Why Futures Come in Different Types?

Futures contracts are a vital part of modern financial markets, offering investors and businesses a way to hedge against price volatility or speculate on future price trends. At their core, futures are standardized agreements to buy or sell an asset at a future date at a predetermined price.

But not all futures contracts are created equal. Depending on the underlying asset, futures can be classified into different types — such as stock, index, currency, commodity, and interest rate futures.

In Pakistan, futures trading is facilitated through two regulated exchanges:

• PSX (Pakistan Stock Exchange) – for financial derivatives like stock and index futures.
• PMEX (Pakistan Mercantile Exchange) – for commodity and currency futures.

Let’s explore each type in more detail.

1. Stock Futures (PSX)

Stock futures are contracts based on individual company shares listed on the PSX. These allow traders to speculate on the future price of a specific stock — such as HBL, OGDC, ENGRO, or LUCK — without owning the shares.

Key Features:

• Traded in market lots, not single shares.
• Require initial margin, offering leverage (control large value with smaller capital).
• Cash-settled on expiry (no physical share delivery).
• Useful for speculation and short-term hedging.

Example:
If you expect HBL’s stock price to rise, you can buy HBL futures. If the price increases before expiry, you profit. If it drops, you incur a loss.

2. Index Futures (PSX)

Index futures are contracts based on a stock market index, like the KSE-30 Index. They allow traders to speculate on the overall market direction rather than individual stocks.

Use Cases:

• Portfolio managers use index futures to hedge against market-wide declines.
• Short-term traders use them to bet on bullish or bearish market trends.

Example:
If you expect the KSE-30 Index to rise in the next month, buying a futures contract now at today’s index level could earn you a profit if the index indeed goes up.

3. Currency Futures (PMEX)

Currency futures are among the most actively traded instruments on PMEX. These contracts allow buyers and sellers to lock in an exchange rate for a specific future date.

Common Pairs Traded on PMEX:

• USD/EUR
• USD/GBP
• USD/SIF
• JPY/USD

Who Uses Currency Futures?

• Importers/exporters hedging against exchange rate risk.
• Corporates with foreign currency exposure.
• Speculators seeking to profit from fluctuations in exchange rates.

Example:
If a Pakistani importer is concerned that USD will appreciate, they can buy USD/PKR futures to fix today’s exchange rate and avoid future losses.

4. Commodity Futures (PMEX)

Commodity futures are contracts based on physical commodities such as:

• Gold
• Silver
• Crude oil
• Wheat
• Cotton
• Sugar

These contracts are either physically settled (rarely) or cash-settled before expiry.

Users:

• Producers & consumers of commodities (e.g., wheat farmers, textile manufacturers).
• Government entities managing import price risks.
• Retail & institutional traders seeking exposure to global commodity markets.

Leverage:
Initial margins are often low, enabling high exposure with small capital — but this increases both potential gains and risk.

5. Interest Rate Futures (Currently not available in Pakistan)

Interest rate futures are contracts to buy or sell a debt instrument (such as a government bond or treasury bill) at a future date at a fixed interest rate.

While these are traded internationally and on exchanges like NSE and CME, interest rate futures are not yet offered on PMEX or PSX. However, SECP may introduce such products in the future to help financial institutions hedge interest rate risk.

Types of Futures Traders

There are two primary types of market participants in the futures market:

Hedgers

Hedgers are businesses or investors who use futures contracts to protect themselves against price volatility in their core operations.

Examples in Pakistan:

• A textile exporter hedging against USD/PKR volatility.
• A farmer locking in wheat prices in advance via PMEX.
• An equity fund manager protecting against market drops via KSE-30 futures.

By fixing prices in advance, hedgers reduce uncertainty in their financial planning.

Speculators

Speculators seek to profit from price movements without any intention of using the underlying asset.

Speculators in Pakistan:

• Retail traders betting on gold prices via PMEX.
• Day traders using index futures for short-term gains.
• Proprietary trading desks of brokerage firms.

Though speculators add risk, they also provide liquidity and market efficiency, making it easier for hedgers to enter and exit positions.

Summary Table: Types of Futures in Pakistan

Why Trade Futures with Azee Securities?

• SECP-licensed broker for PSX and PMEX
• Access to currency, commodity, and equity futures
• Real-time risk management and margin tracking
• Local insights and research to guide your trades
• Hands-on support from experienced advisory teams

Quick Recap

Futures contracts are standardized agreements to buy or sell an asset at a set price on a future date.

• In Pakistan, futures are traded on:
  • PSX – Stock & index futures
  • PMEX – Commodity & currency futures
• Stock Futures – Based on individual shares (e.g., HBL, ENGRO); ideal for short-term trading or hedging.
• Index Futures – Track market indices (e.g., KSE-30); used for broad market exposure or hedging.
• Currency Futures – Help manage exchange rate risk (e.g., USD/EUR); used by importers/exporters and speculators.
• Commodity Futures – Cover gold, oil, wheat, etc.; offer low margins but carry high volatility and risk.
• Interest Rate Futures – Not yet available in Pakistan, but common globally for managing bond-related risks.
• Two Types of Traders:
  • Hedgers: Use futures to reduce risk.
  • Speculators: Aim to profit from price changes.

Futures can offer powerful tools for hedging and speculation — but must be used with proper knowledge, discipline, and risk control.

Get Started with Azee Securities

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