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DERIVATIVES
Derivative is a financial instrument whose value depends on the value of one or multiple underlying assets. Derivatives are made into various types of contracts, which clearly state the rights and/ or obligations of related parties regarding the payment in cash and/ or transfer of underlying assets at a pre-defined price and at a pre-determined point of time in the future. 
There are 04 major types of Derivatives:
  Forwards
  Futures
  Options
  Swaps

RongViet offers a full range of products related to Derivatives based on the principle of confidentiality, integrity, accuracy and timeliness so that it can help clients have easy access to this financial instrument.

     MARGIN PRINCIPLES
1.  Initial Margin: is the minimum deposit that a client needs to make to open new positions as well as maintain open positions, except for counter trades.
 
 Initial Margin (IM) = No. of Contracts * Market Value * Contract Multiplier * Margin Ratio 
Index Futures Government Bond Futures
Contract Multiplier 100,000 10,000
Rong Viet’s Margin Ratio 15% 2.5%
2. Variation Margin: is gain or loss of open positions on the account within a trading session.
 Variation Margin (VM) = Price Differential * No. of Contracts * Contract Multiplier 
Assuming that the current trading day is Day T, price differential is definded as below:
Open Position Intraday Closed Position
 Opened before T Market price on T – Settlement price end of T-1 Settlement price of a position closed T - Settlement price end of T-1
 Opened on T Market price on T – Settlement price of a position opened on T Settlement price of a position closed on T Settlement price of a position opened on T
3. Delivery Margin and Bond Futures Final Settlement 
Date Long Position Short Position
E-3 DM Ratio 2.5% DM Ratio 2.5%
E-2 DM Ratio 2.5% DM Ratio 2.5%
E-1 DM Ratio 2.5% DM Ratio 2.5%
The Client must deposit deliverable bonds for the full payment. If not, Rong Viet will close out corresponding positions after this period. In case of failure to close out position, the contract is considered to be insolvent and the Client must pay compensation fee as prescribed
E (Last trading date) DM Ratio 5%
The Client must deposit cash for the full payment before 3pm, after this period the contract is considered to be insolvent and the Client must pay compensation fee as prescribed
DM Ratio 5%
Delivery Margin (DM) = No. of Contracts * Settlement Price * Contract Multiplier * DM Ratio
Final Settlement Value  = No. of Contracts * Contract Multiplier * (Final Settlement Price * Conversion Factor  + Accrued Interest * 100,000)
 
Compensation Value = 5% * Final Settlement Price * Contract Multiplier * No. of Insolvency Contracts
4. Maintenance Margin: is the total margin a client must have to maintain open positions in a trading session.
 Maintenance Margin (MR) = Initial Margin (IM) + Variation Margin (net loss VM) + Delivery Margin (DM) 
Note: only net loss VM is calculated in MR.
     SUPERVISING ACCOUNT RATIO
1.  Account Ratio: is the ratio between maintenance margin (MR) and total equity.
 Account Ratio = MR/Total Equity 
2. Warning Levels
     POSITION LIMIT
Position limit is the maximum number of future contracts having the same underlying assets but different expiration months which client is permitted to maintain in each derivatives trading account.
Types of Account Index Futures Government Bond Futures
Individual Investor 5,000 Contracts N/A
Insitutional Investor 10,000 Contracts 5,000 Contracts
Professtional Investor 20,000 Contracts 10,000 Contracts
     TAX
 Tax = Trading value per trade* Tax rate 
Tax rate is 0.1%.
Trading value per trade = Contract settlement price * Contract Multiplier * No. of contracts * Initial Margin at VSD)/2
Index Futures Government Bond Futures
Initial Margin at VSD 13% 2.5%
     FEE SCHEDULE
Fee Schedule
     DEFINITIONS 
Terms Explanation
Close Position Open an opposite position to an existing one having the same underlying assets and expiration date.
Contract Price Price matched between orders via the trading system of Stock Exchange as well as transaction price of a contract.
Final Settlement Price Price of the underlying asset that is determined by the Stock Echange and Clearing House on the last trading day of derevatives based on that asset to calculate gain/loss arising on the last trading day.
Closing Price Price of a derivative contract that is determined by the Stock Exchange to to calculate gain/loss arising at the end of a day of each contract.
Position Limit Maximum number of future contracts having the same underlying assets but different in expiration months that a client is allowed to hold in each derivatives trading account.
Margin Call Request an investor to deposit additional money when the margin is lower than maintenance margin.
Mark to Market A daily process happening at the end of a trading day, in which, the Stock Exchange will determine closing price for each contract. Investor’s trading account will be reconciled the gains/losses based on portfolio and positions held.
Contract Multiplier Coefficient to convert the value of index future contract into amount of money. For index future contract, because the unit is index point, there must be a coefficient to convert these points into value of money.
Margin Amount of cash and stocks accepted as deposit for an investor to trade to ensure the investor’s ability to pay for the contract.
Initial Margin Amount of cash an investor must deposit at a brokerage company for each contract before any trading
Maintenance Margin The minimum amount of cash in an account for each open position an investor is holding.
Delivery Margin The margin an investor must deposit from the last trading day (E+1) and maintain until the last settlement day (E+3) to assure the contract settlement obligation, replacing the initial margin.
Open Position Enter either position of a derivative contract
Last Trading Day The last day on which a contract is traded in its expiration month.In the end of the last trading day, all positions held of an expired contract will be settled; the contract will be delisted and a new one having the same underlying assets with the longest expiration period based on the regulations will be listed.
Underlying Asset Assets which are objects for dealing in the derivative contract.
Margin Asset Assets accepted as margin to trade derivative contract.
Expiration Month Month in which a derivative contract is expired and delisted.
Liquidate Position Settle in accordance with the contract upon expiration.
Clearing Members Institutions accepted as members buy clearing house to do clearing service.
Trading Members Institutions approved by the Stock Exchange as member to conduct derivatives trading business.
Underlying Market Trading market of underlying assets.
Clearing House The institution providing clearing and settlement service for derevatives trading, namely Vietnam Securities Depository.
Position Trading status and volume of derevatives an investor is holding at the specific time.
Long Position The act of buying a derivative contract by an investor is opening a long position
Short Position The act of selling a derivative contract by an investor is opening a short position
     FAQ

Q1: Comparison of HOSE listed stocks' trading regulations and derivatives market's trading regulations
Q2: How to buy futures? How to sell futures?
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.
Q3: Why is there position limit?
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.
Q4: How are futures contracts closed out?
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.
Q5: How are futures contracts settled?
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.
Q6: Why chooses futures?
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 abovementioned 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.
Q7: What is the benefit of leverage of futures?
Leverage is a main differenece between derivatives and underlying securities. Basiacally, 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 100,000VND for each index points, it will be:
Value of 01 contract equals to: 703 points * 100,000 VND/ index point = 70.3 mln VND

However, if the required initial margin is 13%, instead of 70.3mln, the investor only has to put up:
70.3mln 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.
Q8: What are the risks of futures?
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.
Q9: Futures versus single stock trading?
Investors can trade futures instead of buying underlying securities (single 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.

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