Derivatives Risk Market Sectors

International Journal of Management (IJM), ISSN 0976 – 6502(Print), ISSN 0976 - 6510(Online),
Volume 6, Issue 3, March (2015), pp. 66-74 © IAEME
66
DERIVATIVES FLOCK CASE RISK ON MARKET
SECTORS
Dr. Abdullah Ibrahim Nazal
Associate Professor, Department of Finance and Banking,
Faculty of Economics and Administrative Sciences,
Zarqa University, Jordan
ABSTRACT
This study is one of very few studies which have investigated derivatives flock case risk on
market sectors as result to understanding speculation financial crises. It concentrated to analyses way
of derivative value to managing risks in order to find derivatives ignorance environment which lead
many small specters to follow false demand. It called flock case. Derivative law dealing has many
types to face this case in order to protect country domestic economic. The search result show
ignorance increase up to first essential contract delay dealing to be promising in future with out
giving seller sales and buyer give the cash. Derivative from this contract in order to speculate to get
unusual profit increase gap between buyer expectations to increase prices in future also seller expect
decreasing prices in future. False demand and false supply of derivative on loans, commodities,
currencies and shares was increased as result to increase ignorance and follow flock case. It affects
negatively on markets sectors. Searcher recommended to reduce ignorance by accept speculation
with limits obligated by law as make derivative from real contract and obligate buyer to buy cash
currently or obligate seller to give sales currently.
Key words: Derivatives, Market, Crises, Flock case and Managing Risk
1. INTRODUCTION
Industry sector is important for developing. It successes will courage other sectors to follow
developing as agriculture sector and commercial sector because there is relationship between
economic sectors. Industry sector produce types of industry product as simple product as TV or It
may produce heavy products as vehicle for building. Industry tries to use machines to make life
easier as result to fast and quality working. It deals with real economic and real resources.
(International monetary fund, 1998) explained derivatives as financial tools but not grantee
contract which derivative from essential contact with out fixed price and related to its price but it not
deal in market with the essential contract. Investors deal with derivatives as independence contract as
way to transfer risk or as way to speculate to get unusual returns but not own the sales in essential
INTERNATIONAL JOURNAL OF MANAGEMENT (IJM)
ISSN 0976-6502 (Print)
ISSN 0976-6510 (Online)
Volume 6, Issue 3, March (2015), pp. 66-74
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67
contract therefore financial derivatives contract are usually settled by net payment of cash often
before maturity for exchange traded contracts such as commodity future.
(Eric and Lorin,2000) studied problems which facing the financial services industry as
mortgage and insurance to document essential contract which increase credit classification of its
derivatives. It adds cost beside brokerage commission. Problem of transparency, differential price
and disintermediation affect on transforming all sectors. They interact in complex ways as result to
fast deal in internet and phone. They will change market structure over time which limits mortgage
and insurance documentary affection.
1.1. The problem
To find possibility of law ruling derivatives dealing by possibility to account its price and to
success its benefit to give hedge or to give unusual net profit in flock case. The problem questions
are:
1- What is the resources of derivatives ignorance dealing?
2- What is the negative derivatives flock case affection on industry sector?
3- What is derivatives law needs to get derivative benefit and avoid its negatives?
1.2. The Importance
This search importance come from analysis derivative flock case on Market sectors. It shows
the reason of negative affection on market pricing which give false directing of supply and demand.
It answers the question:" why there is increasing of subjects prices as oil price in spite of real enough
supply. It analysis the derivative contract in order to give suitable reason to built suitable derivative
law for dealing up to sensible derivative types.
1.3. The Objectives
The objectives answering problem questions as follow:
1- To find derivatives ignorance dealing.
2- To find derivatives flock case negative affection on industry sector.
3- To find the Derivatives law needs to get derivative benefit and avoid its negatives.
1.4 Literature Review
Studies show different affection of derivatives on financial market up to different using of
testing models and different countries environment. These studies show the difficult of derivative
affection measure. These studies show difficult of standardization derivative dealing as result to
assuming a constant error variance throughout the time period of study as econometric techniques
and different models for measure. (Coenraad, 1997) explained that Theoretically study showed the
monetary policy which includes interest rate, credit policy and exchange rates can affect on
derivatives trading speeds to financial assets price but in empirically study there was no affection on
derivatives in UK. (Angelos and Katrina, 2007) founded that introduction of futures in market leaded
to significant change in the spot market volatility of FTSE/ASE-20 index in Athens stock exchange.
This index related to product of the cooperation of the Athens stock exchange (ASE) and financial
time's stock exchange (FTSE). This index includes 20 stocks with the highest capitalization traded
which equal more than half of total capitalization of ASE companies. (Spiros and Nicholas,2006)
found evidence of a reduction in systemic risk of the stocks underlying the futures and options
contracts traded in Greek derivatives exchange after derivatives began trading and little effect on not
systemic risk of stocks or the way volatility reacts to bad or good news. (T. M and Afsal, 2008)
studied the affection of future contracts and options contract on the cash market in India by general
index called S&P CNX Nifty Index. There was no affect of changing introduction of derivatives.

