Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows: Table 2.3: History of the Korean Derivatives Market May. 1996 KOSPI 200 Futures listed Jul. 1997 KOSPI 200 Options listed Apr. 1999 US Dollar, CD Interest Rate, Gold Futures & US Dollar Options listed Sep. 1999 3-year KTB Futures listed Jan. 2001 Kosdaq 50 Futures listed Sep. 2001 KOSPI 200 Inter-contract months spread listed Dec. 2001 Kosdaq 50 Options listed Jan. 2002 Equity Options listed May. 2002 Options on 3-year KTB Futures listed Dec. 2002 MSB Futures listed Aug. 2003 5-year KTB Futures listed Jan. 2005 Consolidated KRX launched Nov. 2005 STAR Index Futures listed Dec. 2005 Kosdaq 50 Futures & Options de-listed May. 2006 Yen Futures/Euro Futures listed Table 2.3 (cont.): History of the Korean Derivatives Market Dec. 2007 CD Interest Rate Futures, Options on 3-year KTB Futures de-listed Feb. 2008 10-year KTB Futures listed Source: Korea Exchange (KRX), http://www.krx.co.kr/ Many factors have contributed to the impressive growth of Korean derivatives market. Some of the main contributing factors are: After the financial crisis of the late 1990s, the demands for risk management tools have increased. The investors have been effectively utilizing such products as KOSPI 200 futures and options, 3-Year KTB futures and USD futures to meet their hedging needs. A... ... middle of paper ... ...nsecutive) futures Source: Source: Korea Exchange (KRX), http://www.krx.co.kr/ Works Cited Brorsen, B. W., 1991, Futures Trading, Transaction Costs, and Stock Market Volatility, Journal of Futures Markets 11, 153-163. China Securities Regulatory Commission (CSRC) Annual report 2008, CSRC Cox, C.C., 1976, Futures Trading and Market Information, Journal of Political Economy 84, 1215-1237 Jae Ha Lee, February 2002, Index Arbitrage with the KOSPI 200 Future Leading Futures Market KRX, Korea Exchange Ross, S. A., 1989, Information and Volatility: The No-arbitrage Martingale Approach to Timing and Resolution Irrelevancy, Journal of Finance 44, 1-17. Sung C. Bae, Taekho Kwon, and Jongwon Park, 2004, Futures Trading, Spot Market Volatility, and Market Efficiency: The Case of the Korean Index Futures Markets, Journal of Futures Markets 24, 1195-1228
Equity markets have become much more volatile. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a “key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.” When the last M&A Outlook was written, the VIX was at 11.57. At the start of November 2007, the VIX had increased to 23.21.
Many people believe the efficient market hypothesis is inefficient and Bloomfield presents an alternative to this hypothesis. Bloomfield posits the meaning of costly statistics is not fully revealed in the market. Some investors put more importance on some statistics rather than others which indicates that some statistics are less exposed in market prices. IRH essentially extends EMH by identifying extraction costs of statistics from publicly available data.
Pennings, Joost M.E. Research in Agricultural Futures Markets: Past Present and Future. Presentation Paper: Wageningen Agricultural University: Netherlands. 8 June 2001.
I will first present some brief theory on the Efficient Market Hypothesis and behavioral finance. Then I give an overview of the critique by Fama (1998). In the next section I will present the main points of the articles by Odean (1998), and Barber and Odean (2007). These are then compared to the relevant conclusions of Fama.
Caterpillar Inc. also faces the risk of its cash flow and earnings being affected by fluctuations in the exchange rates of currency, commodity prices, and interest rates. To control for this, the company’s Risk Management Policy ensures prudent management of interest rates, commodity prices, and exchange rates of foreign currency by allowing the use of derivative financial instruments. According to the policy, the derivative financial instruments are not supposed to be used for the purpose of speculation. In its pricing strategy, Caterpillar Inc. faces the risk of difficult shipping of its products. This risk can be encountered by offering its products on instalments and lease to its loyal customers (Caterpillar, Inc. (CAT), 2011).
The empirical results show that (1) the introduction of futures trading is related with an increase in spot price volatility for both KOSPI 200 stocks and non-KOSPI 200 stocks; (2) the addition of options trading to the futures trading is related with even greater spot price volatility for both groups of stocks; (3) the publication of the KOSPI 200 company list brings in a significant increase in the spot price volatility of non-KOSPI 200 stocks, but almost no change in the spot price volatility for KOSPI 200 stocks; and (4) the futures trading would generate more trading in non-KOSPI 200 stocks, leading to a relatively large increase in both spot price volatility and trading efficiency of non-KOSPI 200 stocks, compared to KOSPI 200 stocks.
South Korea has a strong $1-trillion economy; it is the third largest market in Asia, behind Japan and China. It also has the 13th largest economy in the world. It is expected that the economy’s current upward trajectory will continue for some time to come. This makes South Korea an attractive market for foreign investment, especially as the world economy, as a whole, continues to improve.
2 (1970): 383–417. i.e. a. Fama, Eugene F. “Efficient Capital Markets II.” Journal of Finance 46, no. 1 (September, 2011). 5 (1991): 1575–1617.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
In conclusion, hedging risk with financial derivatives can give firm range of benefits such as lower probability of having financial distress, lower value of debt ratio, and earn tax benefit. It can be concluded that firm should hedge risk using financial derivatives because lot evidence shows that firm using this strategy is more successful than those who are not. However, since different type of companies facing different risks, they should not necessarily use the same hedging strategy.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
...t Efficiency and Stock Market Predictability" [Online] Available On: http://www.e-m-h.org/Pesa03.pdf [Accessed On 5 december, 2011].
Systemically important payment systems include the large value payment system MEPS+ and securities and derivatives clearing and settlement systems operated by the Singapore Exchange (SGX). Two financial central counterparty clearing house (CCPs) are the Central Depository (Pte) Limited (CDP) that clears equities and corporate debt securities; and the Singapore Exchange Derivatives Clearing Limited (SGX-DC) that clears exchange traded and OTC derivatives. CDP’s value of transactions processed was equivalent to 94 percent of GDP in 2012. Worldwide, SGX- DC is the eighth largest clearer in exchange traded equity index futures. Singapore is also one of the largest trading centres for OTC derivatives in Asia. CDP and SGX-DC are assessed as effective and efficient CCPs with sound risk management frameworks. Both CCPs comply with relevant international standards. They are guided by SGX’s comprehensive and transparent risk management framework comprising clear policies, sound governance arrangements and operational systems, accompanied with business continuity procedures that are regularly tested. The CCPs apply a comprehensive credit risk management framework which serves to maintain sufficient financial resources to cover the default of the clearing member and its affiliates with the largest exposure, as well as the default of the two financially weakest clearing members. However, SGX’s