Trading in financial products always involves risks. As a general rule, you should therefore only trade in financial products if you understand the products and the risks associated with them. We have endeavoured in the following sections to cover the key leveraged products that Fortune Option Xpert offers to its clients as well as the risks associated with these particular products.
A Digital Option is a type of option in which the pay-out can take only two possible outcomes: either you are paid the return in a predefined fixed amount upon the occurrence of the event on or before the expiry date, or you lose the amount invested in the option. Simply stated, a Digital Option is generally held until expiry in an “all or nothing” pay-out structure and based on a simple “yes” or “no” proposition: Will a currency pair touch a set price on or before a certain date? This is different from a traditional FX option which grants the right, but not the obligation to buy or sell a currency pair at a set price on or before a certain date.
The maximum loss is known when you trade a Digital Option, and depending on whether it is a buy or sell position, the premium or the notional/pay-out (whichever represents the maximum loss) is reserved from your account in full when the Digital Option is dealt, i.e., the product cannot be traded on margin.
Whether a Digital Option is regulated will depend on its underlying asset. Where the underlying asset of the binary option is traded OTC such as FX spot, it is important to note that the OTC markets are largely unregulated due its decentralised structure where deals take place directly between two counterparties and liquidity is fragmented across different venues. Therefore, the level of regulatory oversight and transparency in an OTC market is very low compared to that of a formal exchange which is required to maintain fair, orderly and transparent markets.
Tradeable tenures for Digital Options are available from 1 minute to 1 hour. Digital Options with shorter tenures are riskier as investors may be exposed to short term volatility and further, it is challenging to consistently predict the performance of an underlying asset within a short period of time.
You should not engage in Digital Options trading unless you fully understand the basic aspects of such trading as well as its associated risks. By trading in unregulated financial products, investors will not have the protection afforded under the regulatory framework which are only available in the context of regulated offerings.
For example, if you buy a Digital Option, then the maximum amount you can lose is the premium paid up-front (you stand to receive the notional/pay-out amount if the option “touches”). You must be able to pay this premium upfront, which is deducted from your account at the point of trade, and the market value of the Digital Option position cannot be used as leverage to support any other existing or new open positions from a margin perspective.
Differences in Regulatory Regimes
- Overseas markets may be subject to different regulations, and may operate differently from approved exchanges in United Kingdom. For example, there may be different rules providing for the safekeeping of securities and monies held by custodian banks or depositories. This may affect the level of safeguards in place to ensure proper segregation and safekeeping of your investment products or monies held overseas. There is also the risk of your investment products or monies not being protected if the custodian has credit problems or fails. Overseas markets may also have different periods for clearing and settling transactions. These may affect the information available to you regarding transaction prices and the time you have to settle your trade on such overseas markets.
- Overseas markets may be subject to rules which may offer different investor protection as compared to United Kingdom. Before you start to trade, you should be fully aware of the types of redress available to you in United Kingdom and other relevant jurisdictions, if any.
- Overseas-listed investment products may not be subject to the same disclosure standards that apply to investment products listed for quotation or quoted on an approved exchange in United Kingdom. Where disclosure is made, differences in accounting, auditing and financial reporting standards may also affect the quality and comparability of information provided. It may also be more difficult to locate up-to-date information, and the information published may only be available in a foreign language.
Differences in legal systems
- In some countries, legal concepts which are practiced in mature legal systems may not be in place or may have yet to be tested in courts. This would make it more difficult to predict with a degree of certainty the outcome of judicial proceedings or even the quantum of damages which may be awarded following a successful claim.
- The Monetary Authority of United Kingdom will be unable to compel the enforcement of the rules of the regulatory authorities or markets in other jurisdictions where your transactions will be effected.
- The laws of some jurisdictions may prohibit or restrict the repatriation of funds from such jurisdictions including capital, divestment proceeds, profits, dividends and interest arising from investment in such countries. Therefore, there is no guarantee that the funds you have invested and the funds arising from your investment will be capable of being remitted.
- Some jurisdictions may also restrict the amount or type of investment products that foreign investors may purchase. This can affect the liquidity and prices of the overseas-listed investment products that you invest in.
Different costs involved
- There may be tax implications of investing in an overseas-listed investment product. For example, sale proceeds or the receipt of any dividends and other income may be subject to tax levies, duties or charges in the foreign country, in United Kingdom, or in both countries.
- Your investment return on foreign currency-denominated investment products will be affected by exchange rate fluctuations where there is a need to convert from the currency of denomination of the investment products to another currency, or may be affected by exchange controls.
- You may have to pay additional costs such as fees and broker’s commissions for transactions in overseas exchanges. In some jurisdictions, you may also have to pay a premium to trade certain listed investment products. Therefore, before you begin to trade, you should obtain a clear explanation of all commissions, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss.
Counterparty and correspondent broker risks
- Transactions on overseas exchanges or overseas markets are generally effected by your United Kingdom broker through the use of foreign brokers who have trading and/or clearing rights on those exchanges. All transactions that are executed upon your instructions with such counterparties and correspondent brokers are dependent on their respective due performance of their obligations. The insolvency or default of such counterparties and correspondent brokers may lead to positions being liquidated or closed out without your consent and/or may result in difficulties in recovering your money and assets held overseas.
Political, Economic and Social Developments
- Overseas markets are influenced by the political, economic and social developments in the foreign jurisdiction, which may be uncertain and may increase the risk of investing in overseas-listed investment products.
No Warranty or Liability
The information presented herein is intended for general circulation and does not constitute investment, legal, accounting, tax or financial advice. It does not take into account the specific investment objectives, financial situation or particular needs of any person, and any information contained herein should be verified independently, taking into account, the specific investment objectives, financial situation or particular needs of the investor, before the investor makes a commitment to transact in any investment.
Although information presented in this document has been obtained or derived from sources believed to be correct and reliable, Fortune Option Xpert makes no warranty or accepts any liability of any kind as to its accuracy, adequacy, reliability, timeliness or reasonableness of such information. You assume all risks for any reliance on the information presented herein.
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