Here's a simple note about Futures Contracts:

What is a Futures Contract?

It's a legal promise to buy or sell something (like palm oil or a stock index) at a set price on a future date.
It helps you deal with price changes without actually owning the asset.

Key Features (Standardized by the Exchange):

Underlying Asset: What the contract is based on (e.g., crude palm oil, FBM KLCI).
Contract Size: A fixed amount for each contract (e.g., 25 metric tons of palm oil, RM50 per index point).
Contract Months: Specific dates when the contract ends (expires) and can no longer be traded.

What Happens When a Contract Ends (Expires)?

Expiration Date: The very last day you can trade the contract.
Settlement:
- Physical Delivery: For commodities, the actual item is delivered (e.g., palm oil). Usually for businesses, not for typical traders.
- Cash Settlement: For financial items like stock indexes, money is exchanged to cover profits or losses – no physical item changes hands.
Most traders close their positions before expiry or "rollover" to a new contract month.

Important Terms:

Margins: Money you put in your account to open and keep a futures position open. It's like a good-faith deposit.
- Initial Margin: The first deposit to open a position.
- Maintenance Margin: The minimum balance you need to keep.
- Margin Call: If your account balance drops too low, you might need to deposit more money. If you don't, your position might be closed.
Notional Value: The total value of a contract if you multiplied its size by the current price. It helps understand how much money a contract represents.

Leverage in Futures Trading

Leverage allows traders to control large investments (notional value) with a relatively small amount of capital (margin deposits, typically 3-15% of the notional value). This creates a multiplier effect, significantly amplifying both potential returns and risks. For example, a 20:1 leverage ratio means a 5% index gain could translate to a 100% return on the capital deposited. However, leverage "cuts both ways"; a small adverse price movement can also lead to significant losses. Therefore, prudent use of leverage and strong risk management are crucial, as improper use can lead to risks beyond one's capacity. Understanding margins and leverage is essential for effective futures trading.

==Question== A trader goes Long one (1) FKLI contract at a price of 1500. If FKLI rallies to by 10 percent to 1650, what percentage gain or loss will the trader make if the required margin is RM4000. (Each index point of FKLI is worth RM50)

= Trader goes long 1 FKLI contract at 1500.

FKLI goes up 10% → New price = 1650.
Each index point = RM50.
Initial margin = RM4000.

Step 1: Calculate Point Gain 1650 - 1500 = 150 points

Step 2: Multiply by Value Per Point 150 points × RM50 = RM7,500

Step 3: Calculate Percentage Gain Based on Margin (RM7,500 / RM4,000) × 100% = 187.5%

Final Answer:

The trader makes a 187.5% gain on their margin.

You didn’t need to pay the full contract value upfront — just RM4000 margin. But since each point movement = RM50, a big move like 150 points means you get RM7,500 profit, even though you only committed RM4000 to start.

This is leverage in action — small upfront capital controlling a large position.

Contract Basics

Instrument: FKLI (FTSE Bursa Malaysia KLCI Futures)
Contract Size: RM50 per index point
Minimum Price Movement (Tick Size): 0.5 index point
Tick Value:
= 0.5 × RM50
= RM25 per tick

==Question== A trader goes Long one (1) FKLI contract at a price of 1500. If FKLI declines to by one (1) percent to 1485, what percentage gain or loss will the trader make if the required margin is RM4000. (Each index point of FKLI is worth RM50)

= Trader goes long 1 FKLI contract at 1500.

FKLI goes up 10% → New price = 1485.
Each index point = RM50.
Initial margin = RM4000.

Step 1: Calculate Point Gain 1485 - 1500 = -15

Step 2: Multiply by Value Per Point -15 points × RM50 = -RM750

Step 3: Calculate Percentage Gain Based on Margin (RM-750 / RM4,000) × 100% = -18.75%

Bullish = Going Long

You expect price to rise

So you buy (go long)

You make profit if price goes up

Buy Low → Sell High Example:
You’re bullish on FKLI → you go long at 1500
If it rises to 1550, you profit

Bearish = Going Short

You expect price to fall

So you sell (go short)

You make profit if price goes down

Sell High → Buy Low Example:
You’re bearish on FCPO → you short at 4000
If it drops to 3900, you profit

Spread Strategy

A spread is a combination of two related positions:

One long (buy)
One short (sell) Used in futures, options, and commodities markets to reduce risk or take advantage of price relationships.

The Goal:

Not to profit from price going up/down directly, but from the change in the price difference between two contracts.

Hedging

What is Hedging?

It's using futures contracts to manage or remove the risk of bad price changes for something you already own or plan to buy/sell.
You take an opposite position in the futures market to balance out risks in the real market.
Losses in your physical asset can be offset by gains in your futures contract.

Who are Hedgers?

Producers: Like palm oil growers, protect against prices falling.
Buyers/Processors: Like cooking oil makers, protect against raw material prices rising.
Fund Managers: Protect their stock portfolios from prices dropping.

Types of Hedges: