DERIVATIVES

MARKETS AND RISK
MANAGEMENT ON
MERCENTILE
EXCHANGE NEPAL
Research proposal by
ARPAN BASNET

(opt. subject = finance) phone number = 9806036825
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BACKGROUND
The Oxford dictionary defines a derivative as something derived or obtained
from another, coming from a source; not original. In the field of financial
economics, a derivative security is generally referred to a financial contract
whose value is derived from the value of an underlying asset or simply
underlying. Derivatives are financial contract or financial instrument whose
prices are derived from the price of something else. The underlying price
on which a derivative is based can be that of asset (e.g ., commodities,
equities, residential mortgages, commercial real estate, loans, bonds ), an
index(e.g, interest rates, exchange rates, stock market indices, consumer
price index(CPI) i.e. inflations derivatives )or other item. Credit derivatives
are based on loans, bonds or other forms of credit. Derivatives allow risk
about the price of the underlying asset to be transferred from one party to
another.

The word “derivative” is a magic word. There can be derivative of
everything e.g., commodities, equities (stock), residential mortgages,
commercial real estate, loans, bonds), an index (e.g., interest rates,
exchange rates, stock market indices, consumer price index(CPI) i.e.
inflation derivatives), or other items. So there is scope for everyone and
every sector like growers, traders, exporters, importers, financial
institutions, industrialists, investors and end users. Dequan He PH.D.
Candidate (2004), Karan lama (BOD at Global Pristine Enterprises
Pvt. Ltd)(2015) and Maria Pochea (2012).
The derivatives market is the financial market for derivatives, financial
instruments like futures contracts or options. Which are derived from
other forms of Assets. A derivative is a financial instrument which derives
its value from the value of underling entities such an asset, index, or
interest rate _it has no intrinsic value in itself. Derivatives can be used
either for risk management (i.e. to “hedge” by providing offsetting
compensation in case of undesired event a kind of “insurance”) or for
speculation (i.e. making a financial ”bet”).

STATEMENT OF PROBLEM
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According to the Karan lama (BOD at Global Pristine Enterprises
Pvt. Ltd), a case study of “challenges and Prospects of
Derivative Market in Nepal” (2015), a derivatives market goes more
than a Decade in Nepal. Still it face a various problem such problem are;
lake of consumer awareness, lack of proper governance or supervised
organization, lake of policy, thinking of a people about derivative market
like as gambling and different types of risk such as; credit risk, market
risk, inflation risk, interest rate risk etc.

Risk management is also the importance in exchange. According to the
PHD thesis “TESTING THE EFFICIENCY OF ROMANIAN FINANCIAL
DERIVATIVES MARKET” by Maria Pochea (2012), every exchange required
a proper risk management system to insure the market participant on the
exchange.

1. Does market participant are secure by the risk management system
implemented by the exchange?
2. Does the market system and technology use by the exchange are
highly secures or not and internationally accepted?
3. Does transactions or customers participants are consistent?
4. Does all derivative products are available for trade, which are available
in international exchange?

OBJECTIVES OF THE RESEARCH
Major objectives of studies of “Derivatives Market and Risk Management
on mercantile exchange Nepal (MEX) Nepal” are to know about the
current situations of derivative and risk management in MEX. Such
objectives are point out below:

 To have an overview of Nepalese derivative market.

 To studies the types of derivatives traded in MEX Nepal.

 To studies about risk management with the help of derivatives.

 To know the customer position on MEX Nepal.
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 To analyze the performance of derivatives trading in MEX.

 To know the technology and tools use by MEX are comparatives in
the contents of derivative market in internationally or not.

THEORETICAL FRAMEWORK
Karan lama (BOD at Global Pristine Enterprises Pvt. Ltd)(2015), explain
that the Nepali derivative market are still not secured. Customers were
still not trusted on the market, because of the lack of supervisory body.
Exchange in Nepal not highly standardizes, comparing with international
level exchange. He also explains his case studies or thesis, MEX is the 1st
exchange which provides standardizes platform for future derivative
contracts.

Maria Pochea (2012) explains on his PHD thesis, Derivatives can be used
either for risk management (i.e. to “hedge” by providing offsetting
compensation in case of undesired event a kind of “insurance”) or for
speculation (i.e. making a financial ”bet”).

Dequan He PH.D. Candidate (2004),’efficiency on forest commodity
feature market’, he explain on his research report people are involves in
commodity features market for different purpose out of these the main
purpose are:

1. For heading purpose
2. For speculations purpose
3. Arbitrations purpose
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hedging

participa speculation
nts
arbitration
Dependent variables independent variables

DEFINATION OF TERMINOLOGY

Hedging
The risk of increase and decrease price in future is mitigation by
making a contract through exchange is called hedging. For example
producer’s make a contract for mitigate the risk of decrease price in
future whereas customer make a contract to mitigate a loss due to the
increase in price in future is call hedging.

