Futures, derivatives, and other derivative markets are financial marketplaces where derivative products are bought and sold. Derivatives are financial agreements that derive their value from the underlying asset. The most common derivatives are futures contracts, options, and swaps.

In a future market, participants buy and sell derivatives contracts to speculate on or hedge against future changes in the underlying asset price. For example, a trader might buy a futures contract on gold if they believe the price will rise. Alternatively, a trader might sell a futures contract on gold if they believe the price will fall.

The Hong Kong Futures Exchange (HKFE) is the largest derivatives exchange in Hong Kong. It offers various derivative products, including futures, options, and swaps. The HKFE is regulated by the Hong Kong Securities and Futures Commission (SFC).

The HKFE’s flagship product is the Hang Seng Index Futures contract. This contract is based on the Hang Seng Index (HSI), the Hong Kong benchmark stock index. The HSI Futures contract has become one of Asia’s most popular futures contracts.

Other popular products traded on the HKFE

Other popular products traded on the HKFE include:

China A50 Index Futures

These futures contracts are based on the FTSE China A50 Index, a capitalisation-weighted index of the most extensive 50  stocks listed on the Shanghai and Shenzhen stock exchanges.

Mini-Hang Seng Index Futures

These are smaller versions of the Hang Seng Index Futures contract. They are one-fifth the size of the standard HSI Futures contract.

Hang Seng China Enterprises Index Futures

Also known as “HSCEI Futures”, these are futures contracts based on the Hang Seng China Enterprises Index (HSCEI). The HSCEI is a capitalisation-weighted index of the Chinese stock trade on the Hong Kong Stock Exchange.

What are the benefits of trading futures?

Futures contracts offer several benefits, including:

• The ability to speculate on or hedge against future price movements.
• Leverage – traders can control a considerable contract value with relatively small capital.
• Tight bid/ask spreads – the difference between the buying and selling prices is typically minimal.
• High liquidity is always somebody willing to buy or sell a contract.
• Diversification – futures contracts are available on various underlying assets, including commodities, equity indices, foreign exchange, and interest rates.

What are the risks of trading futures?

Like any financial product, several risks are associated with trading futures contracts. These include:

• Market risk is the risk that the underlying asset price may move unexpectedly.
• Leverage risk, a slight movement in the underlying asset price, can significantly affect the Counterparty risk. There is always the risk that the other party to the contract will not fulfil their obligations.
• Volatility risk; Futures contracts are often more volatile than the underlying asset, leading to losses if the market moves against your position.

Hong Kong traders must understand these risks before trading in the futures market. Anyone considering trading in futures should seek professional advice to understand the risks involved fully.

How are futures contracts priced?

Futures contracts are typically priced using what is known as the “futures price”. The futures price is determined by the expected future value of the underlying asset, based on current market conditions. Also, note that the actual future value of the asset may differ from the future price.

The most common way to trade futures contracts is via a broker. Online brokers offer access to the futures markets and typically charge a commission or fee for each trade.

Hong Kong traders can also trade futures contracts directly on some exchanges. However, this is generally only suitable for experienced traders as it requires a high level of knowledge and understanding of the market.

Conclusion

Futures markets in Hong Kong provide a way for investors to speculate on or hedge against future price movements in various underlying assets. These markets are typically highly liquid and offer tight bid/ask spreads. However, they also come with risks, including market risk, leverage risk, and volatility risk. It is essential to understand these risks before trading in the futures market. Anyone considering trading in futures should seek professional advice to understand the risks involved fully.