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JAGANNATH UNIVERSITY
Department of finance

Report on

Course code: FIN-4203

Submitted to:
Roushanara Islam
Assistant Professor
Department of Finance
Jagannath
University,Dhaka

Submitted by:
Group no-13
Department of Finance
Jagannath
University,Dhaka

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Kaniz Fatema B160203035

Al mana manik B160203055

Sibgat ullah B160203063

Jagannath Dey B160203076

Rafisa Naznin Nabila B160203091

Shawon Barai B160203125

Md. khaleduzzaman B160203127

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Contents
Abstract................................................................................................................................................................ 4
1. Introduction ................................................................................................................................................. 4
2. Literature review ......................................................................................................................................... 5
3. Theoretical analysis ..................................................................................................................................... 6
a) What is a derivateive? ............................................................................................................................. 6
b) Major Types of Derivative: ....................................................................................................................... 6
c) Participants in Derivative Markets ........................................................................................................... 6
4.The efficiency of markets and derivative: .......................................................................................................... 6
a) Establishment of Financial Derivative Market for Strengthening Financial Market Functions: .................. 7
b) Establishment of Financial Derivative Market for Eluding Risks of Participators ....................................... 7
c) Establishment of a Derivative Market for the Requirement of Financial Market
Development ................................................................................................................................................... 8
5.Key reasons for necessity of a derivative market in Bangladesh------------------------------------------
a) Reduction of Volatility in the Capital Market ............................................................................................ 7
b) Implication of perfect portfolio ................................................................................................................ 8
c) The possible way of protection using derivative ...................................................................................... 8
d) Protection in Major Export Sector (Especially RMG) Sector ...................................................................... 9
e) Protection in Major Import Sector (Import of Petroleum) Sector ........................................................... 11
5.Recommendations .......................................................................................................................................... 10
6.Conclusion ....................................................................................................................................................... 11

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Abstract: Derivative instruments are a feature of recent monetary markets for many
decades. They play a important role in managing underlying security risks like bonds,
equity, equity and currency indices, short-run interest rates or liabilities positions.
With the event of the economic system in Bangladesh, it's currently become terribly
necessary to ascertain a marketplace for derivatives within the country, and in our
article we've tried to clarify the theoretical framework of various varieties of
derivatives and their potential use in capital sweetening in details within the market,
the capital structure of economic banks, against the fluctuations central sectors
Major (petroleum) and export (RMG), so reworking Bangladesh's economy into a
robust world economy. within the final a part of our study, some recommendations
were created proposing the inclusion of the derivatives market creation section.

1. Introduction:

Derivatives area unit the foremost actively listed money instruments for
guaranteeing potency and depth of capital market. institution of a money derivative
market improves the capital structure and profit creating ability of business banks.
Hedgers will simply use spin off as safeguard against the risks related to their assets.
spin off market will play a crucial role to strengthen the impact of financial policy and
absorb the foreign capital into a rustic because it helps bring stability within the
overall money markets. when the harmful fall of capital market of Bangladesh in
2010, it hasn’t nonetheless recovered yet;causing speedy decline of FDI and
insufficiency of innovative and versatile money merchandise.As derivative securities
area unit prevailing in Bangladesh, the institution of monetary derivative market is
also a correct call for the country.

At the terribly 1st a part of our study, we tend to provided the final description of
spin off varieties and therefore the major participants of derivative market. within
the second half, we tend to tried to clarify the importance of derivative intimately
and create a theoretical framework for the potential use of such instruments to
bring the market potency and stability, and so attracting the foreign capital to show
Bangladesh economy into a world economy. In last half, we tend to explained
however institution of monetary derivative market in Bangladesh will scale back
volatility in capital market, and convey profit for the most important commerce and
mercantilism areas.

The general objective of this analysis is to investigate the potential advantages of the
institution of a money derivative market in Bangladesh. On the opposite hand, the
particular objective is to search out out the most important contribution of potential
derivative instruments in Bangladesh.

