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Introduction to Gold Futures

A Gold Futures contract consists of two important componentsa futures contract and the gold bullion. The combination of these two components creates a futures contract with the gold bullion as the underlying asset.


Characteristics and Specifications of Gold Futures

TFEX has defined the characteristics and specifications for SET50 Index Futures, as follow:

Underlying Asset
The underlying asset of a Gold Futures contract is gold bullion with a purity of 96.5%the most traded standard bullion gold in Thailand.

Contract Size
There are 2 contract size; Gold Futures contract size of 50 Thai Gold Baht weight (762.2 grams) and Mini Gold Futures contract size of10 Thai Gold Baht weight (152.44 grams). That means if the price of Gold Futures traded at Bt22,000, the value of the contract is 22,000 x 50 = Bt1,100,000 and Mini Gold Futures traded at Bt21,000, the value of the contract is 21,000 x 50 = Bt210,000

Contract Months
The TFEX has set the contract months (delivery months) of Gold Futures to 6 even months in the calendar year; February, April, June, August, October and December. The contract months allowed to trade the Gold Futures will always be the three nearest even months. For example, if today is February 2, 2011, the outstanding futures contracts being traded will be for the following contract months only:

  • February 2011
  • April 2011
  • June 2011

However, on the last trading day of the nearest contract, a new further contract will be opened for trading. Assuming that today is the last trading day for the contracts expiring in Feb 2011, a new contract expiring in Aug 2011 will automatically be opened for trading.

Tick size
The tick size for a Gold Futures contract equals Bt10. That means that the price difference between each order cannot be less than Bt10.

  • Examples of valid price ranges are Bt22,000, Bt22,010 and Bt22,020 etc.
  • Examples of invalid price ranges are Bt22,005, Bt22,014 and Bt22,029 etc.

Ceiling/Floor
TFEX has set the daily ceiling and floor for Gold Futures to +/-10% of the previous days settlement price. However, this ceiling and floor will be changed to +/-20% of the previous days settlement price if the price of the nearest month Gold Futures reaches +/-10%.
The trading day is divided into four sessions

Session

Details

Periods

1

Pre-open

9:15 9:45

2

Morning session

9:45 12:30

3

Pre-open

14:00 14:30

4

Afternoon session

14:30 16:55

5

Pre-open

19:15 19:30

6

Night session

19:30 22:30

Last Trading Day
The last trading day of each contract is the day prior to the last exchange business day in the contract month. Examples are as follow:

Expirations Last trading days

February 2011

25 February 2011

April 2011

28 April 2011

June 2011

29 June 2011

August 2011

30 August 2011

October 2011

28 October 2011

December 2011

29 December 2011

Note also that on every last trading day the contract can be traded only until 16.30 hrs.

Final Settlement Price
The price will be based on the London Gold AM Fix Price, adjusted for the weight, purity and currency as per following details:

  • Weight: From troy ounce to Thai Gold Baht
  • Purity: From 99.5% to 96.5%
  • Currency: From USD to Bt
The calculation will be made using the below formula

Cash Settlement
For the sake of convenience, there is no physical delivery of a futures contract for gold bullion. Only cash settlement is made. Gains and losses from the contracts position will result in cash transfers to the customers account. When a contract is settled in cash, its position is declared closed.


Contract Code

Single Order
The contract code for a single order of a Gold Futures contract comprises three parts, as shown below:

Part 1

Part 2

Part 3

GF or GF10

Z

11


Part 1: Underlying Asset
The gold bullion is the underlying asset for a Gold Futures contractGF is used for 50Bt contract size and GF10 is used for 10Bt contract size.

Part 2: Contract Month
The symbol of each expiry month is represented by a letter, see below.

Contract Months

Symbol

Contract Months

Symbol

February

G

August

Q

April

J

October

V

June

M

December

Z

Part 3: Expiry Year
The last two digits of the expiry year are usedfor example, 11 for contract expiry year 2011 and 12 for a contract due to expire in 2012.

Examples of contract codes for SET50 Index Futures using a Single Order

Examples of contract codes for SET50 Index Futures using Combination Orders

Combination Order
The contract code of a combination order for Gold Futures comprises five parts, as follow:

Part 1

Part 2

Part 3

Part 4

Part 5

GF or GF10

V

11

Z

11

Part 1: Underlying Asset
As the gold bullion is the only underlying asset of a Gold Futures contract, GF is used for 50Bt contract size and GF10 is used for 10Bt contract size.

Part 2 and part 4: Expiry Months
Each expiry month is represented by a letter, see below.

Contract Months

Symbol

Contract Months

Symbol

February

G

August

Q

April

J

October

V

June

M

December

Z

Part 3 and part 5: Expiry Year
The last two digits of the respective expiry years are usedfor example, 11 for contract expiry year 2011 and 12 for a contract due to expire in 2012.

Examples of trading using a Combination Order

  • An investor sends an order to buy GFV11Z11 at price Bt50, which means the investor wants to buy GFZ11 and sell GFV11 simultaneously. The price of GFZ11 minus that of GFV11 must not exceed Bt50.
  • An investor sends an order to sell GFM11Q11 priced at Bt20, which means the investor wants to sell GFQ11 and buy GFM11 simultaneously. The price of GFQ11 minus that of GFM11 must not be lower than Bt20.
The contract codes of Gold Futures for all contract months.

