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CHAPTER 5: DERIVATIVES MARKET - Coggle Diagram
CHAPTER 5: DERIVATIVES
MARKET
Concept, Development and
Structure of Derivatives Market
Bursa Malaysia Derivatives Berhad (BMD), formerly known as Malaysia Derivatives Exchange Berhad (MDEX)
75% owned subsidiary of Bursa Malaysia Berhad which provides, operates and maintains a futures and options exchange
BMD operates under the supervision of the Securities Commission and is governed by the Capital Market and Services Act 2007
What are Derivatives?
Derivatives are financial instruments whose value is derived
from an underlying physical commodity or financial instrument
Concepts
Contract to buy and sell which is set today but will be
fulfilled at a stipulated date later.
Derivatives products are financial instruments available to corporation and investor for the purpose of managing their
exposure to financial markets’ volatility.
CASH MARKET VS. DERIVATIVES
MARKET
The market for immediate delivery of and payment for
commodity or financial instruments
Delivery of and payment for commodity of financial instruments
will be made in the future.
Developments of Derivatives Market
1980’s
Malaysia joined the derivative market trading community with the launched of Crude Palm Oil Futures at KLCE in October 1980
2000’s
KLOFFE joins the elite financial centers by trading KLCI options on Oct 2000
Market Participants and It Uses
Commercial Bank
To hedge against interest risk
Fund Manager
To hedge portfolios against stock market and interest rate
fluctuations
To speculate on future stock market or interest rate movement
Securities Firms
To hedge own portfolios against stock market and interest rate
movements
Uses of Derivatives
Risk management
The hedger’s primary motivation is risk
management
Someone who is bullish believes prices are
going to rise
Someone who is bearish believes prices are
going to fall
Income generation
Writing a covered call is a way to generate income
Financial engineering
Financial engineering refers to the practice of using derivatives as building blocks in the creation of some
specialized product
Derivatives Products and Underlying
Instruments
Crude Palm Oil Futures (FCPO)
Crude Palm Kernel Oil Futures (FPKO)
Kuala Lumpur Composite Index Futures (FKLI)
Categories of Derivatives
Swaps
Interest rate swap
Foreign currency swap
Options
An option is the right to either buy or sell something at a
set price, within a set period of time
The right to buy is a call option
The right to sell is a put option
The fee for option is a option premium
The price at which the asset is bought or sold is a fixed price
Futures
An futures contract specifies delivery at a future date at a
current price
Examples
Interest Rates (on T-bills, notes, bonds)
Stock Indices, stocks
Currencies
Futures Contracts
Futures contracts involve a promise to exchange a product
for cash by a set delivery date
A futures contract involves a process known as marking to
market