Question

Q.7. Critically examine on derivative market (futures and options) around the word and particularly in Oman ?

Answer 1

Derivative markets is a financial market for the trading of the derivatives, financial instruments like futures, contracts or options. The market can be subdivded into 2 categories:

a) Exchange Traded MArket

b) Over the counter market

Through the derivative market we can:

a) Earn money without physical settlement,

b) Arbitrage trading

c) Hedge against price fluctuations.

d) Transfer risks.

There are basically 4 players in the derivative market, which are:

a) Hedgers

b) Speculators

c) Margin Traders

d) Arbitrageuers

Options offer the potential for huge gains and huge losses. While the potential for gain is alluring, their complexity makes them appropriate for only sophisticated investors with a high tolerance for risk.

1. When a derivative fails to help investors achieve their objectives, the derivative itself is blamed for the ensuing losses when, in fact, it's often the investor who did not fully understand how it should be used, its inherent risk, etc.
2. Some view derivatives as a form of legalized gambling enabling users to make bets on the market. However, derivatives offer benefits that extend beyond those of gambling by making markets more efficient, helping to manage risk and helping investors to discover asset prices.

While professional traders and money managers can use derivatives effectively, the odds that a casual investor will be able to generate profits by trading in derivatives are mitigated by the fundamental characteristics of the instrument.

Derivative markets in Onam:

The Muscat Securities exchange is the only security exchange in Oman. From its inception, Muscat Securities Market has issued instructions and regulations as required to ensure that it attains its objectives and performs its duties and responsibilities with the utmost efficiency and fairness, and in conformity with a technical platform of the new electronic trading system, with intensive working on solid infrastructure enabling trading through the internet.

The Muscat Securities Market Index was established in 1992, and the base date was June 1990. The number of companies included in the index sample has changed over time to reach currently 30 companies, the most liquid in the market.

The main objectives of the MSM 30 are to represent the price movement of the listed shares objectively and to be a benchmark for individual and institutional investors which guides them through their investment processes. To achieve these objectives, the MSM 30 has the following features:

1. Freely available shares for trading are included only. Any shares which fall under the following will be excluded:
   1. Founders (exclusion ends when the company issues two balance sheets for two consecutive financial years);
   2. Government holdings;
   3. Strategic holdings (10% or more);
   4. Locked-in shares, which are not tradable for at least 3 months.
2. A 10% capping (CAP) is set to ensure wider representation of smaller companies in the index.
3. The free float and capping has been revised (re-set) on a quarterly basis. The revision is conducted quarterly, by end of March, June, September and December. The index sample amendment, on the other hand, takes place in the beginning of July of each year. The sample is selected based on the applicable selection criteria (market capitalization, liquidity, and earnings per share).

The MSM 30 index contains three sub-indices representing the three sectors (Banking & Investment, Industry & Services, and Insurance).