RISK DISCLOSURE STATEMENT FOR FUTURES AND OPTIONS
This brief statement does not disclose all of the risks and other significant aspects
of trading in futures and options. In light of the risks, you should undertake such
transactions only if you understand the nature of the contracts (and contractual
relationships) into which you are entering and the extent of your exposure to risk.
Trading in futures and options is not suitable for many members of the public. You
should carefully consider whether trading is appropriate for you in light of your
experience, objectives, financial resources and other relevant circumstances.
1. Effect of Leverage or Gearing
Transactions in futures carry a high degree of risk. The amount of initial margin
is small relative to the value of the futures contract so that transactions are
"leveraged" or "geared." A relatively small market movement will have a proportionately
larger impact on the funds you have deposited or will have to deposit: this may
work against you as well as for you. You may sustain a total loss of initial margin
funds and any additional funds deposited with the firm to maintain your position.
If the market moves against your position or margin levels are increased, you may
be called upon to pay substantial additional funds on short notice to maintain your
position. If you fail to comply with a request for additional funds within the time
prescribed, your position may be liquidated at a loss and you will be liable for
any resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g. "stop-loss" orders, where permitted under local
law, or "stop-limit" orders) which are intended to limit losses to certain amounts
may not be effective because market conditions may make it impossible to execute
such orders. Strategies using combinations of positions, such as "spread" and "straddle"
positions may be as risky as taking simple "long" or "short" positions.
3. Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers of options
should familiarize themselves with the type of option (i.e. put or call) which they
contemplate trading and the associated risks. You should calculate the extent to
which the value of the options must increase for your position to become profitable,
taking into account the premium and all transaction costs.
The purchaser of options may offset or exercise the options or allow the options
to expire. The exercise of an option results either in a cash settlement or in the
purchaser acquiring or delivering the underlying interest. If the option is on a
future, the purchaser will acquire a futures position with associated liabilities
for margin (see the section on futures above). If the purchased options expire worthless,
you will suffer a total loss of your investment which will consist of the option
premium plus transaction costs. If you are contemplating purchasing deep-out-of
the-money options, you should be aware that the chance of such options becoming
profitable ordinarily is remote.
Selling ("writing" or "granting") an option generally entails considerably greater
risk than purchasing options. Although the premium received by the seller is fixed,
the seller may sustain a loss well in excess of that amount. The seller will be
liable for additional margin to maintain the position if the market moves unfavorably.
The seller will also be exposed to the risk of the purchaser exercising the option
and the seller will be obligated to either settle the option in cash or to acquire
or deliver the underlying interest. If the option is on a future, the seller will
acquire a position in a future with associated liabilities for margin (see the section
on Futures above). If the option is "covered" by the seller holding a corresponding
position in the underlying interest or a future or another option, the risk may
be reduced. If the option is not covered, the risk of loss can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the option premium,
exposing the purchaser to liability for margin payments not exceeding the amount
of the premium. The purchaser is still subject to the risk of losing the premium
and transaction costs. When the option is exercised or expires, the purchaser is
responsible for any unpaid premium outstanding at that time.
Additional risks common to futures and options
4. Terms and conditions of contracts
You should ask the firm with which you deal about the terms and conditions of the
specific futures or options which you are trading and associated obligations (e.g.,
the circumstances under which you may become obligated to make or take delivery
of the underlying interest of a futures contract and, in respect to options, expiration
dates and restrictions on the time for exercise). Under certain circumstances the
specifications of outstanding contracts (including the exercise price of an option)
may be modified by the exchange or clearing house to reflect changes in the underlying
5. Suspension or restriction of trading and pricing relationships
Market conditions (e.g. illiquidity) and/or the operation of the rules of certain
markets (e.g. the suspension of trading in any contract or contract month because
of price limits or "circuit breakers") may increase the risk of loss by making it
difficult or impossible to effect transactions or liquidate/offset positions. If
you have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying interest and the future,
and the underlying interest and the option may not exist. This can occur when, for
example, the futures contract underlying the option is subject to price limits while
the option is not. The absence of an underlying reference price may make it difficult
to judge ?air?value.
6. Deposited cash and property
You should familiarize yourself with the protections accorded money or other property
you deposit for domestic and foreign transactions, particularly in the event of
a firm insolvency or bankruptcy. The extent to which you may recover your money
or property may be governed by specific legislation or local rules. In some jurisdictions,
property which had been specifically identifiable as your own will be pro-rated
in the same manner as cash for purposes of distribution in the event of a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all commission,
fees and other charges for which you will be liable. These charges will affect your
net profit (if any) or increase your loss.
8. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally linked
to a domestic market, may expose you to additional risk. Such markets may be subject
to regulation which may offer different or diminished investor protection. Before
you trade you should inquire about any rules relevant to your particular transactions.
Your local regulatory authority will be unable to compel the enforcement of the
rules of regulatory authorities or markets in other jurisdictions where your transactions
have been effected. You should ask the firm with which you deal for details about
the types of redress available in both your home jurisdiction and other relevant
jurisdictions before you start to trade.
9. Currency risks
The profit or loss in transactions in foreign currency denominated contracts (whether
they are traded in your own or another jurisdiction) will be affected by fluctuations
in currency rates where there is a need to convert from the currency denomination
of the contract to another currency.
10. Trading facilities
Most open-outcry and electronic trading facilities are supported by computer-based
component systems for the order routing, execution, matching, registration or clearing
of trades. As with all facilities and systems, they are vulnerable to temporary
disruption or failure. Your ability to recover certain losses may be subject to
limits on liability imposed by the system provider, the market, the clearinghouse
and/or member firms. Such limits may vary, you should ask the firm with which you
deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ not only from trading in an open-outcry
market but also from trading on other electronic trading systems. If you undertake
transactions on an electronic trading system, you will be exposed to risks associated
with the system including the failure of hardware and software. The result of any
system failure may be that your order is either not executed according to your instructions
or is not executed at all.
12. Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances, firms are permitted
to effect off-exchange transactions. The firm with which you deal may be acting
as your counterparty to the transaction. It may be difficult or impossible to liquidate
an existing position, to assess the value, to determine a firm price or to assess
the exposure to risk, For these reasons, these transactions may involve increased
risks. Off-exchange transactions may be less regulated or subject to a separate
regulatory regime. Before you undertake such transactions, you should familiarize
yourself with applicable rules and attendant risks.