Futures and options will make good additions to the trading platform of capital markets, argues Charlie Rubin, a consultant on international securities and derivatives.

Rubin, who was responsible for the modification of the New York Stock exchange settlement system, which became the system for the New York Futures Exchange was speaking at the Fifth Conference on Investments and the Capital Market put on by the Jamaica Stock Exchange (JSE)at the Jamaica Pegasus Hotel this week.

Rubin argued that futures and options offer greater diversity in trading and more opportunities as there are more financial products to trade. He said the introduction of a futures trading on the New York Exchange resulted in an increase of over 8 times the number of trades done before its introduction and 30 times the trade value.

Other benefits he said includes reducing the market risk to an investor who can take advantage of either narrowing or widening interest rates, reducing currency risks and price risks.

Eliminating price risk

A futures is a contract to buy or sell a commodity at a specified date in the future and at a specified price. Rubin says this can eliminate price risk as it locks in the price now that you will pay in the future. A futures contract gives the holder the obligation to buy or sell under the terms of the contract, whereas an option grants the buyer the right, but not the obligation, to do so. Therefore, the owner of an options contract may exercise the contract, but both parties of a futures contract must fulfil the contract on the settlement date. This is especially useful for commodity traders.

It allows commodity producers to avoid or eliminate the price risk for their product. So they can sell now at a certain price, even though they will deliver the product at a future date and can lock in the price now that they are going to buy at based on market rates and other considerations.

“It allows you to buy individual securities or the entire market with high leverage and there is no downside or adverse risk to the stock market,” Rubin said of futures.

Will bring in more players

Rubin also added that futures and options can introduce more players within the capital markets, even those who may not have the money up front, as is required for the stock market which is a spot or cash market.

“If you are a pension manager or a manager where you get contributions weekly or monthly, if you like the market now, what futures and options can do, is allow you to buy the shares now even though you don’t have the money.

“The money is going to come in because you know its a pension fund. So you can take advantage of your opinion on the market by buying now even though you don’t have any money,” Rubin said.

Allows managers to reduce risks

“It also allows asset managers or business managers to reduce their risk, reduce market risk or currency risk.” You can protect your assets, you can protect your position with futures and options and you can become more versatile in trading”, Rubin said.

Greater earnings

Traders and brokers can also earn more from the addition of a futures and options market as it opens up the opportunity to generate additional interest income.

“You can take advantage of either narrowing interest rates or widening interest rates. If you have a long term business idea and you think the spread is too narrow you can take advantage of that with futures. If you think it is going to widen you can also take advantage of that with futures. If you are wrong you lose money, but if you are right you make money.”

Rubin went on to say: “If you are a broker you get more commissions, more restitution and settlement fees than if you are a stock exchange repository.”