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2. Literature review :

The derivative instruments have the innate characteristics of risk-shifting. within

the development of laissez-faire economy, the target laws need the institution of
a lot of and a lot of monetary derivative markets. derivative markets everywhere
the planet are becoming a speedy momentum.Establishment of derivative
market is that the objective demand of delivery the monetary stability in
associate economy. “Establishing derivative market can improve the capital
structure and profit-making ability of economic banks, strengthen the result of
financial policies and absorb a lot of international capital into a rustic, therefore
fast economy’s future growth”(Li Tian, 2005). During a study by Michael Chui
named “Derivative markets, product and participants: associate overview”, it's
been showed some basic problems regarding the abstract framework of
derivative, their main functions, major participants likewise as a straightforward
historical background of victimisation derivative in hedging and different
functions.
In a study named “The role of monetary derivative within the recent capital
market condition of Bangladesh”by Md. Nazmul Hasanet.al., the importance of
derivative market explained as “Bangladesh has still an extended thanks to select
making certain a positive condition for introduction of derivative. derivative
market ought to be in our long set up and therefore the short-run set up ought to
embody removal of existing issues of the capital market and therefore the
commencement of liquid bond market. Some consultants aforesaid that while
not derivative, investors go in investment market barefooted”.In remarks
conferred at the SDI-Bloomberg Seminar command in Buenos Aires, Argentina,it
has been explained that “The actuation behind the recent growth of derivative
was radical technological advancements in PC science”.

Here, it's been additionally represented the most functions of derivative-

“Derivative offer 3 vital economic functions: (1)risk management, (2) worth
discovery, and(3) transnational efficiency”. Considering the current scenario, for
the country like Asian nation, the institution of a monetary derivative market is
crucial in some ways. during a elaborate study by Saif Rahman and M.Kabir
Hassan (2011), it's been shown however and why monetary derivative market in
Asian nation is important.

They represented the need of derivative market: “Due to the recent harmful fall
of capital market, rapid decline in FDI associated inadequacy of investment
opportunities in an equity centrical economy, investors of Asian nation is crying
out for associate innovative and versatile monetary product like derivative
securities for hedging and market expansion”.

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3. Theoretical analysis

What is a derivative?
The Oxford lexicon defines a derivative as one thing derived or obtained from
another, returning from a source; not original. within the field of economic economic
science, a derivative security is mostly named a monetary contract whose price
comes from the worth of Associate in Nursing underlying plus. A derivative derives
its price from the worth of another monetary plus or variable. for instance, a stock
option is a derivative that derives its price from the worth of a stock. Associate in
Nursing rate swap could be a derivative as a result of it derives its price from
Associate in Nursing rate index. The plus from that a derivative derives its price is
referred because the underlying plus. the worth of a derivative rises and falls in
accordance with the worth of the underlying plus. the foremost common underlying
assets embody stocks, bonds, commodities, currencies, interest rates and market
indexes. Like alternative contracts, derivative represents Associate in Nursing
agreement between 2 parties; the terms of the agreement are extremely versatile
and therefore the contract encompasses a fastened starting and ending date.
derivative transactions are currently common among a good vary of entities,
together with industrial banks, investment banks, central banks, fund managers,
insurance corporations and alternative non-financial firms. Key points to recollect
regarding derivative.

Major Types of Derivative:

 Forward Contract
 Future Contract
 Options Contracts
 Swap Contracts

Participants in Derivative Markets

 Arbitrageurs
 Speculators
 Hedgers

4. The efficiency of markets and derivative:

The array of derivative merchandise that has been developed in recent years has
increased economic potency. derivative became an integral a part of the national
economy within the world's leading economies. “Efficient markets cause tighter
bid-ask spreads, higher volumes of commerce, and larger market liquidity. In AN
economical market, all data relevant for determination the worth of a product is
mirrored within the current market value. money an represent a number of the
essential tools necessary within the mechanics of economical capital markets. The
array of derivative merchandise that has been developed in recent years has
increased economic efficiency”.(Remarks given at the SDI-Bloomberg Seminar,
Buenos Aires, Argentina, 1997). It is clearly true that for property economic process
and development, a stable and economical capital market is inevitable. And for

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creating a capital market more practical, subtle, viable and adoptable to the
fashionable fast dynamic competitive world, introduction of derivative securities is
crucial. Because, today’s risks within the business area are additional difficult than it
had been fifty-sixty years ago. It have been is also for the introduction of freely
floating rate of exchange systems in Nineteen Seventies and ascent in international
trade capitalizing the advantage of trendy transportation and telecommunication
technologies. thus if associate degree economy needs to address the such a lot
dynamic competitive world, it ought to trust the money stability, risks sharing and
market efficiency; here introduction of derivative market is also tried as very
important call. derivative facilitate to enhance market efficiencies in varied ways in
which like by reducing the chance for farmers, oil firms, rate of interest risk for banks,
etc. they permit users to fulfill the demand for efficient protection against risks
related to movements within the costs of the underlying assets. In alternative words,
users of derivative will hedge against fluctuations in exchange and interest rates,
equity and trade goods costs. it's such mechanism through that parties simply will
transfer their risks related to their underlings to others. Specifically, derivative
transactions involve transferring those risks from entities less willing or able to
manage them to those additional willing or able to do thus. derivative transactions
ar currently common among a good vary of entities, as well as industrial banks,
investment banks, central banks, fund managers, insurance firms and alternative
non-financial companies.

