All countries that have developed financial markets have created derivatives markets where futures contracts are traded on interest rates, currencies and stock indices and option contracts on currencies, interest rates, stock indices, stocks and futures contracts.
Basically, the environment where the subject is developed is in Europe, and In Spain the trading of derivative financial instruments in an organized market dates from the late eighties, when simultaneously and by private initiative, two companies, OM Ibérica and MEFF SA, were established in order to manage the options and futures markets, respectively, and decide to launch two contracts on a Government Bond. The resolution of the General Directorate of the Treasury, of March 21, 1989, which authorized forward operations, options and futures on the State's annotated debt, protected said action.
Historical background of derivatives markets
The origin of the financial futures and options markets is in the city of Chicago, which can be considered the most important financial center when it comes to derivative products. The derivatives subsector directly employs 150,000 people in the city of Chicago, since it is in that city where the three most important markets are located in terms of contracting volume, these markets are:
- Chicago Board of Trade (CBOE) Chicago Mercantile Exchange (CME) Chicago Board Options Exchange (CBOE)
In the eighties, approximately ten years after their creation in the United States, financial futures and options contracts reached Europe, gradually establishing markets in the following countries:
- Netherlands EOE (European Options Exchange) 1978 United Kingdom LIFFE (London International Financial Futures Exchange) 1978 France MATIF (Marché a Terme International de France) 1985 Switzerland SOFFEX (Swiss Financial Futures Exchange) 1988 Germany DTB (Deutsche Terminbourse) 1990 Italy MIF (Mercato Italiano Futures) 1993 Sweden, Belgium, Norway, Ireland, Denmark, Finland, Austria and Portugal also have organized markets for derivatives. Other countries that have markets for futures and options are Japan, Canada, Brazil, Singapore, Hong Kong and Australia.
A common characteristic of all the countries that have implemented derivatives markets has been the success in terms of trading volumes, which have grown dramatically, exceeding on many occasions the trading volumes of the respective underlying products that are traded in cash., considering that they have also experienced considerable increases in their trading volumes.
Derivatives markets
Financial markets are made up of three fundamental markets; debt markets (which in turn include interbank, currency, money and other fixed income markets), equity markets and derivatives markets.
Securities traded on derivatives markets are "derived" either from commodities, or from fixed income securities, equities, or indices made up of some of these securities or commodities. For this reason, derivatives markets can be separated into two segments; "Non-Financial Derivatives Markets" and "Financial Derivatives Markets". In both, two defined types of securities are traded; forward contracts and options contracts.
Derivative financial instruments
Some of the most internationally known derivative instruments are forwards, future contracts, financial exchanges or swaps and options; These have the great virtue of offering a wide potential for leverage since, compared to the spot market, they allow with the same capital to carry out a greater number of operations. This is possible thanks to the fact that the derivative operation can be carried out through a deposit equivalent to a percentage of the total operation, called margin and in the OPCF guarantee system, so that it is not necessary to place the total amount of the investment made.
As an example, in the cash market an investor can buy a share today for $ 100 to sell it in 1 year for $ 110, thus obtaining 10 pesos of profit for an effective return of 10% on the initial investment. On the other hand, with a forward operation, a future or an option, the investor will be able to obtain the same $ 10 of profit, placing only as the investment amount the initial margin required for the operation, calculated as a percentage of the $ 100. If that initial margin is set at 20% of the trade, the investor would then require $ 20 to earn $ 10, which would increase his profitability to 50%. In this way, with the same $ 100 invested in the cash market, the investor could carry out 5 operations in the future market.
Future contracts on OPCF: Standardized contracts regarding the contract size, expiration date and number of open expirations in the Colombian Stock Exchange, which establishes the obligation to buy or sell a certain amount of an asset at a future date at a determined price, assuming the parties the obligation to celebrate it and the commitment to pay or receive the losses or gains produced by the price differences of the contract, during the term of the contract and its settlement. It has the backing and is guaranteed by a clearinghouse.
Forward: These are personalized purchase and sale contracts in which one of the parties agrees to sell a certain amount of a certain asset at a future date and the other party agrees to buy at the agreed price. Its difference from futures is that forwards are not standardized and have no guarantees that futures contracts offer.
Differences between Forwards and an OPCF: In OPCF contracts, the fulfillment of the operations is carried out through the daily turnover of the profit or loss (financial fulfillment). Allowing any of the tips to liquidate their operation at any time by carrying out an opposite operation. In forward contracts, the parties are bound on the date of fulfillment of the operation to physically deliver the asset under negotiation and to pay for it (effective fulfillment).
Forward operations are specific to each operation, so that it is a "tailor-made" product, while OPCF's are carried out on contracts with standardized conditions in terms of amount, quality, date, defined by the Colombian stock exchange.
In OPCF contracts, the buyer and seller must constitute the basic guarantee to have the right to buy or sell the contracts. This percentage will depend on the behavior of the volatility of the underlying asset (exchange rate, interest rate), since the start of these operations the basic guarantee has fluctuated between 4% and 16%. It is currently at 7%. Forward operations do not constitute any guarantee.
Forward contracts are backed by a clearinghouse while forward contracts are not.
Options: It is the right but not the obligation to buy or sell an asset, called the underlying asset, at a future date and for an agreed price. A premium is paid for the right, which depends on the price of the underlying asset, its volatility, the option term and interest rates.
