In: Business and Management

Submitted By SaadShaukat
Words 347
Pages 2
Assignment #3
Muhammad Saad Shaukat


Q) What are Derivatives?
A) A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, market indexes and “even some other derivative”.
In short we can say that Derivatives is a “claim on a claim”, it enables the avoidance of unnecessary risk.
Q) At what stage is Derivatives Market in Pakistan?
A) In Pakistan, the derivatives market is in the nascent stage. It has been in this stage from 2004. Although in Pakistan trading in the derivatives market is done in different parts, but still it’s considered in the nascent stage, because there is no common awareness of this sort of market.
In Pakistan trading in the derivatives market is done by. * Banks * DFIs * Mutual Funds * Non-Banking Financial Institutions * Islamic Banking
Banks/DFIs may take exposure in future contracts to the extent of 10% of their equity on an aggregate basis. In this connection, the 10% exposure limit for future contracts will include both, positions taken in future buying and selling. Despite this regulatory support, Banks / DFIs participation is very low.
Mutual Funds manage funds of the general public and they work under the supervision of their respective trustees. Mutual Funds mostly trade in equity derivatives to reap arbitrage opportunities; they first take a long position in the spot market and then sell in the derivatives market to lock in confirmed profits. Mutual funds cannot take positions in future trade to create leverage.
The importance of derivatives has been accepted by the Islamic banking system of Pakistan. Although…...

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