A) Establishment of Financial Derivative Market for Strengthening Financial Market

Functions:
A deep monetary market is taken into account as a nucleus of associate degree
economy. it's a matter of nice regret that once quite four decades of our liberation,
we tend to ar still within the aborning stage relating to the event of associate degree
economical monetary market. In East Pakistan the cash market isn't well developed.
once more the there's no separate bond market here. simply only a few bonds ar
listed within the secondary market. On the opposite hand, the condition of capital
market is therefore volatile in nature. it's generally referred to as united of the more
serious markets within the world. during this regard, the institution of a monetary
by-product market may well be useful in some ways in which, such as: the
risk-shifting mechanism innately owned by the by-product instruments, will enhance
the distributing operate of the monetary market of East Pakistan.

B) Establishment of Financial Derivative Market for Eluding Risks of

Participators:
Hedgers, speculators and arbitrageurs are the key financial market participators.
They make financial market more liquid. In the case of investment and trade hedging
is very common thing. “No speculations, no hedges. We need hedgers who want to
shift their risks to the others. The market needs speculators, and it wants to make
profit by taking the risks.”(Li Tian, 2005). Many economists believe that, correct
speculations will typically decrease the chance of whole market rather than
increasing. thus for sound development of economic market, contribution of hedgers
and speculators area unit important. we all know the by-product such as: forward,
futures, choices and swaps inherently own the risk-shifting characteristics. Yet, we

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tend to haven’t such instruments that might offer the participators with correct
mechanism of evasion risks. consistent with the realistic needs of market and its
participators, People's Republic of Bangladesh ought to discovered a money
by-product market as presently as potential to satisfy the target rules of market
development.

C) Establishment of a Derivative Market for the Requirement of Financial Market

Development:
The capital market of Bangladesh remains in primary stage in respect of
development. This market is such a lot volatile in nature. huge traders will simply
manipulate the market with forming syndicate. 2 major collapses, one in 1996 and
another in 2010-2011, consistent with reports of prove-committee, were the proof
of such syndication and manipulation. the dearth of deepening of market, which
could be with increasing the substantial variety of instruments and participators, is
that the prime reason for syndication, manipulation and supreme collapses.
therefore for deepening of economic market of Bangladesh, there's no different to
extend the amount of economic instruments yet as participators within the market.
If general investors notice the derivative instruments to shift their risk, they'll clearly
have an interest to return within the market with their bit of savings. truly folks need
to return within the market. however Bangladesh hasn’t ready to build an honest
platform to encourage the little investors, WHO is known as because the nucleus of
the monetary market like ours. therefore the institution of a monetary derivative
market would bring some new instruments within the market such as: forward,
futures, choices and swaps that innately own the risk-shifting characteristics. during
this means, the amount of instruments yet because the participators would be
enlarged considerably. that may ultimately deepen the market.

5. Key reasons for necessity of a derivative market in Bangladesh

The article named, “The Potential of Derivative Market in Bangladesh” (Saif Rahman
and M.Kabir Rahman,2011), it has been described elaborately the importance of
derivative market in Bangladesh. They showed some key reasons,explained in below,
for what the derivative market is very essential for Bangladesh .

a) Reduction of Volatility in the Capital Market

The capital market of Bangladesh is so much volatile in nature. In their study
(Syed A. Basher, M. Kabir Hassan, and Anisul M. Islam,2007) empirically examines
the time-varying risk return relationship and the impact of institutional factors such
as circuit breaker on volatility for the emerging equity market of Bangladesh [namely
The Dhaka Stock Exchange (DSE)] using daily and weekly stock returns.The DSE
equity returns showed negative asymmetry, excess kurtosis and deviation from
normality. The returns show important serial correlation suggesting exchange
unskillfulness. The results additionally show a big relationship between conditional
volatility and stock returns, however the risk-return parameter is found to be
sensitive to alternative of samples and frequencies of information. Overall, the
constant of the risk-return parameter is negative and statistically important. during a
study (Mohammad Nayeem Abdullah, Kamruddin Parvez, Moslehuddin Khaled)

