Upload
masterpiece-abundance
View
88
Download
0
Embed Size (px)
Citation preview
Derivative Instruments and
Nepal
Kalpana K.C.Nitesh Khatiwada
Soni SahaniSeminar in Financial System in Nepal
Master of Business ManagementNepal Commerce Campus
Kathmandu
Good Morning!!
2
Derivative Instruments
3
“A security or contract designed in such a way that its
price is derived from the price of an underlying asset.
4
Understanding Derivative Instruments
Consider that if your college reimburses 100%
of costs for an “A”, 75% of costs for a “B”, 50%
for a “C” and 0% for anything less.
Your “right” to claim this reimbursement, then is
tied to the grade you earn. The value of that
reimbursement plan, therefore, is derived from
the grade you earn.
A video: Understanding Derivatives
5
Can be created by mutual agreement - types of
derivative products are limited only by
imagination and so there is no definitive list of
derivative products.
Types:
Options
Swaps
Warrants
Futures
Forwards6
Understanding Derivative Instruments
In creating a financial derivative, the means for,
basis of, and rate of payment are specified
Payment may be in currency, securities,
physical entity such as gold or silver,
agricultural product such as wheat or pork, a
transitory (short lived) commodity such as
communication bandwidth or energy
7
Understanding Derivative Instruments
The amount of payment may be tied to
movement of interest rates, stock indexes, or
foreign currency
8
Understanding Derivative Instruments
Featured of Derivative
Instruments9
Features
Relates to the future contract between two parties
Value derived from underlying assets
Counter parties have specific obligation under the
derivative contract
Undertaken directly between two parties or
through the particular exchange
10
Features
Underlying transactions are mostly settled by
taking offsetting positions
Mostly secondary market instruments, have little
usefulness in mobilization of fresh capital
Standardized exchange traded as well as
customized, OTC traded
Off-balance sheet item
Types of Traders
Hedgers
Use derivatives to reduce the risk that they face from potential
future movements in a market variable
Speculators
Use derivatives to bet on the future direction of a market
variable
Arbitrageurs
Take offsetting positions in two or more instruments to lock in
a profit 12
Critique of Derivatives
Speculative and gambling motives
Increase in risk
Instability of the financial system
Price instability
Displacement effect
Increased regulatory burden
13
Derivative Exchanges
A derivative exchange is a market where
individuals trade standardized contracts that have
been defined by the exchange
The CBOT was established in 1848 to bring
farmers and merchants together
A rival futures exchange CME was established in
1919
CBOE started trading call option contracts on 16
stocks in 197314
OTC Market
The over the counter market is a telephone and
computer linked network of dealers who do not
physically meet.
Trading is done over the telephone.
Usually between two financial institutions (FIs) or
between a FI and its clients
FIs often act as a market maker for more
commonly traded instruments15
OTC Market
Telephone conversations in the OTC are usually
taped.
OTC trades are much larger than the exchange
traded market.
Market participants are free to negotiate any
mutually attractive deal.
Usually some credit risk is involved
16
Myths about Derivatives
Derivatives are new, complex, high-tech
financial products created by Wall Street’s
rocket scientists.
Derivatives are purely speculative, highly
leveraged instrument.
The enormous size of the financial derivatives
market dwarfs bank capital, thereby making
derivatives trading an unsafe and unsound
banking practice.17
Myths about Derivatives
Only large multinational corporations and large
banks have a purpose for using derivatives.
Derivatives take money out of productive
processes and never put anything back.
Only risk seeking organizations should use
derivatives.
The risk associated with financial derivatives
are new and unknown18
Derivative Instruments
in Nepal19
Derivative Market in Nepal
• Est: 14 August, 2007
• Location: Dillibazar, Kathmandu
• Website: http://www.mexnepal.com/
Mercantile Exchange Nepal
Limited(MEX)
• Est: 20 November, 2008
• Location: Tinkune, Kathmandu
• Website: http://ndex.com.np/
Nepal Derivative Exchange
Limited(NDEX)
• Location: Tripureshwor, Kathmandu
• Website: http://www.wexnepal.com/
Wealth Exchange Limited (WEX)
20
Derivative Market in Nepal
• Location: Putalisadak, Kathmandu
• Website: http://www.ezonenepal.com
E-zone Commodities
Market Pvt. Ltd
• Est: 7 June, 2007
• Website: http://www.nationalspotexchange.com/
National Spot Exchange
Limited(NSX)
• Website: http://wellnepal.com/organization/cfx-commodities-futures-exchange-pvt-ltd/
Commodity Future Exchange Nepal
Limited(CFX)
21
Others
Axis Broking Solution Pvt Ltd
Nepal Spot Exchange
Commodities & Metal Exchange Nepal Ltd.
