Futures transactions

Information about risks with futures transactions (futures and options)

Futures transactions are not traditional capital investments, but highly speculative transactions. The risks of suffering losses are high up to and including total losses and beyond. Ongoing obligations may accrue too. Your orders to trade in futures transactions can therefore only be traded after you have received thorough information about the risks. Please ensure that you are aware of the circumstances of futures transactions and how they work. Particularly take note of the risks arising from the costs, as they may exclude any opportunity of making a profit.

List of contents:

  1. General market or speculation risks, particularly with futures transactions
  2. More detailed basic information about risks with futures transactions
  3. Increasing the risks because of transaction costs
  4. Special risks with share options
  5. Special risks from contract partners
  6. The inevitability of risks

1. General market or speculation risks

1.1. Risk of making a complete loss

The temporary rights acquired in conjunction with this business may expire (risk of making a complete loss) or suffer a loss in value. Futures transactions are temporary in nature. The development desired by the investor must take place within a restricted period (so-called term). Therefore, take note of the term of any futures transactions. A complete loss and the expiry of a futures transaction at the end of the term is not an exception at all.

Certain obligations may accrue with particular futures transactions and they go far beyond the investment and the normal assets of the investor and may even include private bankruptcy. We are therefore not talking about traditional capital investments here.

1.2. Risk of losses when purchasing options

The risk of making a loss when purchasing options exists in the options premium that is paid and the transaction costs that are incurred. A complete loss occurs if the option expires at the end of the term. Partial loss occurs if the option does not develop in line with expectations and is then sold without having reached the profit zone.

1.3. Risks of making losses with futures transactions and when selling options (covered option transactions)

In the case of futures transactions and when selling options, the risk of making a loss cannot be determined in advance and may go far beyond the securities that may have been put in place. If a customer does not provide these other securities when requested to, he must expect his open futures transactions to be closed immediately and the immediate use of the securities already made available. Any losses that then occur may lead to additional debts and therefore involve the remaining assets up to and including private bankruptcy.

A loss, which cannot be determined in advance, also occurs if the future is evened up by a counter-transaction without the profit zone having been reached or if a counter-transaction cannot take place to even things up. If there is no counter-transaction, the speculator must then meet the obligation arising from the futures transaction at the time determined in advance: he must accept this and pay for this if the basic value owed has been sold. The costs of intermediate storage for goods until their successful onward sale may also increase the losses. With a future that involves the sale of the basic value owed, there is an obligation to provide the basic value owed. The speculator must cover himself in some other way with the basic value (with the same quality). These purchasing costs increase losses and cannot be determined in advance.

1.4. Spread or combined transactions

So-called spread or combined transactions are not necessarily less risky than individual items.

1.5. Risk of the supply

If a futures transaction is exercised, there may be an actual physical delivery of the basic value required, to which the futures transaction relates. In this case, the conditions of this market must be heeded. Any onward sale of the goods may only be difficult in certain circumstances and involve high costs.

1.6. Stop orders

It may not be possible to activate any transactions, which are supposed to exclude or restrict the risks arising from futures or share transactions (e.g. stop orders), or only at a market price that would entail losses. This is particularly true of so-called loss restriction orders (stop orders).

2. More detailed basic information about risks in futures transactions

2.1. Basic elements about the risks of making losses with futures transactions

The rights, which you acquire through futures transactions, may expire or lose in value, because the transactions always only acquire temporary rights – so there is a risk of expiry or a loss in value. The shorter the deadline, the greater the risk can be.

Incalculable losses

In the case of liabilities arising from futures transactions, your risk of making a loss may be indefinable and also cover your other assets and go beyond the securities that you have provided.

A lack of opportunity to safeguard matters

It may not be possible to activate any transactions, which are designed to exclude or restrict risks with futures transactions, or they only be available at a price that brings you a loss.

Loan risk

Your risk of making a loss increase if you take out a loan for your futures transaction.

Currency risk

In the case of a futures transaction, where your obligations or claims are made in a foreign currency or different accounting unit, there is an additional risk of making a loss as a result of currency fluctuations.

2.2. The risks with individual types of transactions

2.2.1. Purchasing options Purchasing an option on securities, foreign exchange or precious metals

The transaction: If you purchase options on securities, foreign exchange or precious metals, you acquire the claim to delivery or acceptance of the quoted basic values at a price that is set for purchasing the option.

