Forex, Futures and Options
Contracts
1. Effect of "Leverage" or "Gearing"
Spot Forex and Futures transactions carry a high degree of risk. The amount
of Initial margin is small relative to the value of the Spot Forex and Futures
contract so that transactions are 'leveraged' or 'geared'. A relatively small
market movement will have a proportionately larger impact on the funds you have
deposited or will have to deposit: this may work against you as well as for you.
You may sustain a total loss of initial margin funds and any additional funds
deposited with the firm to maintain your position. If the market moves against
your position or margin levels are increased, you may be called upon to pay substantial
additional funds on short notice to maintain your position. If you fail to comply
with a request for additional funds within the time prescribed, your position
may be liquidated at a loss and you will be liable for any resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g., "stop-loss" orders, where permitted under
local law, or "stop-limit" orders) which are intended to limit losses to certain
amounts may not be effective because market conditions may make it Impossible
to execute such orders. Strategies using combinations of positions, such as "spread" and "straddle" positions,
may be as risky as taking simple "long" or "short" positions.
Options
3. Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers
of options should familiarize themselves with the type of option (i.e., put or
call) which they contemplate trading and the associated risks. You should calculate
the extent to which the value of the options must increase for your position
to become profitable, taking into account the premium and all transaction costs.
The purchaser of options may offset or exercise the options or allow the options
to expire. The exercise of an option results either in a cash settlement or in
the purchaser acquiring or delivering the underlying interest. If the option
is on a future, the purchaser will acquire a futures position with associated
liabilities for margin (see the section on Futures above). If the purchased options
expire worthless, you will suffer a total loss of your investment which will
consist of the option premium plus transaction costs. If you are contemplating
purchasing deep-out-of-the-money options, you should be aware that the chance
of such options becoming profitable ordinarily is remote. Selling ("writing" or "granting")
an option generally entails considerably greater risk then purchasing options.
Although the premium received by the seller is fixed, the seller may sustain
a loss well in excess of that amount. The seller will be liable for additional
margin to maintain the position if the market moves unfavorably. The seller will
also be exposed to the risk of the purchaser exercising the option and the seller
will be obligated to either settle the option in cash or to acquire or deliver
the underlying interest. If the option is on a future, the seller will acquire
a position in a future with associated liabilities for margin (see the section
on Futures above). If the option is "covered" by the seller holding a corresponding
position in the underlying interest or a future or another option, the risk may
be reduced. If the option is not covered, the risk of loss can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the option
premium, exposing the purchaser to liability for margin payments not exceeding
the amount of the premium. The purchaser is still subject to the risk of losing
the premium and transaction costs. When the option is exercised or expires, the
purchaser is responsible for any unpaid premium outstanding at that time.
Additional risks common to forex, futures and options contracts
4. Terms and conditions of contracts
You should ask the firm with which you deal about the terms and conditions
of the specific forex, futures or options contract which you are trading and
associated obligations (e.g., the circumstances under which you may become obligated
to make or take delivery of the underlying interest of a forex or futures contract
and, in respect of options, expiration dates and restrictions on the time for
exercise). Under certain circumstances the specifications of outstanding contracts
(including the exercise price of an option) may be modified by the exchange or
clearing house to reflect changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships
Market conditions (e.g., illiquidity) and/or the operation of the rules of
certain markets (e.g., the suspension of trading in any contract or contract
month because of price limits or "circuit breakers") may increase the risk of
loss by making it difficult or impossible to effect transactions or liquidate/offset
positions. If you have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and
the future, the underlying interest and the forex, and the underlying interest
and the option may not exist. This can occur when, for example, the futures contract
underlying the option is subject to price limits while the option is not. The
absence of an underlying reference price may make it difficult to judge "fair" value.
6. Deposited cash and property
You should familiarize yourself with the protections accorded money or other
property you deposit for domestic and foreign transactions, particularly in the
event of a firm insolvency or bankruptcy. The extent to which you may recover
your money or property may be governed by specific legislation or local rules.
In some jurisdictions, property which has been specifically identifiable as your
own will be pro-rated in the same manner as cash for purposes of distribution
in the event of a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all commission,
fees and other charges for which you will be liable. These charges will affect
your net profit (if any) or increase your loss.
8. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally
linked to a domestic market, may expose you to additional risk. Such markets
may be subject to regulation which may offer different or diminished investor
protection. Before you trade you should enquire about any rules relevant to your
particular transactions. Your local regulatory authority will be unable to compel
the enforcement of the rules of regulatory authorities or markets in other jurisdictions
where your transactions have been effected. You should ask the firm with which
you deal for details about the types of redress available in both your home jurisdiction
and other relevant jurisdictions before you start to trade.
9. Currency risks
The profit or loss in transactions in foreign currency-denominated contracts
(whether they are traded in your own or another jurisdiction) will be affected
by fluctuations in currency rates where there is a need to convert from the currency
denomination of the contract to another currency.
10. Trading facilities
Most open-outcry and electronic trading facilities are supported by computer-based
component systems for the order-routing, execution, matching, registration or
clearing of trades. As with all facilities and systems, they are vulnerable to
temporary disruption or failure. Your ability to recover certain losses may be
subject to limits on liability imposed by the system provider, the market, the
clearing house and/or member firms. Such limits may vary: you should ask the
firm with which you deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ not only from trading in
an open-outcry market but also from trading on other electronic trading systems.
If you undertake transactions on an electronic trading system, you will be exposed
to risks associated with the system including the failure of hardware and software.
The result of any system failure may be that your order is either not executed
according to your instructions or is not executed at all.
12. Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances, firms are
permitted to effect off-exchange transactions. The firm with which you deal may
be acting as your counterparty to the transaction. It may be difficult or impossible
to liquidate an existing position, to assess the value, to determine a fair price
or to assess the exposure to risk. For these reasons, these transactions may
involve increased risks. Off-exchange transactions may be less regulated or subject
to a separate regulatory regime. Before you undertake such transactions, you
should familiarize yourself with applicable rules and attendant risks. |