Derivatives - can anyone explain?

[hammer]

Im back! Well at least for a little while. Been away studying, trying to get an economics degree. Will be back on the boards properly in a few weeks when i start trading again.

I have an essay question on derivatives and there is 1 part that im stuck on:

Why do some markets have derivatives and others don't? Where, what countries do/don't?

If anyone can help pls do, the test is tmro

Any help would be appreciated thx. :cheesy:

 

[Rognvald]

I don't think the Tibetan Stock exchange (Lhasa) has derivatives. It has about 1000 quoted companies of which about 90 are tibetan and the remainder chinese
http://www.china.org.cn/english/tibet-english/jrbx.htm
Does this go some way towards answering your question?.Think about it!

 

[SOCRATES]

Dear Hammer,

In order for a market to be effective, there has to be liquidity. Only markets that are truly active in terms of turnover can be said to be truly liquid. This liquidity means that participants should have little or no difficulty in either acquiring or disposing of instruments, whatever they may be, and, in addition there has to be a guarantee for all participants that they will be paid when they sell what they deliver and that they will be delivered what they pay for.

This includes :~

Foreign Exchange (currencies)
Commodities.
Metals.
Shares.
Bonds, etc., for example.

For markets such as these, because they are reliably continously active, because there are always buyers and sellers present, in varying degrees of quantity and intensity, therefore prices move more smoothly than in markets in which these conditions do not exist.

In markets that liquidity is absent prices will behave erratically, in fits and starts, both in price behaviour and in quantity and quality of participation. It will be the natural propensity for underwriters of derivatives to operate in markets in which are well established, well regulated, well regarded cash markets already operating for a long time as a matter of course, in preference to new or undeveloped, illiquid markets.

In consesqence of these considerations markets may or may not have derivatives attached to them.

Any further questions ?

 

[hammer]

Thanks guys that goes along way to helping. Socrates thanks for the detailed response, will almost memorise i think

Basically speaking it can be said that small markets will not have derivatives such as the Lhasa as Rognavald mentioned as there aren't enough participants and prices will be erratic. Underwriters of options will not want to operate in these sorts of markets.

Can you pls give me some other examples of markets without derivatives?

Think i have enough on this as it is but any more would be a bonus. Thanks guys :cheesy:

 

[Quercus]

There are no derivative products derived from the stocks listed on the New Zealand Exchange - a classic example of insufficient liquidity. They are attempting to introduce them but only to be traded on the Sydney Futures Exchange, probably because of existing systems and lower costs.
Hope this helps too!
Cheers
Quercus

 

[hammer]

Thanks Quercus. Thanks guys should be enough to do well on my exam. Wish me luck. :cheesy:

 

[SOCRATES]

Hammer,
The fact that Lhasa does not have a derivatives market was quoted tongue in cheek by Rognvald, since a cash market does not exist in Tibet at all, the Invaders of that country were Chinese communists.
Seriously now, some examples of markets that do not have derivative attachments:~
Portugal, Poland, Chekoslovakia, Hungary, Argentina, for example.
Some examples of countries that do:~
UK, US, Canada, Norway, Denmark, Holland, Germany, Switzerland, France, Spain, Italy, Hong Kong, for example. I have prepared the above and previous in a way that you can present as an answer to an exam question, that is correct, properly structured, and that will satisfy the examiner without you having to write a really heavy duty long winded explanation.
Incidentally, Derivatives are tradeable instruments, linked to the underlying cash instrument traded with the exception of cash indices, which are not tradeable.
Derivatives include the following categories:~
Futures.
Options on Futures.
Traded options.
Good Luck. Let us know how you get on.

 

[Skimbleshanks]

I have prepared the above and previous in a way that you can present as an answer to an exam question, that is correct ...

It is not correct to call Holland a country. It is in fact a region within one - the name of the country is The Netherlands.

The correct spelling is Czechoslovakia.

 

[oatman]

I thought it was Czech Republic as Slovakia is a separate country.

 

[SOCRATES]

Thank you skimbleshanks,

when one is as old as one is and has been in the market for so many years as one has been,
one is always grateful to anyone who is kind and considerate like you are,in pointing out errors of geography and spelling.

 

[Bowball]

when asked "what can you have derivatives on?" there is only one answer. "anything".

when mclaren hired lewis hamilton, lewis sold them an option to hire him for £300k a year. this is an OTC option with a £300k strike and an expiry/exercise date of the start of the F1 season.

you can have a derivative on anything you want (apples, pears, chairs, tables, socks, mobile phones, weather, stocks, whatever) the only thing restricting whether you can have a derivative on something is whether there is a market for it