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What are future markets, and how do they work in Singapore?

What are future markets?

Future markets are a type of financial market where contracts are made to buy or sell assets at a set price in the future. These contracts can be used to hedge risk or speculate on the movement of prices.

How do future markets work in Singapore?

In Singapore, futures markets are regulated by the Monetary Authority of Singapore (MAS). The MAS oversees the trading of futures contracts and sets rules and regulations for participants in these markets. Futures contracts can be traded on the Singapore Exchange (SGX), which is the national stock exchange of Singapore.

Some common examples of futures contracts include:

Commodities

It includes things like gold, silver, oil, and corn.

Currencies

It includes currencies like the US dollar and the British pound.

Interest Rates

It includes interest rates on loans, mortgages, and bonds.

Stock Indices

It includes stock market indices like the S& P 500 and the Nikkei 225.

Trading futures contracts can provide several benefits, including

Hedging risk

They can be used to hedge against risks in the underlying asset. For example, if you are holding a stock that you are worried might go down in price, you could buy a futures contract to sell that stock at a set price in the future. It would help to protect your investment from any price drops.

Speculation

They can also be used to speculate on the movement of prices. If you think that the price of an asset will go up, you could buy a futures contract to buy that asset at a set price in the future. Similarly, if you think the price will go down, you could sell a futures contract to sell the asset at a set price in the future.

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Liquidity

Futures contracts are often more liquid than the underlying asset. It means that it is easier to buy and sell futures contracts than buying and selling the underlying asset.

Trading futures contracts can also involve several risks.

Counterparty risk

It’s the risk that the other party in the contract will not fulfil their obligations. For example, if you buy a futures contract to sell an asset, and the seller does not deliver the asset when it is supposed to, you would lose out on the sale.

Market risk

It is the risk that the asset price will move against you. For example, if you buy a futures contract to buy an asset at a set price, and the asset price goes up before you can purchase it, you would lose money.

Volatility risk

It’s the risk that the price of the asset will move unpredictably. For example, if you buy a futures contract to buy an asset at a set price, and the price of the asset starts to fluctuate wildly, you may not be able to purchase the asset at the set price, or you may have to sell it at a lower price than you wanted.

How can I trade futures markets in Singapore?

To trade futures markets in Singapore, you will need to open an account with a broker (find more info here) that offers these products. You’ll also need to deposit money into your account to cover the margin requirements for the contracts you want to trade. The margin requirements will vary depending on the broker and the contract. Once you have an account and the required margin, you can start trading futures contracts.

What are margin requirements?

They are the amount of money that you need to deposit into your account to cover the risks of trading futures contracts. This money is not used to purchase the contracts, but rather, it is held by the broker as a security in case the contract is not fulfilled.

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