American Investment Training

Tuesday, December 18, 2018

What Causes Volatility in the Pakistan Stock Market

By Ghazi Naseem

For a long time, Pakistan's Stock Market was performing exceptionally well. Over the years of continued stable political and improved security indicator further strengthened the economic activity in the country. All of a sudden, political turmoil gripped the country in wake of Panama Leaks accusing head of the ruling party.

Here are the reasons why the Pakistan stock market has been experiencing major volatility.

Political ripple effect:

Pakistan's largest party and PM accused in Panama Gates and ousted after marathon hearings in the country's highest court. As a result, PSX - biggest stock market of Pakistan invariably had a ripple effect all over. When the KSE100 index fell after marking historic high of around 53,000 slipped more than 30% despite venturing into MSCI regime.

Risk of fiscal gaffe:

Persistent rise in the current account deficit due to a higher trade gap led by a significant increase in imports as compared to exports. Pakistan's trade deficit rose 24.18% to over $9.2 billion in the first seven months of the current fiscal, while foreign currency reserves were declining at a rapid pace. The markets are worried the way the local Rupee devolution in recent past, higher trade deficit may pose extra pressure on Pak Rupee.

The total liquid foreign reserves held by the country stood at $18.413 billion on end of February, 2018 including $12.34 held by the SBP and remaining $6.067 billion by the commercial banks.

Foreign Remittances:

According to figures released by the State Bank of Pakistan for the period July-Feb increased by 3.41% to $12,833.64 Million compared to $12,410.54 Million for the corresponding period from last year.

Foreign direct investment (FDI) remained dried up in the seven months of FY18, as FDI inflows came to $1.487 billion during July-January FY18, compared with $1.532 billion a year ago.

Recuperating Exports:

The exports achieving the highest monthly growth yet in the fiscal year by posting 16% increase in dollar terms exports in February 2017. However the current year's export has already contributed additional inflows of around USD 1.5 bn during the first eight months and is expected to reach the figure of additional USD 2.5 bn, during 2017-18. This increase in economic activity in external sector reflects an increase of 0.8% of GDP.

Keep Check on Macroeconomic trends:

Economic manager needs to keep CHECK on current macroeconomic trends to sustain the achieved growth and huge catch up in the financial years ahead provided with controlled and fiscal discipline. Here are the encouraging signs to buildup.

Timely completion of Energy Projects and low output cost would bring down cost of production.

Inflation Rate around 4%.

CPEC projects on track.

Senate Elections clearing the political vague.

Attractive Valuations.

Potential growth in FDI's.



Monday, December 3, 2018

Option Contract Trading Basics - Stock Option Risks and Strategies

Before you learn the basics about how to trade options and the strategies, it is important to understand the types, cost and risks before opening an options account for trading. This article will focus on stock options vs. foreign currencies, bonds or other securities you can trade options on. This piece will mostly focus on the buy side on the market and the trading strategies used.

What is a Stock Option

An option is the right to buy or sell a stock at the strike price. Each contract on a stock will have an expiration month, a strike price and a premium - which is the cost to buy or short the option. If the contract is not exercised before the option expires, you will lose your money invested in your trading account from that contract. It is important to learn that these instruments are riskier than owning the stocks themselves, because unlike actual shares of stock, options have a time limit. There are 2 types of contracts. Calls and Puts and How to trade them and the basics behind them.

What is a Call Option and how to trade them?

A call option contract gives the holder the right to buy 100 shares of the stock (per contract) at the fixed strike price, which does not change, regardless of the actual market price of the stock. An example of a call option contract would be:

1 PKT Dec 40 Call with a premium of $500. PKT is the stock you are buying the contract on. 1 means One option contract representing 100 shares of PKT. The basic thought and learning how to trade call options in this example is you are paying $500, which is 100% at risk if you do nothing with the contract before December, but you have the right to buy 100 shares of the stock at 40. So, if PKT shoots up to 60. You can exercise the contract and buy 100 shares of it at 40. If you immediately sell the stock in the open market, you would realize a profit of 20 points or $2000. You did pay a premium of $500, so the total net gain in this options trading example would be $1500. So the bottom line is, you always want the market to rise when you are long or have purchased a call option.

