Bursa Derivatives Education Series

Author: bursaderivatives   |   Latest post: Mon, 31 Aug 2020, 10:12 PM


Trading Scenarios of Derivatives

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Scenario 1 – Benefi​t from Bear Markets

On concerns of higher prices of consumer goods and an overall decline of economic conditions, Sofea views that market will be on a decline. To make profit out of the bear market, she can use the FKLI contract in the following manner:

Index Futures (FKLI) is trading at 1780.0

Scenario: FKLI is expected to FALL

Step 1: Sell one FKLI contract at 1780.0


Assuming FKLI declines to 1760.0

Step 2: Buy one FKLI contract at 1760.0

Gross profit on FKLI: MYR 1000 (MYR 50 x 20 points)


Scenario 2 – Benefit from Bull Markets

Ryan has been watching the stock market very closely due to the upcoming General Elections. He foresees that the market will be on an uptrend after the election. To profit out of the bull market, he can use the FKLI contract in the following manner:


Index Futures (FKLI) is trading at 1780.0

Scenario: FKLI is expected to RISE

Step 1: Buy one FKLI contract at 1780.0


Assuming FKLI rises to 1790.0

Step 2: Sell one FKLI contract at 1790.0

Gross profit on FKLI: MYR 500 (MYR 50 x 10 points)



(i) Initial Margin is to be deposited with a Futures Broker prior to trading.

(ii) Open position is subject to daily mark-to-market which may require additional margin to be deposited.

(iii) Transaction costs have been excluded in this example.


Scenario 3 – Hedging

A position established in one market in an attempt to offset exposure to price fluctuations in the opposite position in another market with the goal of minimizing one’s exposure to unwanted risk.

Fund managers perpetually hold stocks in hand, therefore their risk exposure to the market would be enhanced in declining markets. A fund manager expects that in two months’ time, the share price will appreciate. However, he is worried that unforeseen event may cause prices to decline prior to the time he would sell his stocks. He chooses to trade on BMD and hedge his position by selling the forward FKLI contract. In doing so, he has effectively agreed to lock-in his future selling price today for a contract that will expire in two months’ time.


Scenario 4 – Arbitraging

When derivatives are trading above or below their theoretical “fair value,” it is possible to undertake arbitrage strategies by buying or selling the derivatives and simultaneously selling or purchasing the underlying stock(s).

The fund manager realises that the correlation prices of the cash market and the FKLI market have deviated from their usual spreads, and that the FKLI is trading at a premium to the cash market. It decides to sell FKLI and buy the underlying shares in the equity market to arbitrage. The position will be liquidated later once the spread of the prices between both markets return to its fair value.


Scenario 5 – Trading

Observation of trading patterns and post data on reactions to market announcements provide an estimate on possible bullish or bearish trends.

The fund manager expects a spike up in prices in anticipation of an increase in buying activities by foreign funds based on the positive economic data of the country. It naturally will increase its exposure and may purchase stocks and FKLI simultaneously to maximize its ‘buy / long’ portfolio position.


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