http://tribune.com.pk/story/519325/index-futures-stock-exchanges-to-feature-equity-derivatives/
Representatives of the Karachi, Lahore and Islamabad stock exchanges signed an agreement on Monday to formally commence trading in stock index futures contracts, with banking, oil and gas, and the Karachi Stock Exchange (KSE)-30 Index as underlying indices.
The derivatives market constitutes 70% of the total trading volume in India. In Pakistan, it is less than 5%. Even if you include deliverable futures market, it is still less than 10%, said KSE Managing Director Nadeem Naqvi, while speaking on the occasion.
Trading of stock index futures contracts simply means buying or selling a specified number of futures contracts on a stock index. Its mark-to-market difference or the current value of a futures contract will be settled on a daily basis through the National Clearing Company of Pakistans standard pay-in-collect system.
This product can be used for both hedging and taking view of the market from a trading perspective, Naqvi noted.
According to KSE General Manager for Market Development and New Products Sani-e-Mehmood Khan, stock index futures will be a typical exchange-traded product that will track the performance of the KSE-30 Index. It will protect investors from adverse market movements, as it is envisaged as an important leveraged product based on the free-float of blue-chip stocks, Khan said.
In 2011, the Securities and Exchange Commission of Pakistan (SECP) allowed mutual funds to use derivatives for hedging purposes. Therefore, mutual funds can duplicate the holdings of the underlying index by investing in stock index futures, he added.
It means if the underlying index goes up by 5%, the stock index futures contract based on that index will also increase 5% for that mutual fund. This has the tremendous advantage of lower costs, as institutional investors can use stock index futures to hedge their positions in the underlying stocks in their portfolio, he observed.
With the contract duration of 90 days and the contract multiplier of Rs5, the contract unit will be the numerical value of the underlying index, such as the KSE-30 Index.
In his brief address, KSE Chairman Muneer Kamal thanked AKD Securities for acting as market-maker in Karachi, hoping that it will do the same for the rest of the two markets as well to ensure liquidity.
The derivatives market has not worked in Pakistan. But if cash-settled futures are a champion derivative product in Bombay, then why cannot it be so in Pakistan? he said, while encouraging brokers and AMCs to trade in stock index futures contracts.
COMMENTS: I will 1st post the same comment I left in their comment section and then add my useless commentary
"Derivatives give the illusion of stability. Everyone cannot be hedged all at the same time. Someone somewhere is going to get burnt. Its usually the Govt Institutions getting caught in the firestorm.
The only way to keep these financial assets in line with the real economy is to tax the equity in every financial asset, compounded on a overnight basis."
Its not like Derivatives are absolutely evil. There is an absolute need for them but what ends up happening is these genies are left loose and they start to then dictate the markets. Derivatives become assets and assets become their derivatives. Few dealers (usually the primary dealers) start to manipulate market prices by flooding the markets with naked short contracts and then the State Bank comes in to bail out the Primary dealers..
Just because India is doing it, or the birthplace of Aids is doing it or just because they said that derivatives are good in the Harvard MBA classes, does not alter reality.
