A stock futures contract is a commitment to buy or sell the financial exposure equivalent to a specific amount (contract multiplier) of shares of the underlying stock at a predetermined price (contracted price) on a specified future date.
As stock futures contracts are cash settled, there is no physical delivery of shares when the contract expires.
Upon expiry, profits and losses are credited or debited to the account of the contract buyers/sellers in an amount equal to the difference between the contracted price and the final settlement price multiplied by the contract multiplier.
The final settlement price is the average of the midpoints of the best bid and offer prices for the underlying stock as quoted on The Stock Exchange of Hong Kong, taken at five-minute intervals during the last trading day.
To offset an open short stock futures position before expiry, a seller of a stock futures contract simply buys back the contract while a buyer sells a stock futures contract to close the open long position.
All buyers and sellers of stock futures are required to post margin when opening a position in the market to ensure performance of the contractual obligations. If the margin falls below the stipulated level due to adverse price movements, the investor will be called upon to promptly restore the margin back to the original level.
- Low transaction costs
As stock futures contracts are based on the value of several thousand shares, the stock transaction costs are low relative to purchasing or selling the total underlying shares.
- Ease of short selling
A short position in a stock futures contract can be easily established, allowing investors to benefit from an anticipated fall in the value of the underlying stock.
- Leverage effect
As the margin required to carry a stock futures position is only a fraction of the value of the underlying stock, hedging/trading activities can be conducted with a smaller capital outlay.
- Lower currency exposure for offshore investors
For global investors with an exposure in Hong Kong through stock futures contract, only the margin to carry the position is subjected to home currency price fluctuations.
- Market making system
To ensure adequate market liquidity, registered traders (market makers) make firm bid/offer prices within a maximum spread limit. Price quotations by market makers, together with the participation of other traders, provide an active and liquid market for investors to open and/or close their stock futures positions.
- Electronic trading
As stock futures are traded on the HKFE's Automated Trading System (ATS), where orders are electronically matched based on price and time priority and bid, offer and transaction prices are instantly disseminated, providing the highest level of price and market transparency.
- Clearing House guarantee
As with all futures and options contracts traded on the HKFE, stock futures are registered, cleared and guaranteed by the HKFE Clearing Corporation (HKCC), a wholly-owned subsidiary of the HKFE. HKCC acts as the counter-party to all open contracts which effectively eliminates counter-party risks between its HKCC Participants. The HKCC guarantee does not cover an HKCC Participant's obligations to its clients. Investors should exercise due care and diligence when deciding through whom they will conduct business.