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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.
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.
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