What is a mini-future?

A mini-future is the offspring of a standard futures contract. In comparison to its parent, the future, the mini-future is a recent creation, and has gradually become more widely used among a broader investor base.

What is a future?

A future is an agreement to buy or sell a quantity of assets (stock market indices, commodities) at a predetermined price and at a future date. This type of agreement is said to have a very long history, since some experts have discovered evidence that they were used in Mesopotamia. We know that they were widely used in Japan from the beginning of the 18th century: in fact, the Dojima rice exchange is considered to be the world’s first futures market. Their purpose at that time was to protect against future uncertainty, as a strategy to hedge against risk.

More recently, speculative strategies have become more popular and many investors use futures as trading instruments.

…and a mini-future?

The first mini-future contracts were created at the beginning of the 1990s and were over the S&P 500 index. Initial investments in standard S&P 500 futures contracts had become too large, as had the margins required to trade in the futures (investors had to buy US T-Bills with a minimum value of US$ 1 million). The first mini-futures, with a value of only one-fifth of the standard futures contract based on this index, were thus made available to the public.

The mini-futures on Swissquote’s Swiss DOTS platform

The Swiss DOTS platform has already provided access to 15’500 mini-futures for some time now. It should be noted that these certificates first appeared on the Swiss market around 2006, after proving themselves in Germany and the Netherlands, and they are not quite the same as those that were being used in the United States in the 1990s. Essentially, the buyer can buy a product if they expect the value of the underlying asset to rise (a Mini Long) or to protect themselves against a fall in the value of the underlying asset (a Mini Short).

The term « underlying asset » covers all sorts of asset classes. The underlying asset may be a specific share, a stock market index, a currency or one of a number of commodities.

What is the value of a mini-future certificate?

The market value of a mini-future is equal to its intrinsic value, i.e. the difference between its strike price (the financing level) and the price of the underlying asset. Unlike an option, its value does not reflect any time value (as the certificate has no expiration date) or volatility.

How does it differ from a future?

Mini-futures are structured so that there are no margin calls, unlike traditional futures. They also offer leverage, as the buyer only partly pays for the investment, with the remainder being financed by the issuer. If the price changes by just one per cent, the value of the mini-future may move much more dramatically, depending on the leverage effect introduced into the product by the issuer.

Then there is the financing level. Although the buyer does not need to create a margin account (for example, containing the notorious T-Bills), there is nevertheless a cost. The issuer of the mini-future will include this « loan » in the price.

Like all good things, mini-futures have a number of specific features, in particular a knock-out mechanism. In this sense, the mini-future is similar to a knock-out warrant. This knock-out threshold is calculated as a percentage of the reference threshold. If that threshold is breached, the product immediately expires. Investors generally receive partial repayments, but may also lose all the funds they have invested.

What is the attraction for investors?

Mini-futures are financial instruments that — with no margin call and a stop-loss mechanism — allow investors to implement a strategy based on the rise or fall in the value of an underlying asset. They do not require a significant investment and the investor’s risk is capped at their initial investment.

Example

Jack buys 100 Novartis shares at the price of CHF 81.82. He invests CHF 8’182.

Jack places a stop-loss order at the price of CHF 72.59. HIs risk is therefore (81.82–72.59) = 9.23 x 100 shares = CHF 923.

Simon buys 1’000 Long mini-futures with a stop-loss order at CHF 72.59 at the price of CHF 1.17 (ratio of 10). He therefore invests CHF 1’170. His risk is equal to the amount invested.

What would happen in the following three scenarios?

The gains and losses vary in the three scenarios but are, in all scenarios, capped at the level of the stop-loss. In percentage terms, we can see that, where the share price rises, Jack’s return is 10% while Simon’s is 70%. However, where the share price falls, Jack loses 11% and Simon loses between 78% and 100%.

There are a number of situations in which mini-futures may be attractive to investors:

• Where investors speculate that the value of the underlying asset will significantly rise (or fall), but want to limit the risk of loss via the stop-loss mechanism included in the product.
• For a small initial investment, investors are able to diversify their portfolios. Instead of buying 100 Novartis shares for more than CHF 8’000, they could buy 5 different mini-futures (e.g. Novartis, SMI, etc.) for the same amount.
• Investors may also want consider purchasing a Short mini-future to hedge a portion of the risk of their portfolio.

In conclusion

The platform provided by Swissquote and its partners offers a sufficiently wide range of mini-futures to meet the needs any investors and speculators.

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