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The derivatives market has attained the highest growth of all financial market segments in recent years and has become the central contributor to the stability of the financial world. In recent years, derivative markets have grown by leaps and bounds in emerging economics and given the high level of economic and financial risks faced by market participants and investors in emerging countries, derivatives contribute to a country's economic development by making these risks manageable. Due to the recent catastrophic fall of capital market, rapidly declining FDI and scarcity of investment opportunities in an equity centric economy, investors of Bangladesh is crying out for an innovative and versatile financial product such as derivative securities for hedging and market expansion. In our paper, we have provided clear examples of how derivative securities can strengthen capital market of Bangladesh, both in terms of risk mitigation and creating alterative investment vehicles as well as reduce burden on our major import and export sectors. Furthermore, we have also looked into the prerequisite of setting up a derivative markets in Bangladesh and provided a clear roadmap. In view of recent turmoil in the equity markets, we need to be circumspect and foresighted in our approach; a standardized exchange traded derivative market with phase-by-phase introduction of product has been recommended.
1. Introduction
Derivative securities are one of the most actively traded financial instrument for ensuring efficiency and depth of capital market. These securities have no intrinsic value; their returns are linked to, or derived from, some other product or underlying asset. The derivatives market has attained the highest growth of all financial market segments in recent years and has become the central contributor to the stability of the financial world. Its size has increased by around 24 percent per year in terms of notional amount outstanding, far outpacing other financial instruments such as equities (1 1 percent) and bonds (9 percent)3. With a global reach and involvement of players with varied objective (hedging, speculation or arbitrage), derivatives offer various types of risk protection and innovative investment strategies.
The market for derivatives is the largest single segment of the financial market and as of June 2007, the global derivatives market amounted to euro457 trillion in terms of notional amount outstanding4. From the...