Trading Strategy vs. Exercising and Understanding Premiums

With call options, the premium will rise as the market on the underlying stock rises. Buyer demand will increase. This increase in premiums allows for the investor to trade the option in the market for a profit. So you are not exercising the contract, but trading it back. The difference in the premium you paid and the premium it was sold for, will be your profit. The benefit for people looking to learn how to trade options or learn the basics of a trading strategy is you do not need to buy a stock outright to profit from it's increase with calls.

What are Put Options?

A put option is the reverse of a call contract. Puts allow the owner of the contract to SELL a stock at the strike price. You are bearish on the shares or perhaps the sector that the company is in. Since selling a stock short is extremely risky, since you have to cover that short and your buyback price of that stock is unknown. Bet THAT wrong and you are in a world of trouble. However, put options leave the risk to the cost of the option itself - the premium. Learning or getting information on how to trade Puts starts with the above and looking at an example of a put contract. Using the same contract as above, our anticipation of the market is completely different.

1 PKT Dec 40 Put with a premium of $500. If the stock declines, the trader has a right to sell the stock at 40, regardless of how low the market goes. You are bearish when you buy or are long put options. Learning to trade puts or understanding them starts with market direction and what you have paid for the option. Any basic strategy you take on this contract must be done by December. Options normally expire toward the end of the month.

You have the same 3 trading strategy choices.

Let Option Expire - usually because the market went up and trading them is not worth it, nor is exercising your right to sell it at the strike price.

Exercise the Contract - Market declined, so you buy the stock at the lower price and exercise the contract to sell it at 40 and make your profit.

Trading The Option - The market either declined, which raised the premium or the market rose and you are just looking to get out before losing all of your premium.

Conclusion Basics

Trading Options carries nice leverage because you do not have to buy or short the stock itself, which requires more capital.

They carry 100% risk of premiums invested.

There is an expiration time frame to take action after you buy options.

Trading Options should be done slowly and with stocks you are familiar with.

I hope you learned some of the basics of options buy side trading, investing and how to trade them. Look for more of our articles. American Investment Training.

More on Options and Trading Strategies at American Investment Training 

Nick Hunter is the President of American Investment Training. AIT provides broker and investor education, including Call Options. Visit for their full resources.

Thursday, November 29, 2018

Cryptocurrency Article - Cryptocurrency: The Fintech Disruptor

By Riasat Noor

Blockchains, sidechains, mining - terminologies in the clandestine world of cryptocurrency keep piling up by minutes. Although it sounds unreasonable to introduce new financial terms in an already intricate world of finance, cryptocurrencies offer a much-needed solution to one of the biggest annoyances in today's money market - security of transaction in a digital world. Cryptocurrency is a defining and disruptive innovation in the fast-moving world of fin-tech, a pertinent response to the need for a secure medium of exchange in the days of virtual transaction. In a time when deals are merely digits and numbers, cryptocurrency proposes to do exactly that!

In the most rudimentary form of the term, cryptocurrency is a proof-of-concept for alternative virtual currency that promises secured, anonymous transactions through peer-to-peer online mesh networking. The misnomer is more of a property rather than actual currency. Unlike everyday money, cryptocurrency models operate without a central authority, as a decentralized digital mechanism. In a distributed cryptocurrency mechanism, the money is issued, managed and endorsed by the collective community peer network - the continuous activity of which is known as mining on a peer's machine. Successful miners receive coins too in appreciation of their time and resources utilized. Once used, the transaction information is broadcasted to a blockchain in the network under a public-key, preventing each coin from being spent twice from the same user. The blockchain can be thought of as the cashier's register. Coins are secured behind a password-protected digital wallet representing the user.