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2. WAY OF DERIVATIVE VALUE TO MANAGING RISKS
Derivative successes is affected by ways of financial managing risks and speculation tool.
Managing risk is not shown in company's financial tables as secret weapon. Derivatives are complex
and involve risks of several kinds. Both theoretical and practical methods dealing with risk by
mathematics sophistication by build formulating a mathematical model with include clauses to
identified factors (Tomasz and Marek, 2002). Ignorance of financing increased as result to
developing financial tools to face problems or to get aims. This means that ways of managing risks
developing are increasing factors which affect on industry sector success. Derivatives are financial
tools as other financial tools have negative affection and positive affection. It needs to reach balance
between this affection to success. It comes as result to face future changing risk. Its case appears by
delay cash or product and by delay cash with product to gather. See next table:
Table 1: Derivatives Cases
Possibility of apply
derivatives
Contract includingContract Cases
No possibility of apply
derivatives for future risk
Current buying cash from buyer and current
giving product from seller
contract in case 1
Possibility of apply derivatives
for future risk as result to delay
cash or giving product
Current buying cash from buyer and delay
giving product from seller or delay buying cash
from buyer and current giving product from
seller
contract in case 2
Possibility of apply derivatives
for future risk as result to delay
cash and giving product
Delay buying cash from buyer and delay giving
product from seller
contract in case 3
From table (1): Derivatives are contracts which has been derivative from contract in case 2
and 3 as result to time delay.
This means buyer just buy settlement margin not buy all cost amount in execution time
therefore financial market rules of future contracts (as type of derivatives) obligates buyer to put 2%-
5% of derivatives contract value which increase by increasing risk as grantee to give other dealer his
rightful. Ex: investor (A) buy currency future contract to avoid increasing British bound price after
month but investor (B) expect reducing British pound price after month. Investor (A) will buy future
contract to get 100000 British pound by 150000$ but investor (B) sell this future contract.
"Expectation is often incorrect. It is because of different expectations that some speculators prefer to
purchase futures contracts while other speculators prefer to sell the same contracts at a given point in
time"(Jeff, 2000). In this case settlement margin will be 10000$ when 1.6$ will equal 1 British
pound which is profit for buyer who expect price increasing and buy on price that 1.5$ equal 1
British Pound. As result to settlement time seller will give buyer 10000$ not all amount of contract
price.
Derivatives can be based on real assets as metals and source of energy also it based on
financial assets as shares, bonds, loans and currency. Its return derived from those assets (Don,
2004).
Way of Derivative were deal in bank as way to increase using of cash money in current
deposits because depositors do not get their deposits in same time. Bank can use part of these
deposits to give loan services. Law give bank this right as result to consider current deposit a loan for
bank with out returns. Ex: Bank derivative loan as in next table. Bank derivative loan by customer

