Presentation in basics of Derivative Market and its situation in Nepal. Its challenges, prospect, and ways to develop it.

1. Derivative
Instruments and
Nepal

2. Kalpana K.C.
Nitesh Khatiwada
Soni Sahani
Seminar in Financial System in Nepal
Master of Business Management
Nepal Commerce Campus
Kathmandu
Good Morning!!
2

3. Derivative Instruments
3

4. “
A security or contract designed in such a way that its
price is derived from the price of an underlying
asset.
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5. Understanding Derivative Instruments
 Consider that if your college reimburses 100%
of costs for an “A”, 75% of costs for a “B”, 50%
for a “C” and 0% for anything less.
 Your “right” to claim this reimbursement, then is
tied to the grade you earn. The value of that
reimbursement plan, therefore, is derived from
the grade you earn.
 A video: Understanding Derivatives
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6.  Can be created by mutual agreement - types of
derivative products are limited only by
imagination and so there is no definitive list of
derivative products.
 Types:
 Options
 Swaps
 Warrants
 Futures
 Forwards6
Understanding Derivative Instruments

7.  In creating a financial derivative, the means for,
basis of, and rate of payment are specified
 Payment may be in currency, securities,
physical entity such as gold or silver,
agricultural product such as wheat or pork, a
transitory (short lived) commodity such as
communication bandwidth or energy
7
Understanding Derivative Instruments

8.  The amount of payment may be tied to
movement of interest rates, stock indexes, or
foreign currency
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Understanding Derivative Instruments

9. Featured of Derivative
Instruments9

10. Features
 Relates to the future contract between two parties
 Value derived from underlying assets
 Counter parties have specific obligation under the
derivative contract
 Undertaken directly between two parties or
through the particular exchange
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11. Features
 Underlying transactions are mostly settled by
taking offsetting positions
 Mostly secondary market instruments, have little
usefulness in mobilization of fresh capital
 Standardized exchange traded as well as
customized, OTC traded
 Off-balance sheet item

12. Types of Traders
 Hedgers
Use derivatives to reduce the risk that they face from potential
future movements in a market variable
 Speculators
Use derivatives to bet on the future direction of a market
variable
 Arbitrageurs
Take offsetting positions in two or more instruments to lock in
a profit
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13. Critique of Derivatives
 Speculative and gambling motives
 Increase in risk
 Instability of the financial system
 Price instability
 Displacement effect
 Increased regulatory burden
13

14. Derivative Exchanges
 A derivative exchange is a market where
individuals trade standardized contracts that have
been defined by the exchange
 The CBOT was established in 1848 to bring
farmers and merchants together
 A rival futures exchange CME was established in
1919
 CBOE started trading call option contracts on 16
stocks in 197314

15. OTC Market
 The over the counter market is a telephone and
computer linked network of dealers who do not
physically meet.
 Trading is done over the telephone.
 Usually between two financial institutions (FIs) or
between a FI and its clients
 FIs often act as a market maker for more
commonly traded instruments
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16. OTC Market
 Telephone conversations in the OTC are usually
taped.
 OTC trades are much larger than the exchange
traded market.
 Market participants are free to negotiate any
mutually attractive deal.
 Usually some credit risk is involved
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17. Myths about Derivatives
 Derivatives are new, complex, high-tech
financial products created by Wall Street’s
rocket scientists.
 Derivatives are purely speculative, highly
leveraged instrument.
 The enormous size of the financial derivatives
market dwarfs bank capital, thereby making
derivatives trading an unsafe and unsound
banking practice.17

18. Myths about Derivatives
 Only large multinational corporations and large
banks have a purpose for using derivatives.
 Derivatives take money out of productive
processes and never put anything back.
 Only risk seeking organizations should use
derivatives.
 The risk associated with financial derivatives
are new and unknown
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19. Derivative Instruments
in Nepal
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20. Derivative Market in Nepal
• Est: 14 August, 2007
• Location: Dillibazar, Kathmandu
• Website: http://www.mexnepal.com/
Mercantile
Exchange Nepal
Limited(MEX)
• Est: 20 November, 2008
• Location: Tinkune, Kathmandu
• Website: http://ndex.com.np/
Nepal Derivative
Exchange
Limited(NDEX)
• Location: Tripureshwor, Kathmandu
• Website: http://www.wexnepal.com/
Wealth Exchange
Limited (WEX)
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21. Derivative Market in Nepal
• Location: Putalisadak, Kathmandu
• Website: http://www.ezonenepal.com
E-zone
Commodities
Market Pvt. Ltd
• Est: 7 June, 2007
• Website:
http://www.nationalspotexchange.com/
National Spot
Exchange
Limited(NSX)
• Website: http://wellnepal.com/organization/cfx-
commodities-futures-exchange-pvt-ltd/
Commodity Future
Exchange Nepal
Limited(CFX)
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22.  Others
 Axis Broking Solution Pvt Ltd
 Nepal Spot Exchange
 Commodities & Metal Exchange Nepal Ltd.
 Himalayan Commodity Brokers Pvt. Ltd.
 Kathmandu Commodity Exchange (P) Ltd.
 Asia Commodities and Securities Pvt. Ltd.
 Birat Commodity Market Pvt . Pld.
 Easy Commodities Investment Pvt. Ltd. (ECI)
 Himalayan Commodity Brokers Pvt. Ltd.
 South Asia Commodities and Brokerage Pvt. Ltd.
 Standard Commodities Pvt. Ltd.22
Derivative Market in Nepal

