Definition;

• Equity Futures: Traded equity derivatives, futures and options contracts based on equities and equity indices.
• Purpose: Allow fund managers, insurance companies, and pension funds to hedge and manage equity market risks.
• Volume: Most traded derivative, with 28.5 billion contracts worldwide in 2020.
• Types:
  • Equity Index Futures: Reference movements of underlying equity indices.
  • Single Stock Futures (SSF): Reference movements of individual stocks.
• How They Work: Involve buying and selling a specific equity index or stock at a specific price on a specific date.
• Cash Settlement: Popular equity index futures like the S&P 500 pioneered cash settlement, crediting/debiting price differences in cash upon expiry.
• Examples/History:
  • Kuala Lumpur Options and Financial Futures Exchange (KLOFFE) offered the first equity index futures contract (FTSE Bursa Malaysia KLCI Futures - FKLI) in 1995.
  • FKLI is traded on Bursa Malaysia Derivatives and is based on the FBM KLCI.
  • Other contracts: FTSE Bursa Malaysia Mid 70 Index Futures (FM70), options contracts on FKLI (OKLI).

Introduction to Equity Index Futures: FBM KLCI Futures (FKLI) & FBM Mid 70 Index Futures (FM70)

• Definition & Purpose:
  • Equity futures are traded equity derivatives, specifically futures and options contracts, based on equities and equity indices.
  • They are the most traded derivative, with 28.5 billion contracts worldwide in 2020.
  • They help fund managers, insurance companies, and pension funds hedge and manage equity market risks.
• Types:
  • Equity Index Futures: Reference movements of underlying equity indices.
  • Single Stock Futures (SSF): Reference movements of individual stocks.
  • Both involve buying and selling a specific equity index or stock at a specific price on a specific date.
• Key Characteristics:
  • Often based on benchmark equity market indices.
  • Cash Settlement: Popularized by the S&P 500 index futures, where price differences are credited or debited in cash upon expiry. Many contracts, like FKLI and FM70, are cash settled.
  • Final settlement for FKLI and FM70 is based on the calculated average of underlying index values during the last hour of trading on the final business day of the contract month.
• Examples from Bursa Malaysia Derivatives:
  • FTSE Bursa Malaysia KLCI Futures (FKLI):
    • First offered by KLOFFE (established 1995).
    • Underlying index: FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI).
    • Provides exposure to the largest 30 companies on the main board.
    • Contract multiplier: RM50 per index point.
    • Minimum tick size: 0.5 index points (value RM25).
    • Trades current, following, and two quarterly calendar months, with the spot month being most active.
    • Trading hours: Mon-Fri (Morning: 8:45 am - 12:45 pm, Afternoon: 2:30 pm - 5:15 pm); After hours (T+1): Mon-Thurs (9 pm - 11:30 pm).
    • Example: A gain of 80 index points results in RM4,000 profit (80 * RM50).
  • FTSE Bursa Malaysia Mid 70 Index Futures (FM70):
    • Provides exposure to constituent stocks of the FTSE Bursa Malaysia Mid 70 Index.
    • Contract multiplier: RM4 per index point.
    • Minimum tick size: 5 index points (value RM20).
    • Trading hours, contract months, and last business day are similar to FKLI.