Supply of coins in the digital currency world is pre-decided, free of manipulation, by any individual, organizations, government entities and financial institutions. The cryptocurrency system is known for its speed, as transaction activities over the digital wallets can materialize funds in a matter of minutes, compared to the traditional banking system. It is also largely irreversible by design, further bolstering the idea of anonymity and eliminating any further chances of tracing the money back to its original owner. Unfortunately, the salient features - speed, security, and anonymity - have also made crypto-coins the mode of transaction for numerous illegal trades.

Just like the money market in the real world, currency rates fluctuate in the digital coin ecosystem. Owing to the finite amount of coins, as demand for currency increases, coins inflate in value. Bitcoin is the largest and most successful cryptocurrency so far, with a market cap of $15.3 Billion, capturing 37.6% of the market and currently priced at $8,997.31. Bitcoin hit the currency market in December, 2017 by being traded at $19,783.21 per coin, before facing the sudden plunge in 2018. The fall is partly due to rise of alternative digital coins such as Ethereum, NPCcoin, Ripple, EOS, Litecoin and MintChip.

Due to hard-coded limits on their supply, cryptocurrencies are considered to follow the same principles of economics as gold - price is determined by the limited supply and the fluctuations of demand. With the constant fluctuations in the exchange rates, their sustainability still remains to be seen. Consequently, the investment in virtual currencies is more speculation at the moment than an everyday money market.

In the wake of industrial revolution, this digital currency is an indispensable part of technological disruption. From the point of a casual observer, this rise may look exciting, threatening and mysterious all at once. While some economist remain skeptical, others see it as a lightning revolution of monetary industry. Conservatively, the digital coins are going to displace roughly quarter of national currencies in the developed countries by 2030. This has already created a new asset class alongside the traditional global economy and a new set of investment vehicle will come from cryptofinance in the next years. Recently, Bitcoin may have taken a dip to give spotlight to other cryptocurrencies. But this does not signal any crash of the cryptocurrency itself. While some financial advisors emphasis over governments' role in cracking down the clandestine world to regulate the central governance mechanism, others insist on continuing the current free-flow. The more popular cryptocurrencies are, the more scrutiny and regulation they attract - a common paradox that bedevils the digital note and erodes the primary objective of its existence. Either way, the lack of intermediaries and oversight is making it remarkably attractive to the investors and causing daily commerce to change drastically. Even the International Monetary Fund (IMF) fears that cryptocurrencies will displace central banks and international banking in the near future. After 2030, regular commerce will be dominated by crypto supply chain which will offer less friction and more economic value between technologically adept buyers and sellers.

If cryptocurrency aspires to become an essential part of the existing financial system, it will have to satisfy very divergent financial, regulatory and societal criteria. It will need to be hacker-proof, consumer friendly, and heavily safeguarded to offer its fundamental benefit to the mainstream monetary system. It should preserve user anonymity without being a channel of money laundering, tax evasion and internet fraud. As these are must-haves for the digital system, it will take few more years to comprehend whether cryptocurrency will be able to compete with the real world currency in full swing. While it is likely to happen, cryptocurrency's success (or lack thereof) of tackling the challenges will determine the fortune of the monetary system in the days ahead.

Delving into the much-talked-about and hard-coded clandestine world of the next monetary system - cryptocurrency. While the digital coin offers immersive prospect and benefit to the potential investors and traders; it is yet to face numerous challenges and devise response mechanism for the future world.

Article Source:

SERIES 31 LICENSE TRAINING - Futures Managed Funds Exam

Monday, November 26, 2018

China and Cryptocurrency

In 2008 following the financial crisis, a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" was published, detailing the concepts of a payment system. Bitcoin was born. Bitcoin gained the attention of the world for its use of blockchain technology and as an alternative to fiat currencies and commodities. Dubbed the next best technology after the internet, blockchain offered solutions to issues we have failed to address, or ignored over the past few decades. I will not delve into the technical aspect of it but here are some articles and videos that I recommend:

How Bitcoin Works Under the Hood

A gentle introduction to blockchain technology

Ever wonder how Bitcoin (and other cryptocurrencies) actually work?

