender is made before the last trading day of the delivery month; or
  2. the 1st Business Day of the delivery month to the Business Day immediately preceding the last day of trading, if the tender is made on the last trading day or thereafter
Product brochure

FAQ on Palm oil physical delivery, click here

Alright folks, pre-school is finally over, time to head to first grade !!! 


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