Martin Lee @ Sg
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Trading the Singapore Market Using Futures

One way of trading the Singapore market is through the use of futures, which allows you to take either a long or short position in a cost efficient manner.

On the SGX derivatives board, there is both the STI futures and MSCI Singapore futures (SiMSCI). Options on the SiMSCI are also available.

Each point of the STI futures is equivalent to $10, so one contract size of STI futures at 3200 points is worth $32,000. The STI futures is hardly traded and suffers from a wider spread and poor liquidity.

The SiMSCI, on the other hand, is the instrument that is more widely traded. For example, the SiMSCI (Aug 2010) had 228,287 contracts traded in Aug 2010 while the corresponding STI futures only had 6 contracts traded over the same period of time.

The MSCI Singapore Index has a basket of 30 stocks and tracks the Straits Times index (STI) very closely. In fact, the MSCI Singapore Index has a 99.9% correlation with the STI over a period of two years, and a 99.6% correlation over five years.

The current value for the SiMSCI November 2010 contract is about 377. Each point of the contract is equivalent to $200, so one contract size of SiMSCI at 377 is worth $75,400.

To get an idea of how cost efficient futures are, we can take a look at the broker commission charges. The charges for the STI futures is S$10/contract while that for the SiMSCI is S$12/contract.

If you trade $76,000 worth of shares, brokerage at 0.25% will come up to about $190. Compare that to S$12 for the SiMSCI.

One note of caution though.

Futures can be highly leveraged. To open one contract of SiMSCI, you require a margin of less than $3000. Trying to buy SiMSCI with a capital of just $3000 would of course be suicidal in the long run. You will need a much higher capital base than $3000 to trade the SiMSCI.

Trading on leverage comes with high risks. Tight risk management and money management rules will need to be adhered to.

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