Fast forward to today, 5th February to be exact, authorities in China have just unveiled a new set of regulations to ban cryptocurrency. The Chinese government have already done so last year, but many have circumvented through foreign exchanges. It has now enlisted the almighty 'Great Firewall of China' to block access to foreign exchanges in a bid to stop its citizens from carrying out any cryptocurrency transactions.

To know more about the Chinese government stance, let's backtrack a couple years back to 2013 when Bitcoin was gaining popularity among the Chinese citizens and prices were soaring. Concerned with the price volatility and speculations, the People's Bank of China and five other government ministries published an official notice on December 2013 titled "Notice on Preventing Financial Risk of Bitcoin" (Link is in Mandarin). Several points were highlighted:

1. Due to various factors such as limited supply, anonymity and lack of a centralized issuer, Bitcoin is not a official currency but a virtual commodity that cannot be used in the open market.

2. All banks and financial organizations are not allowed to offer Bitcoin-related financial services or engage in trading activity related to Bitcoin.

3. All companies and websites that offer Bitcoin-related services are to register with the necessary government ministries.

4. Due to the anonymity and cross-border features of Bitcoin, organizations providing Bitcoin-related services ought to implement preventive measures such as KYC to prevent money laundering. Any suspicious activity including fraud, gambling and money laundering should to be reported to the authorities.

5. Organizations providing Bitcoin-related services ought to educate the public about Bitcoin and the technology behind it and not mislead the public with misinformation.

In layman's term, Bitcoin is categorized as a virtual commodity (e.g in-game credits,) that can be bought or sold in its original form and not to be exchanged with fiat currency. It cannot be defined as money- something that serves as a medium of exchange, a unit of accounting, and a store of value.

Despite the notice being dated in 2013, it is still relevant with regards to the Chinese government stance on Bitcoin and as mentioned, there is no indication of the banning Bitcoin and cryptocurrency. Rather, regulation and education about Bitcoin and blockchain will play a role in the Chinese crypto-market.

A similar notice was issued on Jan 2017, again emphasizing that Bitcoin is a virtual commodity and not a currency. In September 2017, the boom of initial coin offerings (ICOs) led to the publishing of a separate notice titled "Notice on Preventing Financial Risk of Issued Tokens". Soon after, ICOs were banned and Chinese exchanges were investigated and eventually closed. (Hindsight is 20/20, they have made the right decision to ban ICOs and stop senseless gambling). Another blow was dealt to China's cryptocurrency community in January 2018 when mining operations faced serious crackdowns, citing excessive electricity consumption.

While there is no official explanation on the crackdown of cryptocurrencies, capital controls, illegal activities and protection of its citizens from financial risk are some of the main reasons cited by experts. Indeed, Chinese regulators have implemented stricter controls such as overseas withdrawal cap and regulating foreign direct investment to limit capital outflow and ensure domestic investments. The anonymity and ease of cross-border transactions have also made cryptocurrency a favorite means for money laundering and fraudulent activities.

Since 2011, China has played a crucial role in the meteoric rise and fall of Bitcoin. At its peak, China accounted for over 95% of the global Bitcoin trading volume and three quarters of the mining operations. With regulators stepping in to control trading and mining operations, China's dominance has shrunk significantly in exchange for stability.

With countries like Korea and India following suit in the crackdown, a shadow is now casted over the future of cryptocurrency. (I shall reiterate my point here: countries are regulating cryptocurrency, not banning it). Without a doubt, we will see more nations join in in the coming months to rein in the tumultuous crypto-market. Indeed, some kind of order was long overdue. Over the past year, cryptocurrencies are experiencing price volatility unheard of and ICOs are happening literally every other day. In 2017, the total market capitalization rose from 18 billion USD in January to an all-time high of 828 billion USD.

