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Application of
Derivatives in
the Capital
Market of
Date: 7 Dec 2018
The Concept of Financial Derivatives
A derivative is an investment instrument that
consists of a contract between parties whose
value derives from and depends on the value
of an underlying financial asset.

Commonly Traded Derivatives:

• Future Contracts
• Option Contracts
• The Concept of derivatives is more • Swaps etc.
than 30 years old as many countries
other than Bangladesh have been
using this concept to hedge different
financial risks.
• Derivatives are available on almost
every possible type of investment
asset (e.g. equities, commodities,
bonds and foreign currency exchange)
Derivative Market in Bangladesh
Derivatives are the part and parcel of financial market development. Derivatives Market is an
organized market place where derivatives contracts are traded.
In Bangladesh there is no derivatives market yet. But there is an enormous opportunity
for Derivatives Market.
3 types of potential investors in the
Derivatives Market of Bangladesh:
■ Speculators: They will take position
to gain from the expected fluctuation
in the price of derivatives contracts
over time.
■ Hedgers: They will take position to
reduce their probability of movements
of interest rate or stock price in future.
■ Arbitragers: They will make profit
from short term price fluctuations.
Scopes of Derivatives in Bangladesh
■ Risk Management:
Hedging business risk, minimizing the risk for one party to another
■ Offsetting market price risk
Derivatives can offset the risks of changing underlying market prices by taking counter-
positions in the futures market.
■ Margin trading
Derivatives are highly leveraged instruments; hence the investor is required to pay a small
fraction of the value of the total contract as margins. It provides an incentive to make profits
with minimal amount of capital.
■ Derivatives market can be a lead economic indicator of Bangladesh
Former Federal Reserve Board chairman Alan Greenspan commented in 2003 that he
believed that the use of derivatives has softened the impact of the economic downturn at the
beginning of the 21st century.
Importance Of Derivatives in the
Recent Capital Market Condition In
■ The capital market is the engine of growth for an economy, and performs a critical role in
acting as an intermediary between savers and companies seeking additional financing
for business expansion. But it is still undeveloped and growing at a slower pace
■ In the capital markets of Bangladesh, stock prices, bond prices, currency rates, interest
rates and dividends go up and down, creating risk. The Increased volatility in the asset
prices in the recent market conditions lead to urgency of derivatives after the market
crash in 2010. If derivatives are available in our capital market, may be we can control
the price fluctuations in the recent market crash.
■ There is increased integration of the global financial market and it drives to the necessity
of introducing derivatives in our capital market.
■ There are many developments of the risk management tools of the derivatives. They
provide a wider set of strategies in risk management
Fear factor barriers to launch
financial derivatives in Bangladesh
■ More Risks:
The primary risks associated with trading derivatives are market, counterparty, liquidity and
interconnection risks.
■ More Difficulties in Market Monitoring:
It will be difficult for the BSEC to know the actual size of the derivative market. There is a
big difference between the notional value ($542.4 trillion) and the actual market value of
derivative contracts. ($12.7 trillion.) Therefore the asset price will fluctuate wildly.
■ Possibility of More scams:
The underlying assets are not actually delivered in most of the derivatives in reality.
Therefore, more speculative trading and gambling activities might be introduced which will
lead to scams and malpractices.
■ Lack of Investors:
Derivatives market will require a strong number of investors. But the investors in the capital
market of Bangladesh are reluctant to invest due to the capital market scams.
Steps for Applying Financial
Derivatives in Bangladesh
■ Developing Infrastructure required for derivatives trading:
Before launching the derivative market, the exchanges will have to establish all
infrastructures required for launching derivative platform, ensure settlement guarantee fund,
investors’ protection fund and training of brokers and market participants on derivatives.
■ Enacting laws and guidelines:
Before enacting the law, everything necessary for launching the financial derivatives should
be ready.
■ Automation:
Trading, clearing and settlement should be made in automated electronic system.
■ Training:
An investor will not be eligible to invest in the derivatives market without having necessary
knowledge and training on derivatives.