Your risk: Any change in the market price of the basic value (e.g. the shares) may reduce the value of your option: in the case of a purchase option (call), in the case of a sales option (put) if the market value of the subject of the contract increases in value. A reduction in value takes place in a manner that is disproportionate to the change of the market value of the basic value – up to and including the total loss in value for your option. Even if the market price of the basic value does not change, the value may diminish, because it is affected by other price formation factors (e.g. term or frequency and intensity of the price fluctuations in the basic value). Because of the restricted term of an option, you cannot rely on the fact that the price of the option will recover again in good time. If your expectations regarding market developments do not come true and you decide not to exercise the option or miss the opportunity to do so, your option will expire with the expiry of the term. Your loss will then consist of the price paid for the option (the option premium) plus the transaction costs that arose for you. Purchasing an option on financial futures contracts

The transaction: When purchasing an option on a financial futures contract, you acquire the right to conclude a contract with conditions that are set in advance and this obliges you to buy or sell e.g. securities, foreign exchange or precious metals on a set date.

Your risk: Even this option is subject to the risks described in After exercising the option, you are subject to new risks: they are governed by the financial futures contract that has been agreed and may go far beyond your original investment (i.e. the price paid for the option). You then face additional risks arising from the futures transactions described below, which have to be met on a set date.

2.2.2. Selling options and futures transactions, which have to be met on a set date on a set date and selling a purchase option on securities, foreign exchange or precious metals

The transaction: As a seller on a set date, you take on an obligation to supply securities, foreign exchange or precious metals at an agreed purchase price. As the seller of a purchased option, you only face this obligation if the option is exercised.

The risk: If the market prices increases, you must still deliver at the price set earlier, which may significantly be below the current market price. If the subject of the contract, which you have to supply, is already in your possession, rising market prices will no longer benefit you. If you wish to purchase it later, the current market price may be significantly above the price set in advance. Your risk lies in the price difference. This risk of making a loss cannot be determined in advance, i.e. is theoretically unlimited. It may go far beyond the securities, which you have provided, if you do not own the item to be delivered, but only wish to buy it when it is due. In this case, considerable losses may accrue for you, as you may have to make your purchase at very high prices, depending on the market situation, or have to make compensation payments if it is not possible to purchase the item in advance.

Please note: If you own the item that is the subject of the contract, which you have to deliver, you are protected from any losses regarding future purchases. But if these values are completely or partially blocked for the term of your futures transaction (as securities), you cannot access them during this time or to even out your futures contract and not sell the values either in order to prevent losses if the market prices fall. Purchasing on a set date and selling a sales option on securities, foreign exchange or precious metals

The transaction: As a purchaser on a set date or as a seller of a sale option, you have to accept securities, foreign exchange or precious metals at a set price.

Your risk: Even if the market prices fall, you have to accept the purchase item at the agreed price, which may then be considerably higher than the current market price. Your risk lies in the difference. This risk of making a loss cannot be determined in advance and may go beyond the securities that you have provided. If you intend to sell the values after accepting them immediately, you should note that you may find it difficult to find a buyer or not find one at all, depending on how the market has developed. Selling an option on financial futures contracts

The transaction: When selling an option on a financial futures contract, you have to conclude a contract at conditions fixed in advance and you are then obliged to purchase or sell e.g. securities, foreign exchange or precious metals on a set date.

Your risk: If the option that you purchased is exercised, you run the risk of being a seller or purchaser on a set date, as described in sections and

2.2.3. Option and financial futures contracts with margin compensation

The transaction: In the case of many futures transactions, cash compensation is the only thing available. This particularly applies to:

Your risk: If your expectations are not met, you have to pay the difference, which exists between the market price that formed the basis at the time of the contract and the current market price when your transaction become due. This difference makes up your loss. The maximum amount of your loss cannot be determined in advance. It may be far beyond the securities that you have provided.

2.3. Other risks from futures transactions

2.3.1. Futures transactions with currency risk

The transaction: If you enter a financial future contract, where your obligation or the counter-performance that you claim takes place in a foreign currency or accounting unit or the value of the subject of the contract is determined by this (e.g. gold), you are exposed to an additional risk.