Himalayan Commodity Brokers Pvt. Ltd.
Kathmandu Commodity Exchange (P) Ltd.
Asia Commodities and Securities Pvt. Ltd.
Birat Commodity Market Pvt . Pld.
Easy Commodities Investment Pvt. Ltd. (ECI)
Himalayan Commodity Brokers Pvt. Ltd.
South Asia Commodities and Brokerage Pvt. Ltd.
Standard Commodities Pvt. Ltd.22
Derivative Market in Nepal
Instruments Traded in Nepal
Future
Forward
SWAPS
23
Instruments Traded in Nepal
Forward
Contract that gives the buyer and the seller the right
and the obligation to buy a specified asset on a
specified date at a specified price
Ownership of good is transferred and payment is
made
Traded Over the counter
24
Instruments Traded in Nepal
Future
Contract that gives the buyer and the seller the right
and the obligation to buy a specified asset on a
specified date at a specified price
No physical delivery of goods
Traded on organized exchange
25
Instruments Traded in Nepal
SWAPS
Practice seen in Banking Industry
26
Challenges of Derivative Market in Nepal
Lack of sufficient penetration of internet in
urban areas
computer literacy with minimum number of
people
traditional method of agro-economy
non-commercialized agro production sector
lower literacy rate
Financial Literacy of educated people27
Challenges of Derivative Market in Nepal
Other challenges:
Contract sizes at international markets that can be too
large for developing country requirements.
Exchange rate controls or risk
28
Prospect of Derivative Market in Nepal
Fluctuating Exchange Rate
Huge loss in agro products due to natural
calamities
Predicting future price
SWAP income flows
Devised to mitigate risk
Employment
Market for local commodity29
“Developing Derivative Market in
Nepal
30
1🔑
Creating Derivative Market
31
Creating Derivatives Market
Legal
Environment• Does and
Don'ts
Regulatory
Environment• Regulatory
Bodies
Economic
Environment• Interest Rates
• Taxes
• Inflation
• Market Size
• Suppliers
3
Political
Environment• Monetory Policy
• Fiscal Policy
1 2 4
2🔑
Creating Derivative Contract
33
Creating
Derivatives
Contract
Large Spot Market
Maturity of Spot Market
Existance and
Involvement of Dealer
Community
3🔑
Creating Successful Derivative
Contract
35
Creating Successful Derivative Contract
Exchange
Perseverance
Derivative
Market
Environment
Well Designed
Contract
Quotes for illustration purposes only
Creating Derivative Markets
Other Considerations
High level of investor’s sophistication and awareness
Information Symmetry
Availability of local commodity in large scale
Adequate risk management knowledge and practice
37
Conclusions
There was considerable enthusiasm in the field
Speculative use of derivatives with intent to
earn more in a short span of time can de-
stabilize the financial market and ultimately
pose a real threat to financial stability
Considered as complex
38
Conclusions
Unethical practices, manipulation of the real
rates
Potential for miscalculation, misuse and
unawareness had led to some highly publicized
losses has driven the sentiments of the public
against
Decreasing attraction
The misuse, compromised and speculative use
of derivatives39
References
40
David Siegel. (2016, June 23). Derivative. Retrieved from Investopedia:
http://www.investopedia.com/terms/d/derivative.asp?layout=infini&v=5E&orig=1&adtest=5
E
Hull, J. C., & Basu, S. (2011). Options, Futures and Other Derivatives. Delhi: PEARSON.
Mahat, M. (2011). New Financial Products and Challenges for Central Bank: Nepal. 174-206.
Risal, N. (2016). Capital Market. Financial System in Nepal. Kathmandu: Nepal Commerce Campus.
Shrestha, R. (2010). Why to Invest in Derivative Market? New Business Age.
Sigdel, S. N. (2012). Basics of Derivatives. Options, Futures and Derivatives. Kathmandu: Apex
College.
Weber, E. J. (2008). A Short History of Derivative Security Markets. Economics.
Thank You!!
You can find us at:
Master of Business Management
Nepal Commerce Campus (2015-2017)
Kathmandu, Nepal