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(A) current depositor up to bank law use 10% of deposit and get interest15% part of this interest 10%
in advance.
Table 2: Bank derivative loan from customer current deposit
Bank Use 10% as a rule= 10000$ from the
customer (A)current deposit
customer (A) has current deposit = 100000$ in
2015
-----------------------Derivative loan by bank steps
Bank get cash after dealing first loan contract
1000 $ as profit
Step one giving loan 10000$ but 10% must be
buy in advance and 5% in 2016
Bank get cash after dealing second loan
contract 100 $ as profit to customer (A) using
money service for daily using
Step two giving loan from profit 1000$ with
10% must be bought in advance and 5% in
2016
In this table customer do not get his deposit or get return and use 100$ within the year but
bank use deposit for loan and get (1000 + 100 + (500 in the contract end time) + (50 in the contract
end time)). This profit come as result to own the right to use cash also other derivatives show profit
as result to own right not to own cash or sales. Ex: Option contract to get goods means the right to
use sales as result to get contract. Premium obligated to get units. It is small percent of unit value and
give right to use units. This right increase using units by increasing premium as leverage. Center
bank rule bank derivative from current deposit to protect monetary policy and direct economic loan
needs.
3- DERIVATIVES IGNORANCE ENVIRONMENT
Derivatives were developed by time. There was exchange in trade markets by time from
groups to standardize the quantities and qualities of goods that were traded to use derivatives
contract as way to speculating. It's dealing increase because of using open outcry system then there
were using of electronic trading which increasing dealing and increase changing of prices. Telephone
and computer linked network also increased dealing as over the counter market. This make dealing
huge and weakness of statically study to give exactly data because over the counter market is much
larger than the change trade market (John, 2006).
There is facts affect on derivative pricing as result dealing ways and expectation of risk
value. (John, 2006: 3) explained that: " we should bear in mind that the principle underling an over –
the- counter transaction is not the same as its value" because of derivatives dealing changing. Over
the counter market increase more times the world gross domestic product.
Derivatives pricing is related to essential contact subject price and other cost as commission
or managing operation cost which it is different from country to anther country and from company to
Anther Company. These factors of pricing increased as result to expecting value at risk. It is different
from buyer and seller. It is the main problem of flock case as result to increasing ignorance case in
speculation which increase mistake of pricing (Don, 2004).
(Jeff, 2000: 125) showed that "Expectation is often incorrect. It is because of different
expectations that some speculators prefer to purchase futures contracts while other speculators prefer
to sell the same contracts at a given point in time". Ex: contact include s selling goods amount
1000000 unit every unit = 10$. Seller agrees that there will be change in price for the unit to be 5$.
Seller will sell derivative future contract up to expect reduce price under 10$ per unit but buyer will
buy derivative contract as result to expect increase price more than 10$ per unit. Risk expectation
will be between (-5) to seller and (5+) to buyer. As result to this case the price in execution date will
be as price in market up to economic law of supply and demand for real dealing or there will not be
economic law as result to derivatives directing demand and supply to cover false economic.

