This 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.
Futures
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.
Options
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 then
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 of 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 interest.
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 "fair" 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 has 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 enquire 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 clearing house
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 fair 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.