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studied costs of seventeen actively corporations within the DSE from 2006 to 2010
and used 3 valuation ratios with a certain company sector beside overall market
index information and located that the exchange is overvalued. Syed Golam
Shahjarul Alam in his study named “Recent trends in capital market of Bangladesh:
essential analysis of regulation” in 2012 created a comparison of volatility of DSE
with alternative market within the following manner and showed that the returns of
DSE as compared with Mumbai stock market and SET index of Kingdom of Thailand is
very less at intervals the fundamental measure (Dec’10-Jan’12), whereas the quality
deviation (a live of volatility) of DSE were terribly high therein time.

b) Implication of perfect portfolio

Actually in Bangladesh’s monetary market continues to be in terribly aborning stage
of development. Here, different monetary instruments square measure rare to
search out. there's no separate bond market. market is additionally not
well-established. Investors can’t apply any hedging strategy through risk-shifting
instruments like derivative whereas they're shopping for risky assets.Suppose, at the
time obtaining|of shopping for} a stock if a vendee at the same time might buy
futures or choices from constant marketplace to safeguard his investment, the
proper implication of portfolio (comprising of risky assets and safe assets) might are
doable.
c) The possible way of protection using derivative
We have seen that the character of volatility in DSE is incredibly high than another
comparables. If a derivative market are often established during this country,
associate capitalist may simply be protected himself from potential loss. Suppose in
December ten a client has bought one thousand stock of Beximco Ltd. with BDT40
every. The capitalist cares a couple of potential share worth decline in 2 months
from currently and needs protection. The capitalist should purchase February ten
place choice contracts valuation of every BDT1 on Beximco Ltd. with a strike worth
BDT43. this is able to provide the capitalist a right to sell the stocks with the strike
worth. currently if {the worth|the worth|the value} of stock on the maturity is not
up to the strike price the capitalist will exercise the contract by marketing every with
BDT43.Net profit would be(43-40)×1000=3000-(contract’s shopping for
value,1000×1)=BDT2000. however if the {market worth|market value|value} on the
maturity is on top of the strike price, capitalist wouldn't exercise the contract. His
loss is BDT1000(contract’s shopping for cost).Like choices the investors will use some
others derivative instruments to guard themselves against losing their investment
occurring from the market volatility.

d) Protection in Major Export Sector (Especially RMG) Sector

The ready made garments business acts because the backbone of our economy and
as a catalyst for the event of our country. we tend to experience within the sector
that has been taking billions of dollars as export earnings and making jobs for scores
of folks (especially women) within the country. The country with its restricted
resources has been maintaining 6 June 1944 annual average gross domestic product
rate of growth.This has been attainable with the top-most contribution of RMG
sector. currently we tend to envision bangladesh achieving the middle-income
country standing by 2021. we tend to firmly believe that our dream can come back

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true at intervals the stipulated time and therefore the RMG business will definitely
play a vital role in materializing the dream. RMG business is currently the one biggest
export wage earner for Bangladesh. the world accounts for eighty one of total export
earnings of the country. once the jute business started losing its golden days, it's the
RMG sector that replaced it. The fashion business of Bangladesh started its journey
within the Eighties and has come back to the position it's in nowadays. Despite the
epic growth of our RMG business, and its bright prospects, challenges square
measure still there. one in every of the largest challenges presently featured by our
RMG business is to confirm work safety and higher operating conditions for the
scores of garment staff. 2 major accidents, the Tazreen fire and therefore the Rana
Plaza collapse, have brought the problem of work safety to the fore and led all
stakeholders to act consequently. However, the RMG sector is export directed in
Banglaesh. Its export of ultimate merchandise yet as import of raw materials each
square measure liable to rate of exchange fluctuation. The incomes and prices of
RMG sector changes extremely because of the changes in rate of exchange. during
this context, the house owners of clothes can’t defend themselves through hedging
or different such strategy victimization any instrument like derivative that have
innate characteristics of risk-shifting. Though, to mitigate rate of exchange risk RMG
commerce firms traditionally victimization 2 tools like commerce the rights of Letter
of Credit (LC) and forward contract over the rate of exchange, these have some
issues. “The transfer of LCs has its own disadvantage of high process fees that may
quantity from three-d to five of the overall LC quantity. Again, forward contract on
the exchange typically become hassling because of the rigidity of regulation of the
central bank”.
e) Protection in Major Import Sector (Import of Petroleum) Sector
Petroleum may be a principal commodity for Bangladesh. The national demand of
this product is entirely met by import. Bangladesh’s oil import in principally
incorporates the refined oil product and relatively a really very little fossil oil is
foreign because the country doesn’t have an established trade of oil processing.
Considering the complete national import of any given year, the oil product further
because the machinery and equipments square measure the best contributors
within the whole import quantity. oil commodities square measure extremely worth
inelastic . Its worth is most volatile however demand isn't.That’s why each country is
involved the results of the fast changes in worth of this trade goods. To hedge
against such a risky trend in oil costs globally futures, choices and swap contracts
square measure used. 2 major exchanges addressing energy derivative are new york
Mercantile Exchange and London International oil Exchange. (Rahman and Hossain,
2011).If Bangladesh might ready to establish by-product market, it might are ready
to use numerous customised derivative instruments to hedge import risks.

