1. A Guide to Trading Financial Futures

Derivatives


Financial futures and options are so-called derivative financial instruments. In other words, their prices are derived from the underlying assets. The worldwide success of derivative instruments is attributable to the high volatility and associated risks experienced on currency, equity and bond markets. Managing these risks correctly is extremely important to every investor's success. The use of futures and options allows for efficient and cost-effective risk management.


A Guide to Trading Financial Futures


Financial futures is a generic term for exchange-traded, standardised forward contracts involving specific financial instruments.


Such contracts are always based on the firm contractual agreement



  • to purchase (buyer of a futures contract)

  • or to deliver (seller of a futures contract)

  • a standardized quantity of a particular financial asset (underlying instrument)

  • at a pre-determined price (price of the futures contract)

  • at a pre-determined future point in time (delivery date)

Thus a financial futures contract fixes a price today for a financial instrument, but fulfillment of the contract will only take place at some later date. In comparison to traditional forward transactions which are individually negotiated between both parties to the contract, the standardisation of exchange-traded financial futures affords the investor considerable advantages.


Above all, it enables previously established long (buy) or short (sell) positions to be offset via appropriate opposite transactions (closing transaction). The actual fulfillment of the contract, i.e. the delivery or receipt of the underlying instrument, can therefore be avoided. Only the profit or loss arising from the difference between the entry and exit price remains.


If an open position is not closed out at maturity, futures contracts are settled either through physical delivery (e.g. fixed income futures) or cash settlement (e.g. equity index futures).


Given that an equity index is an abstract underlying instrument, and physical delivery of all underlying securities of an index is not feasible in practice, at maturity, Eurex index futures are settled in cash. Eurex fixed income futures are physically settled at maturity, whereas the holder of a short position is obliged to deliver the underlying securities, depending on the traded contract. The holder of the corresponding long position must accept delivery against payment of the delivery price.


Futures at Eurex


Eurex is the world's leading derivatives exchange providing its customers a broad range of international benchmark products. With market participants connected from 650 locations worldwide, trading volume at Eurex exceeds on average four million contracts a day.


Eurex's high volumes are generated from trading on a full range of fixed income, equity index, ETF and stock option products. Fixed income derivatives cover the euro-denominated yield curve from one night to thirty years and the Swiss yield curve from eight to thirteen years.


Eurex's fixed income benchmark contracts include the Euro Schatz Future, the Euro Bobl Future and the Euro Bund Future. Eurex's equity index products include futures and options on blue chip German, Swiss, Finnish, European, and global indexes including high profile indexes such as the DAX®, Dow Jones (EURO) STOXX 50, and Dow Jones Global Titans 50. Eurex also offers a variety of market sector index derivatives based on the Dow Jones STOXX 600 and Dow Jones EURO STOXX Indexes. In the stock option segment, Eurex lists options on Dutch, Finnish, French, German, Italian, Swiss, and US stocks. Since November 2002, Eurex also offers futures and options on Exchange Traded Funds.


Access


<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />Eurex offers both direct participation as a member firm of the exchange, and indirect participation as a customer of a member. Direct participation is possible by becoming a General Clearing Member (GCM), Direct Clearing Member (DCM), or a Non Clearing Member (NCM) at Eurex. The difference between these memberships is their role in the clearing process.

Indirect participation is possible by becoming a customer of one of more than 400 Eurex members based in 18 countries worldwide. Access can take the form of traditional brokerage services as well as automated order routing.
A list of members and their brokerage services can be found on the Eurex website at www.eurexchange.com.


Product Specifications & Further Information


On the Eurex website www.eurexchange.com you can find



 


A Guide to Trading Options


The contractual substance of every option transaction is a specific right: the right to opt. This right to opt is traded in the form of a so-called option contract. The purchaser of an option contract (buyer) acquires, against payment of a premium, the right



  • to buy (call option) or

  • to sell (put option)

  • a pre-determined amount (contract size)

  • of a specific security or asset (underlying instrument)

  • on or before a specified date (expiration)

  • at a pre-determined price (strike or exercise price)

The seller of an option contract (writer) assumes the respective obligation, and for doing so is entitled to receive the option's price (premium) paid by the buyer. Should the buyer of a call (option to buy) exercise his or her right, the seller is obliged to deliver the underlying instrument to the buyer at the pre-determined price (strike or exercise price). On the other hand, should the buyer of a put (option to sell) exercise his or her right, then the seller is obliged to acquire the underlying instrument at the pre-determined price. If the underlying instrument is not deliverable (as is the case with index options), then settlement of the contract takes place in cash.


Since the buyer of an option acquires a right, but no obligation, he incurs no further capital risk than the amount of the premium paid. If prices develop favorably for him, he can either sell the position at a profit or exercise the option. On the other hand, if the market moves against him, he may simply allow the option to expire without incurring any further costs. For this reason, the buyer of an option is not required to put up any margin, because once the option premium has been paid in full no risk of non-performance of the contractual provisions remains. In the case of futures-style options, the premium is due in full only at the end of the contract's term or upon exercise of the option, so that here the buyer of the option is required to put up margin as well.


Since the writer of an option assumes an obligation to make or take delivery of the underlying instrument, he is required to post margin to ensure fulfillment of this obligation. If market prices develop unfavorably, the fulfillment of the writer's contractual obligation for the case that the option were to be exercised must be ensured. However, the writer does not
necessarily have to continue carrying this potential liability through to expiration  of the contract, because he may offset the position prior to expiration by making an appropriate offsetting transaction.


Derivatives at Eurex


Eurex is the world's leading derivatives exchange providing its customers a broad range of international benchmark products. With market participants connected from 650 locations worldwide, trading volume at Eurex exceeds on average four million contracts a day. Eurex's high volumes are generated from trading on a full range of fixed income, equity index, ETF and stock option products. Fixed income derivatives cover the euro-denominated yield curve from one night to thirty years and the Swiss yield curve from eight to thirteen years. Eurex's fixed income benchmark contracts include the Euro Schatz Future, the Euro Bobl Future and the Euro Bund Future. Eurex's equity index products include futures and options on blue chip German, Swiss, Finnish, European, and global indexes including high profile indexes such as the DAX®, Dow Jones (EURO) STOXX 50, and Dow Jones Global Titans 50. Eurex also offers a variety of market sector index derivatives based on the Dow Jones STOXX 600 and Dow Jones EURO STOXX Indexes. In the stock option segment, Eurex lists options on Dutch, Finnish, French, German, Italian, Swiss, and US stocks. Since November 2002, Eurex also offers futures and options on exchange traded funds (ETFs).


Access


Eurex offers both direct participation as a member firm of the exchange, and indirect participation as a customer of a member. Direct participation is possible by becoming a General Clearing Member (GCM), Direct Clearing Member (DCM), or a Non Clearing Member (NCM) at Eurex. The difference between these memberships is their role in the clearing process.
 
Indirect participation is possible by becoming a customer of one of more than 400 Eurex members based in 18 countries worldwide. Access can take the form of traditional brokerage services as well as automated order routing. A list of members and their brokerage services can be found on the Eurex website at www.eurexchange.com.


Product Specifications & Further Information


On the Eurex website www.eurexchange.com you can find



  • information about the contract specifications 

  • register in the MyEurex section to automatically receive information about Eurex and its products by e-mail 

  • look up delayed price information or statistics for all Eurex derivatives http://www.eurexchange.com/data/statistics/daily.html
Further reading



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