SINGLE stock futures (SSF), which are expected to be launched next month, will not only be a hedging tool for KLSE investors, but will also provide a cheaper entry to certain stocks compared with the underlying cash market.
Nonetheless, high liquidity is an important ingredient for the successful takeoff of this new financial product.
We will definitely be interested in trading SSF if there is high liquidity in the market,'' said TA Asset Management Sdn Bhd senior general manger Ang Kok Heng.
He said market makers played a vital role to start, and to keep, the ball rolling, i.e. to boost liquidity in the SSF market.
Ang said SSF might receive better interest compared with the CI futures contract because SSF contracts were easier for investors to understand and monitor as it was only dependent on one company rather than a basket of component stocks as in the CI futures.
Futures dealers contacted by StarBiz said they had already received inquiries on SSF and were keenly awaiting the launch of the new financial product.
There will be 36 counters offering SSF, which Malaysia Derivatives Exchange Bhd (MDEX) will roll out gradually. It is expected to launch six SSFs next month.
Given the current soft sentiment, some are sceptical that SSFs would be an instant hit. But others point out that the current uncertainties might provide a good platform for SSF contracts, as volatility is what makes futures trading.
The beauty of a futures contract is that you can profit from it which ever way the market moves,'' said a futures dealer.
SSF contracts move in tandem with the individual stocks in the underlying cash market, and hence could be a hedging tool. An investor who is overweight on a stock may want to hold a short position on the futures market to hedge the risk of falling share prices. Similarly for rising prices.
SSF is considered a cheaper entry to certain stocks as investors only pay a fraction of the futures contract value that they trade.
For example, with the KLSE Composite Index (CI) at 648 points, the CI futures contract is at RM64,800. But investors only pay from RM4,000 to RM5,000, or 7%8% of the contract value, to buy a contract.
Similarly, for SSF contracts, which are based on 1,000 shares, investors will also pay a fraction of the RM5,000 futures contract value for a stock that is traded at RM5 per share in the underlying cash market.
SSF will be a cheaper entry for investors,'' said a futures dealer. Furthermore, they will also pay less commission.
MDEX has said that SSF, with minimum price fluctuation of 0.02 sen or RM20, should be able to give investors value even within one to two movements in the price of the contract. Hence, futures dealers do not expect the commission to be high. A dealer said the commission was likely to be no more than RM20 per transaction, so investors would be in the money soon.
An amount of cash (known as margin) is required to be in the investor's account before he can start trading in futures contracts because payment is made immediately upon transaction. It is different from the underlying cash market, which has a transaction period of T+3.
An investor who expects the stock price to climb will opt for a long position in the futures contract. One will want a short position when one expects the price to fall.
If the stock trends accordingly, investors can close their position with a gain. If the stock moves against one's hedge, one will incur losses. Sometimes, one may receive a call from Malaysian Derivatives Clearing House Bhd (MDCH) to top up one's margin in the account.
MDCH's primary function is to ensure that the financial obligations of derivatives contracts entered into on the MDEX are performed in a timely manner. It carries out this function by becoming the counter party to these contracts, assuming the credit risk of its clearing members and managing centralised risk.