Introduction to Financial Futures
Financial futures are standardized contracts to buy or sell specific financial instruments at a predetermined future date and price. These derivatives derive their value from underlying assets such as:
- Stock indices
- Government bonds
- Foreign currencies
- Interest rates
👉 Discover how futures trading works
Key Categories of Financial Futures
1. Equity Index Futures
Representative Product: CSI 300 Index Futures (China Financial Futures Exchange)
| Contract Specification | Details |
|---|---|
| Underlying Asset | CSI 300 Index |
| Contract Multiplier | 300 RMB per index point |
| Minimum Price Movement | 0.2 points |
| Trading Hours | 9:15-11:30, 13:00-15:15 (Beijing Time) |
| Margin Requirement | 12% of contract value |
Four Fundamental Characteristics:
- Leverage Effect: 12% margin allows 8.3x exposure
- Price Correlation: 0.98+ correlation with spot index
- Settlement Mechanism: Cash-settled using arithmetic mean of last 2 hours' index value
- Risk Profile: Volatility typically 1.8x underlying index
2. Interest Rate Futures
Flagship Product: 5-Year Treasury Bond Futures (CFFEX)
| Contract Feature | Specification |
|---|---|
| Deliverable Bonds | 4-7 year residual maturity |
| Price Quotation | Clean price per 100 RMB face value |
| Daily Price Limit | ±2% from settlement price |
| Physical Delivery Requirements | 1 million RMB nominal value per contract |
Market Advantages:
- 83% lower transaction costs vs. cash bond trading
- Average daily liquidity: 85,000 contracts (2023 data)
- Central clearing reduces counterparty risk by 92%
3. Currency Futures
Market Structure Features:
Standardized Contracts:
- Fixed contract sizes (e.g., 12.5M JPY, 125,000 EUR)
- Quarterly expiration cycles (March/June/Sept/Dec)
- Physical delivery required for open positions
Risk Management Protocols:
- Initial margin: 2-5% of notional value
- Mark-to-market settlement twice daily
- Circuit breakers at ±7% price movement
👉 Explore currency hedging strategies
Options vs. Futures: Comparative Analysis
| Parameter | Options | Futures |
|---|---|---|
| Obligation | Right without obligation | Binding contract |
| Margin Requirements | Seller only posts margin | Both parties post margin |
| Profit/Loss Profile | Buyer: Unlimited gain/Limited loss Seller: Limited gain/Unlimited loss | Symmetric risk/reward |
| Pricing Mechanism | Black-Scholes model | Cost-of-carry model |
| Liquidity | 38% lower than futures markets | High daily turnover |
ETF Options Market Mechanics
Shanghai Exchange Specifications:
| Contract Element | 50ETF Options | 180ETF Options |
|---|---|---|
| Contract Size | 10,000 fund units | 10,000 fund units |
| Strike Price Intervals | 5% increments | 5% increments |
| Exercise Style | European (monthly) | European (quarterly) |
| Position Limits | 5,000 contracts/net long | 10,000 contracts/net long |
Investor Tiers:
- Tier 1: Protective puts/calls (requirement: 100% collateral)
- Tier 2: Long positions only (max 20% of portfolio)
- Tier 3: Unrestricted strategies (institutional only)
Frequently Asked Questions
Q: How does leverage work in futures trading?
A: With 12% margin, each 1% index movement creates 8.3% profit/loss. For example:
- CSI 300 at 3,800 points → 456,000 RMB margin per contract
- 38-point move (1%) → 11,400 RMB (2.5% return on margin)
Q: Why choose cash-settled futures?
A: Eliminates physical delivery hassles - 92% of equity futures traders prefer cash settlement for its convenience and tax efficiency.
Q: What's the minimum capital for Treasury futures?
A: Approximately 20,000 RMB (2% of 1M nominal value), though brokers may require higher margins for retail accounts.
Q: How do currency futures hedge risk?
A: A Japanese exporter can sell USD/JPY futures to lock in exchange rates, protecting against yen appreciation. Typical hedge effectiveness exceeds 85%.
Q: When do most options expire worthless?
A: 72% of equity options expire worthless, though this varies by moneyness (ITM/OTM status) and volatility conditions.
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