Exchange-traded Derivatives

A derivative instrument is a contract whose value depends on, or derives from, the value of an underlying asset (such as commodity prices, interest rates and share prices) or an index. Due to the leveraged nature of derivative contracts, investors should have a clear understanding of the use of derivatives and the risks involved before venturing into futures and options trading.

Exchange-traded derivatives have been around in the Malaysian capital market since 1995. There are currently five products being traded on MDEX, i.e.:

• crude palm oil futures
• KLSE composite index futures
• KLSE composite index options
• 3-month KLIBOR interest rate futures
• 5-year Malaysian Government Securities futures.

The MDEX website (www.mdex.com.my) is a good starting place to obtain some basic facts and figures on the Malaysian derivatives market. Some of the information that one can find on the website are:

• delayed price data for the five futures and options contracts
• contract specifications for each derivative instrument
• a section on educational resources that provides details on the mechanism and trading applications of MDEX’s futures and options contracts
• the list of licensed members (this information is also available on the SC website) to check against dealing with bogus spot commodity/index trading firms.

Furthermore, to ensure that investors are aware of and understand what trading in derivative contracts entails, the rules of MDEX require futures brokers to give clients:

• an explanation of the nature of the contract
• the specifications and details of the essential terms of each kind of contact in which the client wants to trade
• risk disclosure statements, before the commencement of trading. The clients are also required to acknowledge receipt of the above information.