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4. THE DERIVATIVES FLOCK CASE AFFECTION
Derivatives affect on demand as it is expectation for demand in future. It can direct producing
to cover this demand as result to marketing management which looking for expecting needs to
increase sales. This case of directing producing will affect on international producing market as
affect of Oil future contracts to increase Oil price. This affection directed by selling and buying
future contracts in international financial market as a market for almost countries. Dealer can be
done by country or company or rich dealer. Problem of Flock Case whom follows expectation of this
country or this company or this rich dealer will increase affection on demands. By time, expectation
builds the demand but not the real demand. Flock Case direct demand from real needs to imagination
needs. It will direct amount of producing to the wrong way and lead to reduce sales also it may
increase costs more than the real case to lead to loss or decrease profits. Other loosing comes from
applying tax. Derivatives have value and it may lead to increase profit as dealer expects which will
increase tax as result to expect increasing profit. Accounting standards may show this profit which
could be not real but it apply increasing tax regardless of expecting loss at execution time while in
case derivatives not appear in financial tables it may lead to profit but with out disclosure.
Flock Case increase demand as rumors. This means the dealing subject as currency, goods,
services, shares and bonds will be affected by false demand.
Financial market have responded to increase interest rate risk as result to allow banks to
transform the duration of their balance sheet with out incurring additional capital charge as result to
use derivatives(Katie, 1999). Bonds are loans. Flock Case may increase demand on loan to increase
interest which increase cost of financing companies and reduce profit. This case will direct investors
to sell shares and prefer to get bank deposit than deal with financial market which leads to
depression.
(Ephraim and Salma, 2010) studied in France the foreign currency derivatives on France
firms value "the value effect of derivatives use is highly significant and almost six times higher for
firm with exposure to a depreciation of the euro than it is to those with exposure to an appreciation.
This is evidence that foreign currency derivatives use is more effective at value creation for
depreciation of the euro " .Currency exchange problems may face problem of increasing liquidity as
result to use international tools (as derivatives) to get in inflation or reduce currency power to get in
depression as result to loss domestic company profits (Joseph and David, 2001). Derivatives deal
with foreign currency therefore it is pricing derivative of stocks and derivatives of commodities up to
foreign currency (Robert and Stuart, 2000). It shows the amount of foreign currency dealing rather
than domestic currency and affect on monetary policy of the country. There is relation ship between
currencies, loans, commodities and shares pricing. Failing in dealing with derivatives will affect on
these factors. The bad negative affect increases as result to increase derivatives value than the world
general gross product more than 5 times which show the huge amount of speculation.
Currency is power to develop country. It may reduce local currency price to increase
international investors and courage export or it may increase local currency price to reduce its
international foreign currency value. Derivatives false demand will affect on country monetary
policy as result to Flock Case.
Goods and services false demand will direct local producing to wrong side which loss sales
or lead to increase cost of producing which will reduce its competitor ability with international
companies and loss markets.
There are relation between derivatives and large capital firm value which shows by
increasing shares market price .Shares build equity of producer companies. False demand may
increase shares price in market than book value which courage shareholders to sell shares which lead
to shareholders changing and possibility to loss strategic sharers as supporter or false will decrease

71
market price than book value to give idea that company is weak to reduce its supporter as increasing
shareholders or get government grants or creditors who gives loan.
5. DERIVATIVES LAW NEEDS
Derivatives need suitable law to be legally in order to give dealers rights and duties as give
goods and get its price also to deserve compensation up to settlement when seller do not give goods
in the limit time addition to derivatives contracts grantee to increase its credit classification degree.
Some countries do not deal with derivatives because there is no law for derivatives but other
countries found illegally dealing with derivatives as USA in 1990 when it found law problems in
commodities future contract which increase uncertainty of future contracts and other derivatives
(Julia, 2009). See next figure:
Law needs
Derivatives Law Documentary to be accepted in assets, financial liabilities and equity
whether services or good or currency
Derivatives Law of dealing grantee as obligatory deposit or other grantor
Derivatives Law to deserve compensation in settlement case as margin
Derivatives Law speculation in financial market as standardization to sell or buy
future contract or some options.
Figure 1: Derivatives Law needs
Derivatives are contract up to promising to give some thing in future has get law acceptance
in some countries. It has been developed to be Future contract, Options contract, Swap contract and
Forward contracts. Future contract and some option contract can be deal up to financial market
standardization but some anther options, forward and swap contracts has been done between dealers
agreement with out financial market standardization.
As result to increasing derivative cost because of uncertainly expectation as result to many
changing with complexity to study and increasing possibility of loss there were discussion with
market participants focused on derivative regulation which relate to center clearing, margining and
bank capital requirements as dealer but this regulation will minimize dealing with derivatives and
lead small companies to avoid dealing as result to regulation cost (Macroeconomic Assessment
Group on Derivatives, 2013).
Some countries obligate Islamic economic system as Pakistan. There is Islamic law which
affect on the economic. In spite of Islamic rules which not accept traditional derivative, some studies
talk about dealing by tradition derivatives. (Faiza, Umare and Kalid, 2013) show derivatives
developing in Pakistan financial services sectors to get liquidity and mobilize the require capital for
economic growth. This means derivatives deal in mix economic system between Islamic rules and
capitalized system rules or there are derivatives up to Islamic rules. Practically, dealing by
derivatives has been done because of its benefit.
Derivatives law is its obligatory rule to deal by derivatives as equity, liabilities and asset. It is
affected by international law as dealing in international financial market as traditional types, ex:
future, options, swaps and forward contracts. Some financial markets deal with Islamic derivatives as
obligate Islamic rules to control dealing. They use Islamic rules as way to avoid ignorance between
dealers as avoid sales contract up to promising of dealing in future with if seller did not give sales to
buyer and buyer did not give seller cash. There is problem of measure seller credit acceptance and
buyer credit acceptance to gather in future as result to looking for profit for each dealers in case one