Your risk: In this case, your risk of making a loss is not only coupled to the development in value of the subject of the contract that forms the basis here. Developments in the foreign exchange market may also be the cause of additional incalculable losses. Fluctuations in exchange rates can:

2.3.2 Transactions excluding or restricting risks

Do not rely on the fact that you can conclude transactions at any time during the term, through which you can compensate for or restrict the risks arising from the futures transactions. Whether this option exists depends on the market circumstances and also on the type of your financial futures contract. It may be true that you cannot complete a relevant transaction or not at a favourable market prices – leading to losses for you.

2.3.3 Making use of loans

Your risk increases if you particularly finance the purchase of options or the fulfilment of your delivery or payment obligations arising from futures transactions through a loan. In this case, you have to not only accept the loss if the market develops against your expectations, but also pay interest on the loan and pay it back. So never rely on the fact that you can pay the interest on the loan and pay it back from the profits of your futures transactions, but check your economic circumstances before agreeing to the transaction to see whether you are able to pay the interest and possibly pay off the loan at short notice, if losses accrue rather than profits. Futures transactions are not suitable guarantees for taking out loans and should not be financed with loans.

2.4. Providing security with securities

The risks arising from the transactions mentioned above do not change if the rights and obligations are secured by securities (e.g. option certificates).

3. Increasing the risks because of transaction costs

3.1. Negative effects of costs

Transaction costs for private speculators are not taken into account when the stock exchange experts set the price. The costs for our activities have a negative effect on the financial results of the transactions and increase the general risk of futures transactions. You can see our costs in the fees agreement. All the fees impair the opportunities of the transaction, as the costs have to be earned again through the appropriate development in market prices in favour of the customer in the market place. The development of market prices required for this is above the scale of the development of market prices, which stock exchange experts consider to be realistic.

This is particularly the case with futures transactions. The investor must take into account that in the price, which the stock exchange participants grant for an investment object, the opportunities are taken into account too. The stock exchange price therefore denotes the framework for a risk area, which is viewed as reasonable for the investment transaction by the market. The stock exchange price therefore equals the value of the opportunity of making a profit, which is granted to the investment object. In the case of options, e.g. the stock exchange premium denotes the value of the opportunity of making a profit and the scale of the risk area, which are granted to the option in the view of the stock exchange participants. Specialist stock exchange traders, whose estimates form the prices and the stock exchanges and futures markets, do not take into account the transaction costs for private speculators. The price formation on the markets therefore only reflect the opportunities and risks in a form that is still reasonable for professional traders. These costs are not taken into account by specialist stock exchange traders in this estimate.

Any costs charged therefore change the already speculative estimate of the professional market participants, as reflected in the stock exchange price, unilaterally to the detriment of the speculator. The assessment and the fundamentals of the futures transactions therefore fundamentally change due to the costs. A far higher price fluctuation is therefore necessary than the already speculative expectations granted by the professional stock exchange traders because of the costs of obtaining profits. The higher the transaction costs, the lower the opportunities of making any profits, until they disappear completely. If you engage in repeated speculation and are successful in the early stages, in the end you must assume that a complete loss will occur. Even if you obtain positive results in the initial transactions, the risk of making a loss increases with every ongoing transaction for the investor. Overall, it should be said that most investors in these markets make a loss.

3.2. Special risks because of high costs – poor prospects in the transactions

These risks become even more severe if the share of the costs is particularly high. You can assume that the costs will be particularly high if costs are incurred, which amount to more than 5% of the net investment. If high costs are incurred, they practically exclude the possibility of you making a profit in the transaction. It is completely improbable that the transaction, which forms the basic business, will be able to develop in such a way that is necessary in order to achieve any profits in the end. The statements on the effects of costs therefore need to be heeded particularly carefully. Otherwise, you face the possibility of making a complete loss.

3.3. Effects of our costs

We charge commission amounting to an absolute sum for our work and this is incurred for each contract individually. A transaction may cover several contracts and commission is payable for each one. The price of an option, the premium, however, has a different amount, depending on the circumstances of each option. The commission that we charge may well account for more than 5% of the pure option premium and therefore be viewed as high costs. In the case of other futures transactions, like futures or sold options, this may also be case taking into account the net expenditure required there. The transaction costs to be paid (e.g. commission/brokerage fees, commission, payments) may possible be greater in the case of options with a lower premium (e.g. options involving money and/or a short residual term) than the premium needing to be paid. You therefore need to take account of the costs and consider whether the transaction makes sense in the light of the costs.