Nonetheless, the Chinese community are in surprisingly good spirits despite crackdowns. Online and offline communities are flourishing (I personally have attended quite a few events and visited some of the firms) and blockchain startups are sprouting all over China.

Major blockchain firms such as NEO, QTUM and VeChain are getting huge attention in the country. Startups like Nebulas, High Performance Blockchain (HPB) and Bibox are also gaining a fair amount of traction. Even giants such as Alibaba and Tencent are also exploring the capabilities of blockchain to enhance their platform. The list goes on and on but you get me; it's going to be HUGGEE!

The Chinese government have also been embracing blockchain technology and have stepped up efforts in recent years to support the creation of a blockchain ecosystem.

In China's 13th Five-Year Plan (2016-2020), it called for the development of promising technologies including blockchain and artificial intelligence. It also plans to strengthen research on the application of fintech in regulation, cloud computing and big data. Even the People's Bank of China is also testing a prototype blockchain-based digital currency; however, with it likely to be a centralized digital currency slapped with some encryption technology, its adoption by the Chinese citizens remains to be seen.

The launch of the Trusted Blockchain Open Lab as well as the China Blockchain Technology and Industry Development Forum by the Ministry of Industry and Information Technology are some of the other initiatives by the Chinese government to support the development of blockchain in China.

A recent report titled " China Blockchain Development Report 2018" (English version in the link) by China Blockchain Research Center detailed the development of the blockchain industry in China in 2017 including the various measures taken to regulate cryptocurrency in the mainland. In a separate section, the report highlighted the optimistic outlook of the blockchain industry and the massive attention it has received from VCs and the Chinese government in 2017.

In summary, the Chinese government have shown a positive attitude towards blockchain technology despite its enforcement on cryptocurrency and mining operations. China wants to control cryptocurrency, and China will get control. The repeated enforcements by the regulators were meant to protect its citizens from the financial risk of cryptocurrencies and limit capital outflow. As of now, it is legal for Chinese citizens to hold cryptocurrencies but they are not allowed to carry out any form of transaction; hence the ban of exchanges. As the market stabilizes in the coming months (or years), we will see undoubtedly see a revival of the Chinese crypto-market. Blockchain and cryptocurrency come hand-in-hand (with the exception of private chain where a token is unnecessary). Countries thus cannot ban cryptocurrency without banning blockchain the awesome technology!

One thing we can all agree on is that blockchain is still at its infancy. Many exciting developments awaits us and right now is definitely the best time to lay the foundation for a blockchain-enabled world.

Last but not least, HODL!

I'm currently a student studying in Shanghai. As a tech enthusiast, I am excited about the tech scene in China. Email me at for working opportunities!



Monday, November 5, 2018

Commodity Tips For Traders, Brokers, and Investors

4 Current Commodity Tips You Need to Know About
By Vivek A Sharma

Commodities are an incredibly strong investment choice. A great way to build a diverse portfolio, they lack the volatility of stocks while providing great room for financial growth.

But investing in commodities without knowing what you're doing is a bad idea.

If you want to make this investment, you'll need to develop an intelligent strategy. Here are some commodity tips to help you make that move.

Commodities Explained

Before you read any other commodity tips, you need to understand the concept. Commodities are structured trades around the delivery, sale, import, and export of a particular good. Popular commodities include oil, gold, and soybeans.

The most popular strategy for investing in commodities is signing a futures contract. These ensure that you will own the commodity for a set amount of time before selling it on a certain date at a specific price.

Here are a few tips for making the most out of your commodity trades in 2017.

Why ETFs Are A Good Choice

If you're looking for an effective way to invest in commodities, one of the best ways to do it is through ETFs. ETFs, or Exchange-traded funds, can either monitor a commodity or a specific market index.