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of them think there will be increasing of price while other think there will be reducing of price. See
next table.
Table no 3: Acceptance derivatives in Islamic law
Acceptance derivatives
in Islamic law
derivatives
Contract including
Contract
Cases
Accepted
derivatives for future risk as
result to delay cash or
giving product
Current buying cash from buyer
and delay giving product from
seller or delay buying cash from
buyer and current giving
product from seller
contract in
case 2
Not Accepted
derivatives for future risk as
result to delay cash and
giving product
Delay buying cash from buyer
and delay giving product from
seller
contract in
case 3
On other hand, some derivatives rule by financial market rules as future contract which
standardize to be sold but anther derivatives do not deal by financial market as forward contract. It is
depended on the agreement between seller and buyer as any selling contract. As result to ignorance
derivatives dealing expectation and electronic dealing which increase uncertainty environment there
were gap between sellers expectation of reducing future price and buyer expectation of increasing
future price. It leads to gambling. Law tries to control bad affection of flock case. It takes many cases
as in next figure:
The Rules
Accept dealing with derivatives Refuse dealing with derivative Rule not affected
Just Accept types of derivatives Accept all type of derivatives
Accept Islamic Derivatives Accept Traditional derivatives
Figure 2: Law of control flock case affection
CONCLUSION
It concentrated to analyses way of derivative value to managing risks in order to find
derivatives ignorance environment which lead many small specters to follow false demand. It called
flock case. Derivative law dealing has many types to face this case in order to protect country
domestic economic. The search result show ignorance increase up to first essential contract delay
dealing to be promising in future with out giving seller sales and buyer give the cash. To get
derivatives from this contract in order to speculate and get unusual profit increase gap between buyer
expectation to increase prices in future and seller expecting of decreasing prices in future. False

73
demand and false supply of derivative on loans, commodities, currencies and shares was increased as
result to increase ignorance and follow flock case. It affects negatively on markets sectors.
RECOMMENDATION
Searcher recommended to reduce ignorance by accept speculation with limits obligated by
law as make derivative from real contract and obligate buyer to buy cash currently or obligate seller
to give sales currently.
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Thomson learning publisher, Ohio, USA, pp1-2.
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learning publisher, Ohio, USA, p375

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15. Spiros Karakostas and Nicholas Tessaromatis, 2006, the effect of the introduction of
derivatives on the systematic and unsystematic Risk in the Greek equity market, Investment
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(IJM), Volume 1, Issue 2, 2010, pp. 106 - 128, ISSN Print: 0976-6502, ISSN Online: 0976-
6510.

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