Index futures: Stock exchanges to feature equity derivatives
Stock index futures contracts to be traded with banking, oil and gas and KSE-30 index as underlying indices.
This product can be used for both hedging and taking view of the market from a trading perspective, says KSE Managing Director.
KARACHI:
Representatives of the Karachi, Lahore and Islamabad stock exchanges signed an agreement on Monday to formally commence trading in stock index futures contracts, with banking, oil and gas, and the Karachi Stock Exchange (KSE)-30 Index as underlying indices.
“The derivatives market constitutes 70% of the total trading volume in India. In Pakistan, it is less than 5%. Even if you include deliverable futures market, it is still less than 10%,” said KSE Managing Director Nadeem Naqvi, while speaking on the occasion.
Trading of stock index futures contracts simply means buying or selling a specified number of futures contracts on a stock index. Its mark-to-market difference – or the current value of a futures contract – will be settled on a daily basis through the National Clearing Company of Pakistan’s standard pay-in-collect system.
“This product can be used for both hedging and taking view of the market from a trading perspective,” Naqvi noted.
According to KSE General Manager for Market Development and New Products Sani-e-Mehmood Khan, stock index futures will be a typical exchange-traded product that will track the performance of the KSE-30 Index. “It will protect investors from adverse market movements, as it is envisaged as an important leveraged product based on the free-float of blue-chip stocks,” Khan said.
In 2011, the Securities and Exchange Commission of Pakistan (SECP) allowed mutual funds to use derivatives for hedging purposes. Therefore, mutual funds can duplicate the holdings of the underlying index by investing in stock index futures, he added.
It means if the underlying index goes up by 5%, the stock index futures contract based on that index will also increase 5% for that mutual fund. “This has the tremendous advantage of lower costs, as institutional investors can use stock index futures to hedge their positions in the underlying stocks in their portfolio,” he observed.
With the contract duration of 90 days and the contract multiplier of Rs5, the contract unit will be the numerical value of the underlying index, such as the KSE-30 Index.
In his brief address, KSE Chairman Muneer Kamal thanked AKD Securities for acting as market-maker in Karachi, hoping that it will do the same for the rest of the two markets as well to ensure liquidity.
“The derivatives market has not worked in Pakistan. But if cash-settled futures are a champion derivative product in Bombay, then why cannot it be so in Pakistan?” he said, while encouraging brokers and AMCs to trade in stock index futures contracts.
Published in The Express Tribune, March 12th, 2013.
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Representatives of the Karachi, Lahore and Islamabad stock exchanges signed an agreement on Monday to formally commence trading in stock index futures contracts, with banking, oil and gas, and the Karachi Stock Exchange (KSE)-30 Index as underlying indices.
“The derivatives market constitutes 70% of the total trading volume in India. In Pakistan, it is less than 5%. Even if you include deliverable futures market, it is still less than 10%,” said KSE Managing Director Nadeem Naqvi, while speaking on the occasion.
Trading of stock index futures contracts simply means buying or selling a specified number of futures contracts on a stock index. Its mark-to-market difference – or the current value of a futures contract – will be settled on a daily basis through the National Clearing Company of Pakistan’s standard pay-in-collect system.
“This product can be used for both hedging and taking view of the market from a trading perspective,” Naqvi noted.
According to KSE General Manager for Market Development and New Products Sani-e-Mehmood Khan, stock index futures will be a typical exchange-traded product that will track the performance of the KSE-30 Index. “It will protect investors from adverse market movements, as it is envisaged as an important leveraged product based on the free-float of blue-chip stocks,” Khan said.
In 2011, the Securities and Exchange Commission of Pakistan (SECP) allowed mutual funds to use derivatives for hedging purposes. Therefore, mutual funds can duplicate the holdings of the underlying index by investing in stock index futures, he added.
It means if the underlying index goes up by 5%, the stock index futures contract based on that index will also increase 5% for that mutual fund. “This has the tremendous advantage of lower costs, as institutional investors can use stock index futures to hedge their positions in the underlying stocks in their portfolio,” he observed.
With the contract duration of 90 days and the contract multiplier of Rs5, the contract unit will be the numerical value of the underlying index, such as the KSE-30 Index.
In his brief address, KSE Chairman Muneer Kamal thanked AKD Securities for acting as market-maker in Karachi, hoping that it will do the same for the rest of the two markets as well to ensure liquidity.
“The derivatives market has not worked in Pakistan. But if cash-settled futures are a champion derivative product in Bombay, then why cannot it be so in Pakistan?” he said, while encouraging brokers and AMCs to trade in stock index futures contracts.
Published in The Express Tribune, March 12th, 2013.
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