Futures consist of two sides: Long (buy) and Short (sell). Investors are Buyers (long position) or Sellers (short position) of futures when placing long/ short orders in the market and are matched with the counter orders based on price and volume. If investors intend to buy underlying assets and/ or expect the price of underlying assets to increase in the future, investors will enter long position; otherwise, if investors intend to sell underlying assets and/ or expect the price of underlying assets to decrease in the future, investors will enter short position.

When position is opened on the market (buy and sell orders are matched), VSD begins settlement and clearing process for that contract in accordance with the mechanism of Central Counterparty Clearing House. Accordingly, at the end of trading day, based on the daily settlement price and the price which investors open long/ short positions, VSD calculates gain/ loss of the positions being held by investor and transfers money from sides which are in the red to sides which are in the black. This activity is called Daily Settlement and happens as long as the positions are still open.

In case that positions are still open on the expiration day, Buyers and Sellers have the obligations to perform final settlement. If the settlement is the transfer of physical assets, buyers pay money in exchange of underlying assets from sellers in accordance with guidances and regulations of VSD.

Position limit is set in order to prevent an individual or institution to hold a large amount of contracts which may have remarkable impact on the market. The implementation of position limit helps to maintain a stable and fair market, which ensures the rights of investors.

After entry, investors can hold the contracts until expiration or exit the positions before that. In order to cancel out open contracts, for example for short position, investors have to place an opposite order (long position) on the market. If this order is matched, investors close out their contracts.

The exit of contract (or closing position) is carried out by investors in the following cases:
• When investors no longer want to own the contracts;
• When investors take profit/ cut loss;
• When investors hold the amount of contracts exceeding position limit;
• When investors are incapable of depositing required margin;

The settlement principle of futures are stipulated in the agreement, in which it can be conducted under either one of the following methods:

Cash settlement: this method is usually applied for futures contracts whose underlying assets cannot be transferred (stock index, interest rate, weather, voting results, etc.) or is due to the relevance when designing the product. The value of cash settled is calculated based on gain/ loss of investors’ margin due to the change of the contracts’ market price.

Physical delivery: applied for futures contracts whose underlying assets are transferrable (single stock, bond, commodities, etc.) or due to the relevance when designing the product. Upon expiration, buy side of futures contracts will transfer money and sell side will transfer underlying assets as required by Central Counterparty Clearing House, via the payment system of the Clearing House.

Futures contracts’s trading principles have many similar characteristics compared to those of underlying securities (stock, bond). However, there are some differences:
• Total amount of futures contracts in circulation is not limited: apart from stocks or bonds, Futures have no issuers. Total amount of contracts on the market depends on the demand of investors.
• Investors can enter positions of futures without owning the underlying assets of those contracts. Moreover, investors do not need to have money equivalent to the total value of the Contracts to buy them.
• Investors only have to put up a portion of the total value of the Contracts they want to buy. This is the benefit of leverage of Futures.

With all the above mentioned features, Futures are highly favoured by investors with the following purposes:
Hedging: investors can reduce the risk due to price volatility of one asset by entering Futures.
Speculating: investors can take a huge profit with only a small amount of margin.
Arbitrage: price of underlying assets and futures are usally correlated. However, sometimes they show differences which provide the opportunities for investors to arbitrage without putting up any money.

Leverage is a main difference between derivatives and underlying securities. Basically, when trading futures, investors only have to put up a portion of money (Margin) which is only a small fraction of the value of the contracts. For instance:

An investor wants to long 01 futures contract of VN30 Index, expiring in September 2017 with the price of 703 points. The investor places a buy order of 01 contract and is matched with the abovementioned price. As a result, the investor has been recorded by VSD as having opened 01 long position with the price of 703 points.

If the futures contract of VN30 Index stipulates that the contract multiplier is 100,000 VND for each index points, it will be:
Value of 01 contract equals to: 703 points * 100,000 VND/ index point = 70.3 million VND

However, if the required initial margin is 13%, instead of 70.3mln, the investor only has to put up:
70.3 million VND * 13% = 9,139,000 VND

This is the Initial Margin.

This amount of initial margin will be used by VSD to calculate gain/ loss of the investor (this is called mark-to-market). For example, when futures price rises from 703 to 705 points, the investor will have a gain of:
(705 – 703) *100,000 VND/index point = 200,000 VND

If trading on the equity market, the profit margin is:
(705 – 703) / 703 * 100% = 0.28%

Meanwhile, for futures, the profit margin is:
(705 – 703) * 100,000 / 9,139,000 * 100% = 2.19%

As a result, with only a small price change of futures, it can create a higher gain/ loss than investing in underlying securities.

Levarage is also the risk factor of futures. When the price is moving in a favourable direction (for example: it increases for long position or decreases for short position), the investor can record a huge profit margin. Otherwise, when it moves unfavourably, the investor can also sustain big loss on the initial margin in a very short time.

When the investor margin is lower than required level (Margin Maintenance), the investor has to promptly deposit additional margin. If the margin is not fulfilled on time, the investor has to cancel out a portion of or all positions. After closing positions, the investor still has to settle the loss to VSD and securities company if the margin is not sufficient.

Investors can trade futures instead of buying underlying securities (stock, fund certificate) to allocate the investment portfolio. In comparison to investing a single stock, futures have the following advantages:

• Investors can buy “the stock market” by purchasing index futures, instead of buying each single stock or investing via asset management company;
• Futures are highly leveraged instruments;
• Initial capital is a small fraction of total value of the contracts;
• Index futures have lower risk than buying and holding single stock;
• Investors have to monitor one futures price instead of hundreds of stocks;
• High applicability: one index futures contract can be used as hedging instrument for multiple portfolios;
• Transparency and safety: due to the fact that underlying assets consist of many stocks, price manipulation will be difficult;
• Easy and convenient settlement: because underlying asset is stock index, which is not transferrable, the settlement is based on mark to market. The settlement is processed by Clearing House continuously during the day to minimize the counterparty risk of the contract.

For those benefits, index futures are the most favourable products on the derivatives markets of Stock Exchanges worldwide, with high liquidity.