SPECULATIONS

It is a way a taking advantage of knowledge of market. Investors make
money by analyzing the product price for futures is called speculations.
For examples the price of gold will be increase then investors make
contracts and earns money for the price moment.

ARBITRATION
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Arbitration is the process of taking advantage of slide change in price
of commodity from one exchange to the other. At that time the
participant can earns by utilize advance of slide change in price to the
exchange.
PARTICIPANT
Participants are person who are involved in derivatives market for their
benefits. They are also called an investor of the derivatives markets.

STATEMENT OF HYPOTHESIS

a. Alternative hypothesis (H1)
There is a relation between government policy or authorization and
participant.
b. Alternative hypothesis(H2)
There is a relation between risk on product and market participants.
c. Alternative Hypothesis(H3)
There is a relation between participant and exchange
competitiveness.

RESEARCH METHODOLOGY
The research design will consists of descriptive research designs to deal
with the various aspects. The descriptive research design will be developed
with the aim of studying the subject of research in detail. It collects and
presents fact and figures in certain situation. Here we trying to show current
situation of derivatives and risk management in Nepali well organized
exchange.

NETURE AND SOURCE OF DATA

The study will be utilized both the primary and secondary source of data.
The derivatives products which are traded in the exchange and their risk and
returns analysis related data are collect form the secondary source. The
overall present condition of derivatives and current situation of derivative
market and its trust ability will be collected form primary and secondary both
of source.
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SECONDARY DATA

The study will be based on secondary data; the data will be collected from
the annual book of mercantile exchange (MEX) Nepal, sometimes other
exchange too, internet and newspaper. The study period will be covered
cross sectional period range from fiscal year 2009 to 2016.

PRIMARY DATA

The study relies on data from primary sources. The direct oral interviews,
observation, indirect oral interviews and telephone interviews etc, are use
accordingly the situation and evaluating the time frame. Mainly the primary
data are collect for to know the correct situation of derivatives market and
the participant are feeling secure or not by the exchange.

POPULATION AND SAMPLE

The size of the population is undefined so we are trying to collect general
conceptual ideas from all 5/6 derivatives exchange information and for
secondary data purpose we take sample information available in MEX years
books and other publication by MEX. For the purpose of primary data we use
interviews method so we collect information from interviews max office
member and different 15/20 participant or investors.

Our question is about the knowledge related to derivatives of participant,
problem face by the exchange due to lack of authority, satisfactions of
participant by MEX service, risk and returns related terms on product wise.
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EXPECTED OUTCOMES
The derivatives market in Nepal are recently introduce in standardizes
platform. There is a lack of supervise by the government sectors. Due the
reason of lack of supervisory participant are feel less secure compare to the
exchange participant of well supervise country exchange. Other hand people
have no ideas about the derivatives concept. Maximum are enter without
knowledge of the derivatives.

In our study we are try to know the current situation of tools and technology
use by exchange, the risk management procedures of the exchange, the
current situation of the participant trend with previous in terms of number of
participant, risk and returns on the basic of product wise and other relevant
for derivatives markets. So ours study is help full for the participant and the
academician to knows the security of participant to involves in derivatives
exchange and the exact picture of derivatives exchange in Nepal. it’s also
helpful to the investors to build a basic knowledge about a derivatives before
entering in this filled.

CHAPTER PLAN

The first chapter will be the introduction part which contains general background of the study,
definition & function, introduction to the sample, statement of problems, objectives of the study,
research questions, theoretical framework, and limitations of the study.

The second chapter will be the Review of Literature. In this chapter, the researcher will review
the past study and the implementation of models in different times and economy. It includes the
conceptual framework, review of articles and dissertations done in the past.

The third chapter will be the research methodology which states about the research design,
define the size of population and sample taken, mentions the sources to data, and explains the
tools employed in the study to serve the objectives set earlier.

The fourth chapter will be the data presentation and analysis. In this chapter, the researcher will
collect show the data and present it in the desired manner through the use of table, graphs,
equations etc. and analyzed by using the methods explained in earlier chapter.
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The last chapter will be the summary, conclusions and recommendations. In this chapter, the
researcher will summarize the whole study, draw the conclusions based on the findings made
earlier and finally make appropriate recommendations to the concerned parties.

Tentative Time Frame

The required time duration to complete the proposed study is 1 month