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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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