Futures and Leverage Foreign Exchange Trading

Effect of 'Leveraged" or 'Gearing'

Transactions in futures and leveraged foreign exchange carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract or leveraged foreign exchange transaction so that the transaction is highly 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 in order to maintain your position. If you fail to comply with 
a request for additional funds with the time prescribed your position may be liquidated at a loss and you will be liable for any resulting deficit in your account.

Risk-Reducing Orders or Strategies

The placing of certain orders leg 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. At times it is also difficult or impossible to liquidate a position without incurring substantial losses. Strategies using combinations of positions such as spread and straddle positions may be as risky as taking simple 'long' or 'short' positions.

Options Trading

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 would have to increase for your position to become profitable taking into account the premium paid and all transaction cost.

The purchaser of options may offer its position by trading in the market or exercise the options or allow the options to expire. The exercise of an option results either in cash settlement or in the purchase acquiring or delivering the underlying interest. If the option is on a futures contract or a leveraged foreign exchange position as the case may be with associated liabilities for margin (see the section on Futures and Leverage Foreign Exchange Trading above.) If the purchased options expire worthless you will suffer a total loss of your investment which will consist of the option premium paid plus transaction costs. If you are contemplating purchasing deep-out-of-the-money options you should be aware that ordinarily the chance of such options becoming profitable is remote.

Selling ('writing' or 'granting') an option generally entails considerably greater risk than purchasing options. Although the premium received by the seller is fixed the seller may sustain a loss well in excess of the amount of premium received. The seller will be liable to deposit 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 futures contract or a leveraged foreign exchange transaction the seller will acquire a futures or a leveraged foreign exchange position as the case may be with associated liabilities for margin (see the section on Futures and Leveraged Foreign Exchange Trading above). If the option is 'covered' by the seller holding a corresponding position in the underlying futures contract leveraged foreign exchange transaction 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 deterred payment of the option premium limiting the liability of the purchaser to 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 Risk Common to Futures Option and Leveraged Foreign Exchange Trading

Term Condition of Contract

You should ask the firm with which you conduct your transactions the terms and conditions of the specific futures contract, options or leveraged foreign exchange transaction which you are trading and the associated obligations (e.g. the circumstances under which you may become obligated to make or take delivery of the underlying interest of a futures contract or a leveraged foreign exchange transaction 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 of clearing house to reflect changes in the underlying interest.

Suspension or Restriction of Trading and Pricing Relationship

Market conditions (e.g. liquidity) and/or the operation of the rules of certain markers (e.g.. the suspension of trading in any contract of 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 or loss.

Further normal pricing relationships between the underlying interest and the futures contract 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.

Deposited Cash and Property

You should familiarize yourself with the protection accorded to any money or other property which you deposit for domestic and foreign transaction particularly in the event of a firm's solvency 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 had 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 . 

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.

Transactions in Other Jurisdiction

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 conduct your transactions for details about the types of redress available in both your home jurisdictions and other relevant jurisdictions before you start to trade.

Currency Risks

The profit or loss in transactions in foreign currency-denominated futures and option 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.

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 conduct your transactions for details in this respect.

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 transaction 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 instruction or is not executed at all.

Off-exchange Transactions

In some jurisdictions firms are permitted to affect off-exchange transactions. The firm with which you conduct your transactions may be acting as your counterpart to the transaction. It may be difficult or impossible to liquidate an existing position 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 application rules and attendant risks.  

Security Futures

You should be aware that trading futures involves the risk of loss, including the possibility of loss greater than your initial investment. Stock futures may not be suitable for all investors.

Click here to view our complete Security Futures Risk Disclosure 

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CMB Trade Group is a National Futures Association member, and is registered with the Commodity Futures Trading Commission
Futures Trading Involves The Substantial Risk Of Loss And Is Not Suitable For Every Investor
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