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

ITF 302

· VIOP is the abbreviation for the market where the futures and options contracts are traded under Borsa Istanbul, which is the sole exchange entity of Turkey. These derivative market contracts has an obligation to buy or sell a commodity, foreign currency, market instrument etc at a pre-set amount, price and quality and at a certain level of maturity. They can be traded until maturity and the profit and losses are calculated and deposited in the respective account on a daily basis.

· Derivative: A derivative refers to a contract between two parties whose value depends on an agreed underlying financial asset like security or a set of assets like index traded in the Borsa Istanbul market.

· Underlying asset: These are financial assets which is used to fix the pricing of a derivative. They are traded as equities in the Borsa Istanbul equity market and whose price indices, commodities etc are selected on the basis of criteria fixed by the market.

· Why should I invest in VIOP: VIOP provides the right amount of opportunity to invest to the same amount of underlying assets as a spot market, but requires only a low collateral for it. It also offers different market conditions and hence is different from the normal spot markets. It provides a risk management opportunity to the investors who wishes to avoid their risks.

· Hours of trade at VIOP: The equity derivatives market are tradable from 9.30 am to 6.10 pm and other markets except index Futures are tradable from 9.30 am to 6.15 pm. The Index futures market are tradable in two sessions, the normal session from 9.30 am to 6.15 pm and the evening session from 7 pm to 11 pm. In half day normal session hour timings, the equity market can be traded from 9.30 am to 12.40 pm and other markets from 9.30 am to 12.45 pm.

· Working of margin and collateral with traded products at VIOP: The risk management structure consists of Pre-Trade Risk Management [PTRM] which is integrated with trading and clearing platforms to provide pre and at-trade risk management and also Post-Trade Risk Management which offers the analysis of possible risk for the members and the Exchange. The risk controls are also done in pre-order and post-order. The post-trade management is done by the Takasbank which employs ‘Standard Portfolio Analysis of the Risk-SPAN’ algorithm on portfolio basis.

· ‘Risky’ account: In the margin analysis, the margin consumption calculated by pre-trade analysis will be compared with the collateral and when the collateral available is negative for an account, it is considered to be a breach of condition and the corresponding account will be provided with the ‘Risky’ status. These accounts can enter only position decreasing orders and their long orders will be also cancelled.

· Tax treatment for profit and losses from derivative transactions on VIOP contracts

I. The taxation is categorised as Withholding Tax [WHT]and Banking and Insurance Tax [BITT].

II. The WHT payers are classified as Individual Investors [II] and Corporate Investors [CI]

III. The II are classified as Residents and non-residents and the CI as resident capital companies and Investment funds and non-resident capital companies and investment funds.

IV. The income generated from the position of contracts in Equity and Equity index are 0% for all the Withholding Tax payers and within the scope of excemption for Banking and Insurance Tax payers

V. The income generated from the position of all other contracts are to be paid 10% for both the categories of Individual Investors and at 0% for both the Corporate Investors. The same is under the scope od excemption for BITT payers.