6. Recommendations

The following recommendations are required to consider:

A)As it's the primary time to determine a by-product market in Bangladesh, associate
informative committee may be fashioned to conduct a fallibleness study. This
committee could also be drawn from all stakeholders and analysts. The committee

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could additional create associate analysis regarding probable advantage of by-product

market in Bangladesh, current and needed capital market structure, and prepare a
comprehensive road map for successful introduction for an efficient derivative market,
a liquid financial market is required. The government must take necessary steps to
make the financial market of Bangladesh highly liquid;

B)Restructuring of (BSEC) Bangladesh Security Exchange Commission is needed.

Comprehensive examination of the activities of this organization is required;

C)The opinion of stakeholders and creating them attentive to the derivative

instruments ar essential. Seminars, workshops, training etc. is also organized to
create such awareness of stakeholders - speculators, hedgers,regulators and others;

D)Deepening of capital market is needed. It is done by increasing participants,

numbers of shares within the market, attracting additional individuals within the
market, correct governance, ensured scientific worth, low level corruption and
manipulation etc;

E)Ensuring correct co-ordination between BSEC, secondary and different markets

and guaranteeing robust regulations;

F)Upgrade and class of infrastructure ar needed. straightforward movement of

capital between completely different market and currencies is important to
eliminate worth discrepancies “Emerging derivative Market in Asia”.
These are:
(i) a deep liquid money market supported by market-determined costs,
(ii) what quantity regulation is required in derivative markets and
(iii) what infrastructure is critical. The authority should analyze these 3 crucial
problems deeply before proceeding.

7. Conclusion
Financial derivative provides risk management tools in addition as various
investment opportunities to market participants. money derivative have an
extended history of use. It started its journey in twelfth century in city. However,
when the origin of freely floating rate in 1971, the usage of such instruments
overpoweringly magnified.

At present, the expansion of derivative market within the world is highest

examination to all or any of the money market segments. derivative market will play
a pivotal role to strengthen the impact of financial policy and absorb the foreign
capital into a country because it helps to bring stability to the general money
markets. It will contribute to form economical capital structure and increase profit
creating ability of economic banks. derivative market contributes to deepen capital
market by its innate mechanism of risk-shifting and increase the quantity of
participants.

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After the harmful fall of capital market of Bangladesh in 2010,there was rapid decline
of FDI and there was also deficiency of innovative and versatile money product like
derivative securities square measure prevailing in Bangladesh, the institution of
monetary derivative market could also be a correct decision for Bangladesh as before
long as doable.If the country can’t establish such market, its backward pace
comparison to alternative participants of the globe competition could also be
inevitable. Hence, Bangladesh ought to take steps currently to determine a money
derivative market however it ought to be done in part by part manner.

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References:
a) https://www.researchgate.net
b) https://www.thefinancialexpress.com.bd/views/reviews/bangladesh-yet-to-develop-fin
ancial-derivatives-mkt-1532874348
c) https://www.asianinstituteofresearch.org/JEBarchives/Does-Bangladesh-Need-to-be-Est
ablished-Derivatives-Markets%3F
d) http://dx.doi.org/10.18775/ijmsba.1849-5664-5419.2014.21.1002
e) https://www.globalcapital.com/article/k38c52vl83kd/bangladesh-proposes-derivatives-
market

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