Question

Discuss
- the evolution of the world's derivative markets and
-possible reasons why derivative markets were introduced relatively late in Turkey

Limit your discussion to a maximum of 400 words.

Answer 1

- the evolution of the world's derivative markets

The history of derivatives is traced back to the origins of commerce in Mesopotamia in the fourth millennium BC. After the collapse of the Roman Empire, contracts for the future delivery of commodities continued to be used in the Byzantine Empire in the Eastern Mediterranean and they survived in canon law in Western Europe. During the Renaissance, financial markets became more sophisticated in Italy and the Low Countries. Contracts for the future delivery of securities were used on a large scale for the first time in Antwerp and then Amsterdam in the sixteenth century. Derivative trading on securities spread from Amsterdam to England and France at the end of the seventeenth century, and from France to Germany in the early nineteenth century. Around 1870, financial practitioners developed graphical tools to represent derivative contracts. Profit charts made derivatives accessible to young scientists, including Louis Bachelier and Vinzenz Bronzin, who had the mathematical knowledge for the rigorous analysis of derivative pricing. This evolved to such level that the derivative market become a global business.

-possible reasons why derivative markets were introduced relatively late in Turkey

In 1995 the first derivatives market in Turkey was planned with an introduction of a cotton futures contract. However, the development of such a contract and derivatives market was not found to be viable at the time. The current Turkish Derivatives Exchange (TURKDEX) was established in 2003, and formal trading in futures contracts started in February 2005. There is considerable interest in the potential success of this new market because of its role in price discovery and risk management prospects for the Turkish capital markets.

One of the contracts introduced by TURKDEX for trading is written on the Istanbul Stock Exchange (ISE) 30 Index. Successful trading in this equity index futures contract would provide risk management solutions for fund managers and also supply alternative investment opportunities for investors.

Although one year of historical data on the trading activity in a newly developed futures market would not be enough to analyze success, a preliminary analysis of trading activity in the ISE 30 Index futures contract would be of interest to market participants as well as regulators.

Concluding Remarks

Financial derivatives provide risk management tools as well as alternative investment opportunities to market participants. Their economic role and value-added have been well documented in developed financial markets, and further evidence is being produced as derivatives exchanges are established in emerging markets. The case of the new derivatives exchange in Turkey also provides a unique opportunity to investigate the trading activity at an early stage of market development