3.4. Increase in costs because of other financial service companies involved

If you engage other financial service providers (e.g. advisers), other costs may be incurred. These service providers charge their own costs, which first have to be earned. This needs to be taken into account in assessing the cost-effectiveness of the transaction.

3.5. Increase in the risk with initial losses and excluding the possibility of making any profits

If the first investment incurs losses, an extraordinarily high price movement in the starting price in a futures transaction is necessary just to reach the financial starting point again. It is completely uncertain whether these kinds of price movements will occur during the term of these transactions. If there are any further losses, and any follow-up transactions, the market movements required to achieve a positive result in terms of your balance increase to a degree that not only excludes the possibility of achieving a positive result at the end of your speculation, but automatically leads to losses. If initial losses occur, you can normally assume that there will be a loss at the end.

3.6. Increase in the risk through a high number of transactions (excessive charging of commission)

If the payment depends on the transaction, there is a conflict of interests between the financial service provider and customer, as the financial service provider earns with each transaction. He or she is therefore interested in trading as many transactions as possible. He or she may then be tempted to perform as many transactions as possible in the interest of earning a lot of money without taking into account the customer’s interests, even if they make no sense for the customer. Transaction costs may be too high in absolute terms in relation to the market investment or relatively so because of frequent, economically senseless entry and exit manoeuvres into and out of transactions (excessive charging of commission, “churning”).

This may have its origin in one-sided information provided by the customer with preference for the commission interests of the financial service provider, who receives a share of the commission. But it is also possible that e.g. loss restriction measures have been calculated too low for the expected fluctuations in prices for the transaction (e.g. stop orders). This may lead to hectic entry and exit measures, with the result that costs are repeatedly incurred and they consume the capital that has been invested without major losses having occurred on the basis of changes in the markets. This effect is particularly felt with low option premiums, as the costs are then relatively high proportionately. These kinds of cases mean that there is no change of making a profit and losses are predestined as a result of the transaction costs. This risk may also occur if you always follow the suggestions and advise of a third party, e.g. us as your supporting financial service provider when making your trading decisions. You should take into account this risk when making your trading decision and making use of suggestions. Please note that this conflict of interest also occurs with us on the basis of payments dependent on transactions.

3.7. Risk with reimbursements

If the financial service provider receives reimbursements from a different company, there is initially a risk that it will not search for or arrange the investment, which would be the best for the customer, but an investment, which attracts the highest reimbursement levels. There is also a danger that the financial service provider will charge excessive commission if the reimbursements depend on the amount of transactions.

4. Special risks with share options

In the case of share options, there are some special features and differences to futures transactions with other underlying values. A share option always relates to a particular share. The data on the share and its earnings (dividends) must therefore be taken into consideration and whether the underlying value is just a second-line stock or a standard value. The company data of the public limited company and its development should be taken into consideration. Any news about the company may have long-term effects on the options and their shares. The price formation of the share option is largely determined by the price formation of the share in question. If the share price changes, there may be disproportionate changes to the option price. You should be aware that, when exercising a purchase option, you may also come into possession of the physical shares. A sale of the shares may be made harder because of a tight market and/or associated with losses.

5. Special risks arising from contract partners

5.1. No risk minimisation by the supervisory body

The supervision provided by the FCA, or by the BaFin (German supervisory body), or by any other supervisory body does not exclude or reduce the risks arising from the transactions or their performance. They continue to be present.

5.2. Risk of applying foreign law

The transactions are often traded by an institute managing the account abroad or using the involvement of a foreign financial services provider from the customer’s point of view. This may mean that you have to assert claims in line with a legal system that is foreign to you and protective measures in your domestic laws may possibly not be effective.

6. Inevitability of the risks

The risks with futures transactions are considerable. They exist in each case, even if you perform the transactions through us. Risks cannot be excluded by advice from financial service providers or through any technical equipment or through computer programmes. If anybody asserts the opposite, this is not correct. If you still wish to trade in futures transactions, you must be aware of these risks.


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