GFG11J11

GFG11M11

GFJ11M11

GFJ11Q11

GFM11Q11

GFM11V11

GFQ11V11

GFQ11Z11

GFV11Z11

GFV11G10

GFZ11G10

GFZ11J10


Circuit Breaker

The TFEX has set the daily Ceiling and Floor for Gold Futures to ? 10% of the previous days settlement price. As soon as the price of the nearest month Gold Futures touches ? 10% of the previous days settlement price, a Circuit Breaker will be announced. If the trading hours continue after the Circuit Breaker is over, the Ceiling and Floor will be extended to ? 20% of the previous days settlement price.

For a Combination order, the Ceiling and Floor are set using the previous days settlement price of the far month minus that of the near month ? Bt200. The Ceiling is equal to the spread of the previous days settlement price of the farnear month +Bt200, while the Floor is equal that spread Bt200.

Contract Holding till Expiration

A Gold Futures Contract, that is held till expiration, will be marked-to-market at the end of the last trading day of that contract month. The investor will receive/pay the difference between the final cost and the final settlement price, while his/her position will be automatically closed.


Reportable Limit

As specified by the SEC and TFEX, all brokers must report name lists of clients that hold at least 1,000 contracts or equivalent in Gold Futures .The contracts will be computed from one single contract month and net of all contract months combined.


Trading Strategies

Directional Trading Strategy
A Gold Futures contract is an instrument that can help investors to speculate in both uptrend and downtrend gold markets. This is due to the fact that the Gold Futures contract does not need a physical transfer between contractors, but only a cash settlementthe process of receiving or paying the difference between the contract price and the final settlement price. As a result, investors can make the following transactions with convenience and efficiency:

  • Buy and sell in order to speculate on a market uptrend.
  • Short sell and buy back in order to speculate on a market downtrend.

Spread Trading Strategies
Besides the directional trading, investors can also apply spread trading strategies that involve trading two futures contracts simultaneously. Three common spread trading strategies are as follow:

1. Calendar Spread
Strategy Components

The calendar spread or, in other words, inter-month spread is a strategy that consists of

  • Long position in one futures contract
  • Short position in one futures contract (the same underlying asset, but a different contract month).

For Example?

  • Long GFV11 and short GFZ11 (Buy near, sell far)?
  • Short GFM11 and long GFQ11 (Buy far, sell near)?

Objectives and Strategies

  1. An investor is holding contracts with low liquidity and needs to close his positions.
    Example On February 1, 2011 Mr A has a long position in GFM11, but the gold price has dropped dramatically by that time, so he needs to close his position. However, the liquidity of GFM11, which is the furthest month, is very low.
    Therefore Mr A should take a short position either on GFG11 or GFJ11 for a similar amount for hedging (stop loss), then he can close out the two contracts later when there is enough liquidity.
  2. An investor has a long position in a contract and would like to close his position. However, the contracts in other series are trading at much better prices.
    Example On March 1, 2011, Mr A has a long position in GFJ11 and wants to close his position as the contract price has increased significantly. However, the price of another contract series, such as GFM11, is much higher comparable to that of GFJ11.
    Therefore, Mr A should short GFM11 for the same amount in order to hedge his position (lock in the profit), then close the two contracts later when the price of GFJ11 increases to the level of GFM11.
  3. Price Speculation
    Example The price difference of GFV11 GFQ11 now is equal to Bt50, but the investor expects the difference between the two contracts (GFV11 GFQ11) to decline.
    Therefore, the investor could short GFQ11V11 at Bt50 and close out his positions in the two contracts when the price difference (GFV11 GFQ11) declines by taking a long position in GFQ11V11.

Tips

  1. The transaction cost of this strategy is double that of a directional trading strategy.
  2. A combination order can be used with a calendar spread trading strategy.

2. Inter-Market Spread
Strategy Components
The inter-market spread consists of:

  1. Long position in X futures contract?
  2. Short position in Y futures contract (different underlying asset and type of market)?

The underlying assets for this strategy are those categorized in different types of markets, which can be referred below.

Market types of each underlying asset

Example

  1. Long GFZ11 and short S50Z11
  2. Short GFM11 and long PTTM11

Objectives of the strategy
The investor expects the return of one underlying asset to outperform that of another, which is of a different market type.

Example Mr A expects the return of gold bullion to outperform that of SET50 Index. The difference between their price returns in percentage points will increase.

Therefore, investors can apply Inter-Market Spread by:

  • Long GFM11 at a price of Bt14,000 for 3 contracts
    (total contract value is 14,000 x 3 x 50 = Bt2,100,000)
  • Short S50M11 at a price of 300 index points for 7 contracts
    (total contract value is 300 x 7 x 1,000 = Bt2,100,000)
In order to close the position, he can short GFM11 for three contracts and long S50M11 for seven contracts.

Tips

  1. The transaction cost of this strategy is double that of a directional trading strategy.
  2. The combination order cannot be used with a calendar spread trading strategy.

Commission fee

Gold Futures(50 Baht)
The commission for Gold Futures is set as a Sliding Scale respective to the daily contract number, VAT exclusive. For offline and Internet trading, the commission fees are as follow:


Mini Gold Futures(10 Baht)
The commission for Mini Gold Futures is set as a Sliding Scale respective to the daily contract number, VAT exclusive. For offline and Internet trading, the commission fees are as follow:

Examples

  • If an investor long GFQ10 10 contracts per day via Offline trading, the commission to be paid = 400 x 10= Bt4,000*
  • If an investor long GF10Q10 100 contracts per day via Internet trading, the commission to be paid = 73 x 100 = Bt7,300 *
*VAT exclusive

 
 
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