23. Instruments Traded in Nepal
 Future
 Forward
 SWAPS
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24. Instruments Traded in Nepal
 Forward
 Contract that gives the buyer and the seller the right
and the obligation to buy a specified asset on a
specified date at a specified price
 Ownership of good is transferred and payment is
made
 Traded Over the counter
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25. Instruments Traded in Nepal
 Future
 Contract that gives the buyer and the seller the right
and the obligation to buy a specified asset on a
specified date at a specified price
 No physical delivery of goods
 Traded on organized exchange
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26. Instruments Traded in Nepal
 SWAPS
 Practice seen in Banking Industry
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27. Challenges of Derivative Market in Nepal
 Lack of sufficient penetration of internet in
urban areas
 computer literacy with minimum number of
people
 traditional method of agro-economy
 non-commercialized agro production sector
 lower literacy rate
 Financial Literacy of educated people
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28. Challenges of Derivative Market in Nepal
 Other challenges:
 Contract sizes at international markets that can be too
large for developing country requirements.
 Exchange rate controls or risk
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29. Prospect of Derivative Market in Nepal
 Fluctuating Exchange Rate
 Huge loss in agro products due to natural
calamities
 Predicting future price
 SWAP income flows
 Devised to mitigate risk
 Employment
 Market for local commodity29

30. “
Developing Derivative Market in
Nepal
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31. 1🔑
Creating Derivative Market
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32. Creating Derivatives Market
Legal
Environment
• Does and
Don'ts
Regulatory
Environment
• Regulatory
Bodies
Economic
Environment
• Interest Rates
• Taxes
• Inflation
• Market Size
• Suppliers
3
Political
Environment
• Monetory Policy
• Fiscal Policy
1 2 4

33. 2🔑
Creating Derivative Contract
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34. Creating
Derivatives
Contract
Large Spot Market
Maturity of Spot Market
Existance and
Involvement of Dealer
Community

35. 3🔑
Creating Successful Derivative
Contract
35

36. Creating Successful Derivative Contract
Exchange
Perseverance
Derivative
Market
Environment
Well Designed
Contract
Quotes for illustration purposes only

37. Creating Derivative Markets
 Other Considerations
 High level of investor’s sophistication and awareness
 Information Symmetry
 Availability of local commodity in large scale
 Adequate risk management knowledge and practice
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38. Conclusions
 There was considerable enthusiasm in the field
 Speculative use of derivatives with intent to
earn more in a short span of time can de-
stabilize the financial market and ultimately
pose a real threat to financial stability
 Considered as complex
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39. Conclusions
 Unethical practices, manipulation of the real
rates
 Potential for miscalculation, misuse and
unawareness had led to some highly publicized
losses has driven the sentiments of the public
against
 Decreasing attraction
 The misuse, compromised and speculative use
of derivatives39

40. References
40
David Siegel. (2016, June 23). Derivative. Retrieved from Investopedia:
http://www.investopedia.com/terms/d/derivative.asp?layout=infini&v=5E&orig=1&adtest=5
E
Hull, J. C., & Basu, S. (2011). Options, Futures and Other Derivatives. Delhi: PEARSON.
Mahat, M. (2011). New Financial Products and Challenges for Central Bank: Nepal. 174-206.
Risal, N. (2016). Capital Market. Financial System in Nepal. Kathmandu: Nepal Commerce Campus.
Shrestha, R. (2010). Why to Invest in Derivative Market? New Business Age.
Sigdel, S. N. (2012). Basics of Derivatives. Options, Futures and Derivatives. Kathmandu: Apex
College.
Weber, E. J. (2008). A Short History of Derivative Security Markets. Economics.

41. Thank You!!
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Master of Business Management
Nepal Commerce Campus (2015-2017)
Kathmandu, Nepal