ETFs can be a great way for beginners to invest in commodities. They are easy to manage and involve a lot less red tape than a futures index. While investing in ETFs is not the only way to make a profit off of a commodity investment, it is the best way to get acquainted.

How To Use a Short Position

Many have a strong preference for the simple game of going long on their commodities. But this can be a mistake. There's a lot of money to be made off of the short sell, and it also isn't particularly difficult.

If you detect a market depreciation, you should sell shares in a commodity. Let the commodity depreciate in value: when you feel it has bottomed out and will experience a resurgence in value, you should buy shares.

This will allow you to minimize the cost of purchasing valuable commodities while profiting off of purchases of a commodity at a low value. Every trader should stop worrying and love the short.

Read The News (Financial and Otherwise)

Commodities are very complex. But in a way, they can also be relatively simple to understand. As a matter of fact, indexes for every commodity from corn to currency will appear in the newspaper. And not just in the business section.

Staying on top of everything from policy to boardroom rumors can help you make the right decision. So devote at least an hour to the news each day.

Be An Oil Skeptic

Oil is one of the most popular commodities. And while it can perform well or poorly in various technical analyses, an essential part of risk mitigation involves taking a look at the international political environment.

Whether it's through long-term transformations in the energy market or instability in OPEC nations, the future for oil is questionable. In the name of risk mitigation, we would advise approaching oil with caution.

Beyond Commodity Tips: Work With The Best

Tips can take you far. But you can go even further by working with seasoned financial professionals.

Work with the experts in various areas of trading. One of these areas is commodities trading. But whether you're looking to succeed at the trading of commodity ETFs or to continue boosting an already thriving portfolio, always look for the best people to work with.

Trade Finance Consultant, Business Development Strategist, Strategic Trade Risk Mitigation Solutions Provider Visit for more details.

It is one of India's leading Trade Finance Company, performing business of arranging trade finance and providing consultancy, advisory, structuring and management services relating to trade finance transactions. One of its main expertise is in commodity trade finance.



Tuesday, October 23, 2018

What is a Futures Contract - Futures Investing

Let us imagine a city where the only living accommodation is a standard apartment. Every unit is identical, and there is no difference in their values.

Suppose that the current value of the apartments in January, 2007, is $500,000 and that the value fluctuates with market conditions in the normal way.

You can enter a contract to buy or sell an apartment whenever you wish, but the City Fathers have decreed that contracts can only have an completion date on the 3rd Friday in March, June, September, or December each year.

If it is currently January '07, you can enter into a contract for completion in March-07, June-07, Sept-07, Dec-07, March-08 etc.

Any citizen of the city can take either the buy or sell side of the contract. Assume there is a very liquid market for the apartments, so citizens can choose to buy or sell contracts whenever they wish (prior to the contract expiry date).

Now, let us assume that the contracts themselves can be bought and sold in a market place, with the contractual obligations being instantly transferred to the new "owner".

It is not hard to see that if I hold a contract to purchase an apartment at $450,000 in March-07, and the current market value in Jan-07 is $500,000, I should be able to sell this contract to another trader in the market for roughly $50,000, less discount. (You might get less if the market expects prices might drop back a bit before March, or more if the market expects prices to continue rising.)

Alternatively, I might hold a contract entitling me to sell an apartment for $585,000 in June-07. Clearly this contract has value because the current market price has now fallen to $500,000. I should be able to get approximately $85,000 for it, less discount. (Again, you could get less if the market expects prices to bounce back up before June, or more if the market expects a further decline.)

Our final assumption in this hypothetical scenario is that you are required to pay a performance bond, which we call the "margin", whenever you enter an open position by buying or selling a contract. For example, you might be required to put down 10% of the full price ($50,000) to guarantee that you will meet your contractual requirements.

Note that you are allowed to enter a contract to sell an apartment even if you do not currently own one! Thus you could enter a contract to sell an apartment for $530,000 in June-07 (6 months from now) even though you currently own nothing.

