Topic 5

derivative Market

MFK FIN536 Topic 4 1

At the end of the lessons, students should be able to:-

 Understand the development of derivatives market in Malaysia.

 Identify the derivatives participants and explain the uses of derivatives.

 List the derivatives products available and its underlying instruments.

 Explain the characteristics of futures contract including ‘open position’

and ‘close out’, margin requirements and product specifications.

 Illustrate briefly how futures are used for speculating hedging.

 Explain the features of options including calls, puts, types of options,

strike price and option status.

MFK FIN536 Topic 4 2

MFK FIN536 Topic 4 3
 Risk reduction.

 Price of the securities are volatile.

 The more volatile an instruments/securities is the higher the

participants is exposed to risk.

 Derivatives products – manage exposure to market

volatilities.

MFK FIN536 Topic 4 4

 Value of derivatives product depends on:-
i. Underlying instruments;
ii. Commodity prices;
iii. Exchanges rates;
iv. Interest rates;
v. Indices;
vi. Share prices

 Derivatives can be traded in an organised exchange or over-the

counter (OTC).

MFK FIN536 Topic 4 5

Year Development

July 1980 Kuala Lumpur Commodity Exchange (KLCE) was established.

Dec1995 Kuala Lumpur Options and Financial Futures Exchange (KLOFFE).

May 1996 Malaysian Monetary Exchange.

Dec 1998 KLCE merged with MME and known as Commodity and Monetary
Exchange of Malaysia (COMMEX).

Jan 1999 KLOFFE become a subsidiary of KLSE Group of Companies.

June 2001 KLOFFE merged with COMMEX and form Malaysia Derivatives
Exchange (MDEX).

2004 Known as Bursa Malaysia Derivatives Berhad.

MFK FIN536 Topic 4 6
 An agreement between two parties to buy or sell
the underlying instrument at a specific time in
the future for a specific price determined today.

MFK FIN536 Topic 4 7

 Provides the holder/buyer the right, but not the
obligation, to purchase or sell a certain quantity
of the underlying instruments.

MFK FIN536 Topic 4 8

 Governed by the Futures Industry Act 1998.

 The act gives power to MOF which empowered SC

to regulate the derivatives market.

MFK FIN536 Topic 4 9

 Malaysian Derivatives Clearing House Berhad (MDCH).

 Provides financial stability by guaranteeing the performance of all

contracts as it acts as the counterparty to all contracts traded.

 Contractual obligation between actual buyer and seller does not exist.

 Guarantee is supported by the collection of margin payment from the

buyer and seller.

MFK FIN536 Topic 4 10

MFK FIN536 Topic 4 11
MFK FIN536 Topic 4 12
No Derivatives products Underlying instrument/commodity

Crude Palm Oil Futures (FCPO) CPO

KLCI Futures KLCI

Kuala Lumpur Composite Index KLCI

Options (OKLI)

3-month KLIBOT Futures (FKB3) 3 month KLIBOR

3-year MGS Futures (FMG3) 3 year MGS

5-year MGS (FMGS5) 5 year MGS

10-year MGS Futures (FMGA) 10 year MGS

Crude palm kernel oil Futures Crude palm kernel oil

(FPKO)

MFK FIN536 Topic 4 13

Futures

MFK FIN536 Topic 4 14

 Value-depends on value of an underlying asset.

 High-risk type of instrument.

MFK FIN536 Topic 4 15

 Future contract has an expiry date – the last day of trading in the
particular contract month.

 ‘Opened’ on the expiry date ???

 ‘Close out’ – close out or resold before the expiry date.

 Contract price vs market price.

 Close out, when the value has risen or fallen.

MFK FIN536 Topic 4 16

 Deposit initial sum of money or other acceptable collateral
with the futures brokers before trading.

 Set by Malaysian Derivatives Clearing House.

 Depend on market volatility and other factors at the

prerogative of the clearing house.

MFK FIN536 Topic 4 17

Profit = SP – BP x 100 x 10 x price per tick

MFK FIN536 Topic 4 18

Options

MFK FIN536 Topic 4 19

 Give the buyer/holder option, not the obligation, to
buy or sell a specified asset at a specified price, at
or before a specified date from the seller.

 Difference with futures:-

Pay premium in addition to the price of the
financial instrument.
Let the options expire on the expiration date
without excercising it.

MFK FIN536 Topic 4 20

Call option
 Gives the buyer/holder the right to buy (not obligation)
an underlying asset.

Put options
 Gives the buyer the right to sell an asset.

*The seller has an obligation to deliver the specified

instrument at the specified price if option owner exercise
the options.

MFK FIN536 Topic 4 21

American option
 Can be exercised at any from the date of

purchase until the expiry date.

European options
 Can be exercise only on the specified expiry

date.

MFK FIN536 Topic 4 22

 The price at which the underlying asset will be
bought or sold if the holder of option wants to
exercise the option.

MFK FIN536 Topic 4 23

 In the money – market price > strike price

 Out of money – market price < strike price

 At the money – market price = strike price

MFK FIN536 Topic 4 24

 Topic:-
Offshore market.

 Assignment should covers the following aspects:-

i. definition;
ii. benefits;
iii. LOFSA – role and features.

 Due on week 11 (17/09/09).

MFK FIN536 Topic 4 25

At the end of the lessons, students should be able to:-

 Understand the development of derivatives market in Malaysia.

 Identify the derivatives participants and explain the uses of derivatives.

 List the derivatives products available and its underlying instruments.

 Explain the characteristics of futures contract including ‘open position’

and ‘close out’, margin requirements and product specifications.

 Illustrate briefly how futures are used for speculating hedging.

 Explain the features of options including calls, puts, types of options,

strike price and option status.

MFK FIN536 Topic 4 26

 Financial legal framework.

MFK FIN536 Topic 4 27

THANK
YOU…

MFK FIN536 Topic 4 28