FUTURES AND OPTIONS RISK
DISCLOSURE STATEMENT
This brief statement
does not disclose all 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:
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.
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:
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
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 cash settlement or in the purchase
acquiring or delivering the underlying interest. If
the option is on a future, the purchaser will
acquire a future 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
transactions cost. If you are contemplating
purchasing deep-out-of-the-money options, you should
be aware that the chance of options becoming
profitable ordinarily is remote.
Selling ("writing" or
"granting") an option generally entails considerably
greater risk than 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
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:
Term and conditions
of contracts
You should ask the firm
with which you deal about the terms and conditions
of specific futures or options which you are trading
and associated obligations (e.g., the circumstances
under which you become obligated to make or delivery
of underlying interest of a futures contract and, in
respect of option, 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.
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.
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 had been specifically
identifiable as your own will be pro-rated in the
same manner as cash for the purposes of distribution
in the event of shortfall.
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.
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
inquire 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
affected. You Should ask the form 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.
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.
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.
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.
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.
ADDITIONAL INFORMATION
The following legal information has been furnished
for your convenience. Managed Account Research, Inc.
may modify any of the information, and such
modifications shall take effect immediately upon
their posting upon this Web site.