If you hold the contract to expiry, you must deliver on your commitment. You can do this by, say, building a new apartment in the interim, or by planning to buy an apartment just before you are required to sell. Obviously, you hope that the market price will decline before you make your purchase, so that you make a net profit.

What I have described is a Futures Market in Apartments. There are three groups of people who might be interested in using this market.


The first group is the genuine participants - people who are actually looking to buy or sell an apartment. In a Futures market this group is called the "Commercials".

Say you want to buy an apartment a year from now, and you fear prices will shoot up during the year. You enter a contract to Buy at an agreed price of $500,000 a year from now. This locks in your purchase price, and you will only lose out if prices actually fall during the year.

Conversely, you may be a developer planning to have new apartments for sale eighteen months from now. Your budget is based on selling the apartments at the current market price, but you fear a sudden drop in market prices could take away all your profit. You could enter contracts now to sell apartments for $500,000 in June-08, thus guaranteeing the price you will receive at that time. Of course, you lose out if the market rises during that period, but you are protected against a disastrous market crash.

The original futures markets were in agricultural products. The Commercials were (a) farmers growing crops and (b) organisations purchasing the crops. For example, coffee growers in Brazil and Starbucks are Commercials in the coffee markets.

Farmers sell futures contracts to achieve guaranteed prices for the coming harvest crops, even though they may not have planted them yet. The organisations buy futures contracts to guarantee the prices they will pay for the harvested crops.

Both sides benefit by getting certainty in their businesses, aiding planning and budgeting. They can continue their business operations knowing they are protected from the vagaries of wild price swings.


The next group is known as the "hedgers". For example, you might be a landlord who owns 10 apartments. This is $5,000,000 of capital value, and you are worried that it is going to be eroded during a market downturn which you anticipate will hit over the next 9 months.

You sell 10 contracts at $500,000 and plan to buy them back just before contract expiry in Sep-07. If you are right and the market price drops to $460,000 by then, you will make $40,000 profit per contract, or $400,000 in total. This exactly offsets the decline in the capital value of your 10 units which are now only worth $4,600,000.

However, if you were wrong and market prices actually rise to, say, $530,000, you will be buying the contracts back for a $30,000 loss per contract, $300,000 in total. This exactly offsets the increase in capital value of your properties which are now worth $5,300,000.

In other words, the hedger sets up a futures trade which is neutral whether the market rises or falls. The hedge protects against a potential disastrous loss of value, but at the same time it gives up the opportunity of windfall profits if the market moves in your favor.

A very common hedge occurs in currency markets when a company agrees to make a major purchase some time in the future in a different currency. The risk is that the exchange rate will move against the company before the delivery date, meaning that the price will be significantly higher in the company's own currency than it had budgeted. (Conversely, the rate could move in its favor and the price in local currency would be cheaper.)

The company can set up a hedge in currency futures which guards against an adverse move in the exchange rate, but sacrifices windfall gains if the rate moves favorably.


Reverting back to our hypothetical scenario, the final group of people is the one I belong to - the "Speculators". We have no interest in buying or selling an apartment, have nothing to hedge, but just want to make money.

A speculator generally takes a view of the market - expecting it to either rise or fall - and buys or sells futures contracts accordingly. The speculator may hold the contract for years, months, weeks, days or minutes! The speculator never holds a contract to expiry because s/he does not want to have to get involved in actually buying or selling a physical apartment.

Some people see the Commercials and Hedgers as the legitimate players in the Futures markets, with the speculators being looked down upon as mere gamblers who don't create or contribute anything. However, it turns out that the speculator makes an extremely important contribution to the market by providing liquidity.

If the market place were confined to Commercials and Hedgers, then they might well find that when they wanted to buy or sell, there would be no market participant prepared to take the other side of their contract. Speculators, who are prepared to assume risk in return for the chance of profits, fill this gap. Never be ashamed of being a Speculator!


