TAILIEUCHUNG - Lecture Financial derivatives - Lecture: Financial derivatives market of Pakistan

This chapter presents the following content: Various types of derivative instruments, development of financial derivatives, regulating authority of derivative transactions in Pakistan and its rules and regulations, the most in use derivative instruments in Pakistan, statistical data showing trends in usage of FD in Pakistan. | Financial Derivatives market of Pakistan OUTLINE Various types of derivative instruments Development of financial derivatives Regulating authority of derivative transactions in Pakistan and its rules and regulations The most in use derivative instruments in Pakistan Statistical data showing trends in usage of FD in Pakistan History of Financial Markets drive the economy Financial instruments are exchanged at reasonable cost Financial markets include foreign exchange market, money market, dept market, derivative market, and equity market Dynamic and responsive to real life conditions Benefits of Derivatives Price discovery Risk management Improve market efficiency for underlying assets Reduce market transaction costs Development of Derivative Market in Pakistan Entry of derivatives began in early 1990s with currency swaps called "dirty swaps“ Few banks are allowed by SBP to deal in derivative securities SBP regulates OTC for foreign currency options, forwards rate agreements, interest rate swaps At nascent stage Development of Derivative Market in Pakistan All derivative agreements require formal approval of the central bank The derivatives market constitutes 70% of the total trading volume in India. In Pakistan, it is less than 5%. In 2011, the Securities and Exchange Commission of Pakistan (SECP) allowed mutual funds to use derivatives for hedging purposes Derivative Users in Pakistan Hedgers, speculators, arbitrageurs Individuals Institutional Investor Corporate Treasurer Banks/Other Financial Intermediaries Factors contributing to growth of derivatives Trend of derivative usage Risk Level of Companies Awareness with modern Finance Correlation between hedging and firm value Business cycle effect and firm’s performance Correlation between internal control and hedging Instruments being used in the derivative market of Pakistan. Financial derivatives (deliverable futures, cash settled futures, index futures) Commodity derivatives Islamic derivatives Types of contracts Cross currency swaps Cross currency interest rate swaps Islamic contracts include: Salam Istisna Joa’la

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