NEW ERA IN FINANCIAL MARKETS: FUTURES (FORWARD) TRANSACTIONS AND OPTION MARKET
The Turkish financial system has been significantly transformed in the last 20 years and is heading towards a modern structure. The capital markets are becoming more and more efficient on a daily basis. The progress is so fast that Turkey has become one of the leading markets among developing markets. When we compare the Turkish capital markets with other developing capital markets, it can be seen that it lacks very important capital market tools. One of the most important tools we may cite is the Futures and Option Market that has been incorporated within İstanbul Stock Exchange that has not been able to start operating for years.
What is the futures contract ?
A futures contract is a type of contract that binds the parties to the contract to sell or purchase a certain standardized amount and quality of goods, foreign exchange, or assets, on a future date that has been predetermined from today.
What is the futures market ?
The futures market is the organized market where futures contracts are sold and purchased. In this market everybody, through members to the market can effect futures sale and purchases by depositing guarantees at amounts and rates determined by the market.
The fundamental functions of the market
Protection: Enterprises are faced with many risks under today’s economic conditions. The futures markets offer many alternatives to enterprises against these risks.
Investment: Each investor chooses one or more investment tools in accordance with his own risk perception and income expectancy. The futures markets can offer different alternatives to the investor as modern and efficient investment tools.
Arbitrage: There are certain relations between the futures prices and spot (daily) prices and the different terms of the same futures contract. If any one of the prices disrupts this relationship, it is possible to eliminate the risk by the asset that can be sold or purchased through contract or as spot (daily) (Türkçesini çıkaramadım). The arbitrage transactions help determination of the prices in the manner expected.
Benefits of this market
Futures markets play an important role in elimination of the risks relating to the future.
The Futures Markets that would enable an efficient risk management shall be the supporting leg of the spot markets as well.
Each investor (protection, investment, and arbitrage) that would enable an efficient risk management will be able to transact in these markets when compared to the spot market.
Position purchase in futures contracts
The party purchasing the futures contract shall be referred to as long and the selling party will be referred to as short. The party in the long position is considers as if he has effected a long purchase and hopes that the prices will rise. And the person in the short position is considered as if he has effected a short selling and hopes the prices to get lower.
Assurance
All sellers and purchasers that wish to transact in the Futures market have to deposit a certain rate of assurance in their accounts in Broker Firms to guarantee that all purchaser and seller contract provisions are fulfilled entirely and in due time.
When the order is given, the amount that must be deposited in the contingent account is called the initial assurance. The amount that must be present in the account after depositing of the initial assurance and realization of the purchase/sell is called the continuation assurance. If the amount in the deposit gets equal to or lower than the continuation assurance, a margin call is effected and the assurance in the account is raised to the initial assurance level.
Initial and continuation assurance based on the type of contract
Initial Assurance (NTL) / Continuation Assurance (NTL) / Continuation Level (NTL)VOB-İMKB 30 ıNDEX / 300 / 225 / 75%
INTEREST (DİBS-91) / 300 / 225 / 75%
INTEREST (DİBS-365) / 500 / 375 / 75%
NTL/DOLLARS / 150 / 112,5 / 75%
NTL/EURO / 200 / 150 / 75%
COTTON (EGEST-1) / 200 / 150 / 75%
WHEAT (AKS) / 200 / 150 / 75%
Choosing of the futures contract
Correct timing
In buy-sell transactions under a futures contract, being right about the direction the prices will move is not always enough. It is also required to be right about the time the price movements will come to pass. When the position is opened the prices at maturity of the contract may be realized in line with the price assumptions, however, the reverse price movements that would be generated at mid-maturity may generate losses that may not be covered in short term, and this would require closing of the position before maturity that would generate profit.
The Liquidity factor
One of the most important points that investors in transacting in the market should know is that some contracts and maturities are more actively transacted, therefore are liquid at a higher level.
CONTRACTS TO BE TRANSACTED IN THE FUTURES MARKET
Name of Contract / Size of ContractEge standard 1 Base quality cotton / 1 Ton
Anadolu red hard wheat / 5 Ton
New Turkish Lira/ US $ Exchange rate / 1.000 US $
New Turkish Lira/ EURO Exchange rate / 1.000 EURO
91-Day Term T-Bill Interest rate / 10.000 NTL (Nominal)
365-Day Term T-Bill Interest rate / 10.000 NTL (Nominal)
İMKB 30 Index / The value calculated by multiplying the Index value with 100.000. If the İMKB 30 Index is at 33.000 level, the nominal value of the contract is 33.000 x 100.000= 3.300 NTL
Conclusion
To restructure the Turkish financial markets in a more modern way, an instrument that has not yet been launched in the markets has been introduced. The most significant characteristic of this market is that it allows the real sector to minimize future risks and show the perspective of the future on markets. For healthy operation of these markets, the market should not be manipulated with shallow transaction volume and the trust in the market should not be shaken. To prevent speculators from such actions, the biggest responsibility lies with corporate investors. The hard lessons earned from the bad experiences in the last 10 years in the İMKB should be taken into consideration in the Futures Market and corporate investors should operate as market regulators, so that the actual prices are reliable. Otherwise, after a while these markets would start to be perceived as gambling clubs.