#1 Let's consider an example of entering a contract to Buy (known as going "Long"). It is now Jan-07 and we go long a June-07 contract at $500,000. A few weeks pass by and the City Fathers publish a report about a predicted property shortage which causes the market price to move up to around $530,000. We decide to take our profit and sell our contract in the Market. Since our contract gives its owner the right to buy an apartment with a current market value of $530,000 for just $500,000 we can sell it and expect to make a profit in the vicinity of $30,000.

#2 Now an example of entering a contract to "Sell" (known as going "Short"). It is Jan-07 and we go short the March-07 contract at $500,000 in anticipation of some bad economic news. Sure enough, the very next week, the City Fathers front up with the bad news that unemployment is gathering pace and the economy is turning sharply downwards. There is a bit of upheaval in the markets, and overnight the value of an apartment drops to $440,000. We now hold a contract guaranteeing a price of $500,000 in March for a commodity valued at $440,000. We go to the market and buy a contract at $440,000 to offset our short contract, taking a profit of about $60,000.


One vitally important concept I haven't mentioned yet is "leverage". Remember I said that you have to pay a deposit, or margin, whenever you buy (go long) or sell (go short) a contract. Suppose the margin is $500,000 - the full purchase price. Then in example #1, we pay $500,000 margin and make $30,000 profit (6% return). This is a conventional transaction with no leverage.

If the margin is reduced to $50,000 then the $30,000 profit represents a 60% return on the capital invested! We now have 10-1 leverage on our investment. Suppose that in #2 above, the margin is $40,000. Then the $60,000 profit is a return of 150% When you consider that such returns may have been achieved in just a few days, then the annualized profit potential is enormous.

However, never forget that leverage is a double edged sword! Suppose that in example #2 the market did not plummet as you had hoped. In fact, the price of an apartment rises to $560,000 and when we buy it back we realize a loss of $60,000. Now we have a negative 150% return.

What is worse, we have lost more money than we invested! When there is no leverage, you cannot lose more than you invest even if the price of the underlying commodity falls to zero. In a leveraged investment, you can lose much more than you invest if you don't manage your trade properly.


o There must be an underlying commodity which is absolutely standardized. e.g. 5,000 bushels of soybeans of a specified grade; 5 times the value of the Dow Jones Industrial stock price index; 100 troy ounces of refined gold. There are literally hundreds of commodities traded in the world's futures markets.

o Participants can enter a contract to purchase the underlying commodity at an agreed price on some future date. This is known as buying a contract, or going Long.

o Participants can enter a contract to supply the underlying commodity at an agreed price on some future date (even if they don't own the commodity now). This is known as selling a contract, or going Short.

o There must be a market where contracts can be freely traded. The contracts are not personalized, so their obligations and benefits are immediately transferable to a new owner.

o As the market price of the underlying commodity fluctuates, the value of contracts changes accordingly. People who buy (go Long) make money when the underlying commodity price rises, and lose money if it falls.

o People who sell (go Short) make money when the underlying commodity price falls, and lose money if the price goes up.

o Participants gain control over the full quantity of the underlying commodity when they buy and sell contracts. Because they only need to deposit the contract margin, this provides a leveraged investment.

David Bennett is an independent Futures Trader. He lives on the Gold Coast of Australia, trading financial and grains futures contracts in Chicago. Visit for more articles.



Thursday, April 6, 2017

Series 31 Home Study Course Book - Become licensed in Futures Managed Funds, Series 31

Pass the Series 31 Futures Managed Funds Exam with this updated study material from American Investment Training

75 pages with chapter exams after each section. Chapter and final exam questions with detailed answers.

For securities brokers who limit their futures business to futures funds. Passing the Series 31 exam allows registered representatives to receive trailing commissions from their sales of futures fund interests without having to take the Series 3 exam. 10-20 hours of study time is recommended.


ONLY $55 - No sponsorship Required

Get the Series 31 Course HERE