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Topic 5

derivative Market

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At the end of the lessons, students should be able to:-

 Understand the development of derivatives market in Malaysia.

 Identify the derivatives participants and explain the uses of derivatives.

 List the derivatives products available and its underlying instruments.

 Explain the characteristics of futures contract including ‘open position’


and ‘close out’, margin requirements and product specifications.

 Illustrate briefly how futures are used for speculating hedging.

 Explain the features of options including calls, puts, types of options,


strike price and option status.

MFK FIN536 Topic 4 2


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 Risk reduction.

 Price of the securities are volatile.

 The more volatile an instruments/securities is the higher the


participants is exposed to risk.

 Derivatives products – manage exposure to market


volatilities.

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 Value of derivatives product depends on:-
i. Underlying instruments;
ii. Commodity prices;
iii. Exchanges rates;
iv. Interest rates;
v. Indices;
vi. Share prices

 Derivatives can be traded in an organised exchange or over-the


counter (OTC).

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Year Development

July 1980 Kuala Lumpur Commodity Exchange (KLCE) was established.

Dec1995 Kuala Lumpur Options and Financial Futures Exchange (KLOFFE).

May 1996 Malaysian Monetary Exchange.

Dec 1998 KLCE merged with MME and known as Commodity and Monetary
Exchange of Malaysia (COMMEX).

Jan 1999 KLOFFE become a subsidiary of KLSE Group of Companies.

June 2001 KLOFFE merged with COMMEX and form Malaysia Derivatives
Exchange (MDEX).

2004 Known as Bursa Malaysia Derivatives Berhad.


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 An agreement between two parties to buy or sell
the underlying instrument at a specific time in
the future for a specific price determined today.

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 Provides the holder/buyer the right, but not the
obligation, to purchase or sell a certain quantity
of the underlying instruments.

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 Governed by the Futures Industry Act 1998.

 The act gives power to MOF which empowered SC


to regulate the derivatives market.

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 Malaysian Derivatives Clearing House Berhad (MDCH).

 Provides financial stability by guaranteeing the performance of all


contracts as it acts as the counterparty to all contracts traded.

 Contractual obligation between actual buyer and seller does not exist.

 Guarantee is supported by the collection of margin payment from the


buyer and seller.

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No Derivatives products Underlying instrument/commodity

Crude Palm Oil Futures (FCPO) CPO

KLCI Futures KLCI

Kuala Lumpur Composite Index KLCI


Options (OKLI)

3-month KLIBOT Futures (FKB3) 3 month KLIBOR

3-year MGS Futures (FMG3) 3 year MGS

5-year MGS (FMGS5) 5 year MGS

10-year MGS Futures (FMGA) 10 year MGS

Crude palm kernel oil Futures Crude palm kernel oil


(FPKO)

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Futures

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 Value-depends on value of an underlying asset.

 High-risk type of instrument.

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 Future contract has an expiry date – the last day of trading in the
particular contract month.

 ‘Opened’ on the expiry date ???

 ‘Close out’ – close out or resold before the expiry date.

 Contract price vs market price.

 Close out, when the value has risen or fallen.

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 Deposit initial sum of money or other acceptable collateral
with the futures brokers before trading.

 Set by Malaysian Derivatives Clearing House.

 Depend on market volatility and other factors at the


prerogative of the clearing house.

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Profit = SP – BP x 100 x 10 x price per tick

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Options

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 Give the buyer/holder option, not the obligation, to
buy or sell a specified asset at a specified price, at
or before a specified date from the seller.

 Difference with futures:-


Pay premium in addition to the price of the
financial instrument.
Let the options expire on the expiration date
without excercising it.

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Call option
 Gives the buyer/holder the right to buy (not obligation)
an underlying asset.

Put options
 Gives the buyer the right to sell an asset.

*The seller has an obligation to deliver the specified


instrument at the specified price if option owner exercise
the options.

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American option
 Can be exercised at any from the date of

purchase until the expiry date.

European options
 Can be exercise only on the specified expiry

date.

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 The price at which the underlying asset will be
bought or sold if the holder of option wants to
exercise the option.

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 In the money – market price > strike price

 Out of money – market price < strike price

 At the money – market price = strike price

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 Topic:-
Offshore market.

 Assignment should covers the following aspects:-


i. definition;
ii. benefits;
iii. LOFSA – role and features.

 Due on week 11 (17/09/09).

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At the end of the lessons, students should be able to:-

 Understand the development of derivatives market in Malaysia.

 Identify the derivatives participants and explain the uses of derivatives.

 List the derivatives products available and its underlying instruments.

 Explain the characteristics of futures contract including ‘open position’


and ‘close out’, margin requirements and product specifications.

 Illustrate briefly how futures are used for speculating hedging.

 Explain the features of options including calls, puts, types of options,


strike price and option status.

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 Financial legal framework.

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THANK
YOU…

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