Understanding Derivatives On ASX: Index Futures And Sector Futures

Understanding Derivatives On ASX: Index Futures And Sector Futures

Derivatives are quite popular among investors in equity markets both in Australia and overseas. The derivative products derive their value from another underlying instrument. The underlying instrument could be listed security of a company or a market index. The suite of derivatives listed on ASX includes exchange-traded options, warrants and futures. The options and warrants markets cover the most liquid securities on ASX while Futures cover indices and other specialist underlying assets.

Derivatives like Index derivates are leveraged products which allow investors to hedge/gain exposure to an underlying index. On Australian Securities Exchange (ASX), ASX SPI 200™ index futures contract is the most popular index future.

Index futures are mainly traded by institutions to protect a domestic equity portfolio from short term market falls, arrange cost-effective exposure to an index while purchasing the underlying shares and bet on the market’s direction.

Trading ASX index futures offers benefits of Price transparency and liquidity. On Australian Securities Exchange (ASX), the transaction fees on trading of index futures is lesser as compared to the transaction fees which is incurred while buying or selling the basket of securities which are part of index. Index futures also offer benefits like- controlling counter-party risk, clearing guarantee and immediate trade confirmation.

Types of index derivatives

ASX Mini SPI 200 index futures – Launched in 2015, ASX’s Mini SPI 200 index futures provide trading exposure to smaller institutions and retail investors which better suits their needs. The also track the benchmark S&P/ASX 200 index as the headline SPI futures contract but with a lesser notional price.

ASX SPI 200 index futures– Traded on Trade 24 platform, ASX SPI 200 index futures are the benchmark derivative product for investors trading in the Australian equity index market, and they allow investors to gain exposure to Australia’s top 200 companies without having to buy or sell shares in every company in the index.

Sector Futures –

ASX sector futures allow investors to gain arbitrage exposure to the three largest sectors of ASX 200, i.e., Financials, Resources and A-REIT.

S&P/ASX 200 A-REIT index futures– These Futures are widely traded by fund managers, and they allow investors to gain exposure to listed vehicles classified as Australian Real Estate Investment Trusts (REIT).

S&P/ASX 200 Resources Index Futures – Launched in 2013, S&P/ASX 200 Resources Index Futures allow investors to gain and manage their exposure to the companies from the S&P/ASX 200 index which belongs to the energy sector or the metals and mining industry.

S&P/ASX 200 Financials-x-A-REIT Index Futures – These futures were also launched in the year 2013, and it allows investors to gain exposure to the companies from the S&P/ASX 200 index that are involved in banking, mortgage finance, and other financial services, except those companies that are classified as A-REITs.

The S&P/ASX 200 Resources Index Futures, ASX 200 Financials-x-A-REIT Index Futures and S&P/ASX 200 A-REIT Index Futures offer Potential arbitrage opportunities between sector futures and sector exchange-traded funds (ETFs), baskets of stock and ASX SPI 200 Futures and these futures also offers Liquidity in the form of a dedicated market maker.

Although ASX futures offers various offers various benefits of exchange-traded markets, trading ASX futures involve a number of risks also, which is why it is very important for investors to understand different types of Index derivatives and take trading positions considering their risk appetite.


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