Question

ITF 302 HOMEWORK GUIDELINES

You are required to conduct an analysis on Turkish Derivatives Market by emphasizing the following points

• What is VIOP?

• What is a derivative?

• What are the underlying assets?

• Why should I invest on the products at VIOP?

• What are the hours that VIOP products can be traded?

• How does margin and collateral work with products traded at VIOP?

• What does it mean a “risky account”?

• What is the tax treatment for profits and losses from derivatives transactions on VIOP contracts?

Important Points:

The report must be written in Times New Roman, 12 pt. and 1.5 line space and justified format. The minimum page for the report must be 3 without the references. You are required to add the references at the end of the report.

As a very important notice, in preparing this homework, you can use websites for references purposes but you definitely cannot copy and paste the content of these websites. You need to contribute with your own wording. Even if you decide to use the same phrase from the website, you need to show in the quotation marks (“…”). Any project that violates these general rules will be treated as plagiarism and will be penalized accordingly.

Answer 1

So, in this question, we are supposed to look closely into the Turkish derivatives market, and need to discuss certain points in detail which are:

a) VIOP is the abbreviation that is used to refer to the Turkish derivatives market, also known as the Borsa Instanbul Derivatives Market i.e. the market which deals in financial derivatives like future and options.

b) In the simplest terms, a derivative is a financial contract which derives its value from something else, which in this case is the performance of an underlying entity, which can be an asset, index or interest rate. Common underlying entities are bonds, stocks,T-bills, currencies etc. So, the name itself implies how this financial security or contract derives its value/price from an agreed-upon underlying financial instruments/asset(s).

c) The underlying assets of VIOP are equities, price indices, currencies, energy products and commodities which are chosen based on certain criteria determined by VIOP. For example, currencies like USD/TRY, EUR/USD etc., commodities like 41 color Aegean cotton, third degree Durum wheat and second degree Anatolian hard red wheat, energy products like precious metals, electricty, steel etc. are some items from the VIOP's list of underlying assets.

d) The Turkish derivative market mainly offers risk mitigating and management opportunities. If you are an investor who is eeking to avoid risk, VIOP is the right choice for you. It gives you the perfect opportunity to gain profits based on your price expectations. This is possible because it allows the investors to invest an equal amount of underlying assets as the spot market, however, the collateral needed is lower. It is also better as compared to the spot market as it provides investors the chance to invest in various market conditions.

e) The equity derivatives market is traded during normal session hours, from 09:30 in the morning till 18:10 in the evening, the index futures market is traded during normal session from 09:30 in the morning till 18:15 in the evening along with evening session hours from 19:00 in the evening to 23:00 at the night. Other markets are traded from 9:30 in the morning till 18:15 in the evening during normal session hours. In case of a half-day, unless otherwise declared, the equity derivatives market is traded from 09:30 in the morning to 12:40 in the afternoon and other markets are traded from 09:30 in the morning to 12:45 in the afternoon.

f) In the VIOP system, there are two layers of the risk management system, a pre-trade and post-trade risk management. The first stage, the pre-stage is executed by a PTRM application which is in close integration with Trading and Clearing platforms that performs this pre-trade and at-trade risk management. The PTRM provides the members of VIOP the opportnity to control and inspect the potential risks arising from various orders and trades. There are trading workstations known as FixAPI and OUCH who realize orders and trades, the risk of which is considerably reduced by the PTRM application. The risk can be controlled at various stages, be it pre-order, post-order or during the transactions. Similarly, the second layer known as the post-trade risk management is done by Takasbank. It uses a "Standard Portfolio Analysis of Risk-SPAN" algorithm for margining on portfolio basis for all the trades realized in the market. The parameters that make up the basis for the portfolio basis is determined by Takasbank itself and it applies its Central Counter Party's Legislation for the risk management, regulation and collateralization.

g) The system checks for margin sufficiency of the trading accounts by comparing their margin consumption. This is doen by calculating their pre-trade margin model and their available collateral. It is done by that sector of the clearing systems which is responsbile for real time margin calculations. In those accounts, where the available collateral is negative, breach takes place and the corresponding account is given the 'risky' status. They are prohibited from entering postion increasing orders and all their long orders are cancelled. They can only enter position decreasing orders and can have more than one order, waiting open in the trading system.

h) To understand the tax treatment which is applicable for the profits and losses resulting from derivatives transctions traded on VIOP, let us take a look at the table attached: