Futures Contracts and Forward Contracts: Which Tool Is Suitable for Vietnamese Investors?

Why Is It Important to Understand Derivatives Contracts?

Since the Vietnam Securities Exchange listed VN30 futures index in 2018, this instrument has gradually become a choice for experienced investors. However, most Vietnamese investors still lack a clear understanding of how it operates, its actual benefits, and potential risks. A thorough understanding of futures contracts and forward contracts is the first step in choosing the right investment tool.

How Do Futures Contracts Work?

Futures contracts originate from practical needs: traders need to protect themselves from commodity price fluctuations. For example, airlines must continuously purchase fuel, and fuel prices are constantly changing unexpectedly. To avoid losses from higher prices in the future, they sign futures contracts with suppliers to lock in current prices.

Basic Mechanism: Long and Short

In futures trading, investors have two approaches:

• Buy (Long): Agree to purchase the asset at contract maturity, hoping the price will rise.
• Sell Short (Short): Commit to sell the asset at contract maturity, expecting the price to fall.

Real-world example: If you predict Brent oil will increase in price by the end of October, you can open a Long position to buy 1000 barrels at $43. If on October 20th, the price rises to $44 and you decide to take profit, you will earn $1,000 profit.

Conversely, if you open a Short position (short sell) at $43 and the price drops $42 by October 20th, you also profit $1,000 when closing the contract.

Main Features of Futures Contracts in Derivatives Markets

Absolute Standardization: Each futures contract clearly specifies the asset type, quantity, trading price, and expiration date. This creates transparency and safety.

Listed and Secured: The derivatives stock exchange acts as a third party guaranteeing the payment obligations of both parties, reducing credit risk.

Margin Mechanism and Daily Clearing: Investors only need to deposit a portion of the contract value as (initial margin). Each day, accounts are marked-to-market based on current prices. If losses are too large, additional margin must be deposited.

High Leverage: This is the most attractive point. You only need to pay about 5-10% of the actual contract value to start trading. If the asset moves by 5%, your profit can increase 4-5 times.

Risks Not to Be Overlooked

Leverage Risks: Although leverage can increase profits, it also amplifies losses. Using a 1:10 ratio and a 5% adverse price movement, you could lose 50% of your initial margin.

Daily Margin Calls Can Pressure Cash Flow: If the contract moves unfavorably, your account immediately records a loss. You must have enough funds to meet margin calls; otherwise, your position will be forcibly closed.

High Speculative Nature: Futures contracts do not generate intrinsic value (unlike investing in a business). They are trading tools with high risk and rapid price volatility.

Comparison: Futures Contracts Versus CFDs (Forward Contracts)

Besides futures, investors can choose CFDs—a different type of derivative that combines features of futures and regular stock trading. CFDs allow trading various assets like gold, forex, bitcoin without actually owning them.

Which Option Is Suitable?

• CFD is suitable for risk-taking investors with limited capital who want short-term speculation with flexible purchasing power.
• Futures contracts are suitable for large investors intending to trade actual assets or hedge against price volatility.

Conclusion

Futures contracts and (CFD) are powerful derivative tools but require high risk management skills. Futures, with their standardization and exchange guarantees, offer more safety, while CFDs provide flexibility and easier access. Before starting, investors should thoroughly understand the mechanisms, assess their risk tolerance, and choose the most suitable tool for their investment goals.