The holder of an option, whether it is a purchase or a sale option, can choose between three possibilities. Exercise the right by buying or selling the securities that the option allows, let the expiration date pass without exercising the option or sell it before its expiration in the secondary option market.
Trading system
The Financial Compliance Term Transactions transaction system is a methodology for the transaction of negotiable contracts, previously authorized by the Superintendency of Securities, where offers and demands previously entered into the system are automatically matched. In addition to being a transactional system, it has an administration module and information on daily positions and a guarantee administration module.
Hours: From 9:00 am - 1:00 pm Local time. Last business day of the month: 9:00 am - 11:30 am Local time.
Title Identification Codes (Mnemonics)
For contracts, the abbreviated name of the underlying to which the contract refers is used, always being a name with which the market easily identifies it.
Trading hours
Conclusions and recommendations
Proper use of financial derivatives can not only help us meet our profitability targets, but also clearly reduce risk positions. With the completion of this investigation on the Derivatives Market, as a group we can conclude that the operations help to:
- Carry out hedging through Financial Compliance Term Operations Mitigate exchange risk through hedging Take advantage of technical market corrections to discover the operation and seek a better entry level Take advantage of technical movements, in such a way that additional profits can be obtained in the hedging Full and constant liquidity for all the terms of the curve Competitive market prices
Annex No.1 Contract between the commissioning company and the principal in relation to OPCF forward operations
Between the parties: On the one hand, ___________________ of age, a resident of this city, identified as appears at the bottom of his signature, who acts in this act in his capacity as legal representative of the commissioning company _____________________., entity that for the purposes of this document will be called the COMMISSIONER, and the other _____________________________________ who is of legal age, a resident of Bogotá, identified as appears at the bottom of his signature, who acts in this act on behalf and legal representation of, _______________________________________, a company that For the purposes of this contract, it will be called THE COMMITTEE, they have agreed to enter into this agreement, which will be governed by the following.
CLAUSES
FIRST.- With the signing of this contract and from the date of its conclusion, THE COMMITTEE expressly authorizes THE COMMISSIONER to carry out and execute the operations at the time that it orders.
FIRST PARAGRAPH.- For all purposes, THE COMMITTEE declares that the persons authorized to represent it before THE COMMITTEE are solely and exclusively those listed below:
_______________________________ C.C _________________
_______________________________ C.C ________________
1. SECOND PARAGRAPH.- For the purposes of this clause, THE COMMITTEE states that the persons previously authorized by him to issue orders in relation to forward transactions may do so by any of the following mechanisms: verbally, in writing, via fax or via email.
SECOND.- THE COMMISSIONER is fully empowered to carry out each and every one of the operations and execute all the necessary acts for the full development of this agreement.
THIRD.- THE COMMITTEE declares and irrevocably accepts to release the COMMISSIONER and the Stock Exchange from all and any liability, contractual and extra-contractual, for the damages that may be suffered in the event of the suspension of operations in the Stock market decreed in accordance with the law or regulations.
FOURTH.- THE COMMITTEE expressly declares and accepts to know the Regulations of the Colombian Stock Exchange SA, the Sole Circular and the Operating Instructions issued in development thereof.
FIFTH.- The COMMITTEE recognizes and accepts that by the simple fact of ordering the operation, it is obliged to establish and adjust the guarantees required by the aforementioned Regulation.
Notwithstanding the foregoing, THE COMMISSIONER, at its will and discretion, may establish in the name of THE COMMITTEE, with its own resources or through a third party that authorizes it, the aforementioned guarantees.
PARAGRAPH.- For these purposes, THE COMMITTEE expressly and irrevocably accepts and authorizes the Stock Exchange that in the events in which the aforementioned Regulation so consecrates, provides and / or executes the guarantees that it or THE COMMISSIONER acting on their own, have constituted.
SIXTH.- In developing this document, THE COMMISSIONER acquires media obligations from THE COMMITTEE, for which in no case does it guarantee any type of utility or performance.
SEVENTH.- The COMMITTEE expressly and irrevocably declares to acknowledge that all stock market operations and, especially, forward operations, in themselves involve a series of risks and, therefore, assumes full responsibility for all those that may be generated in the development of one or several forward operations authorized by THE COMMITTEE.
EIGHTH.- In the event that THE COMMITTEE does not make timely delivery of the sums of money or securities necessary for the fulfillment of the entrusted business, and THE COMMISSIONER assumes the fulfillment of the same with its own resources, it will have the right to pay the Credits that are caused in their favor on the occasion of the execution of the order, with the sums of money or values delivered to guarantee the fulfillment of the corresponding term operation.
For such purposes, when the guarantees to be delivered consist of securities, an irrevocable guarantee must be constituted on them in favor of the Stock Exchange.
For these purposes, the parties and especially, expressly and irrevocably, THE COMMITTEE grants broad powers to the Stock Exchange to make delivery in favor of THE COMMISSIONER, said sums of money or securities.
Notwithstanding the foregoing, if the amount of the sums of money or the sale price of the securities exceeds the amount of the credit in favor of THE COMMISSIONER, the latter must immediately deliver the difference in favor of THE COMMITTEE. Otherwise, THE COMMISSIONER may demand from THE COMMITTEE the payment of the difference, in accordance with the preference provided in article 1277 of the Commercial Code.
NINTH.- The differences that arise between the parties in relation to the contract or its execution, will be submitted to an Arbitration Court made up of (3) Arbitrators appointed for this purpose by the Chamber of Commerce of Bogotá DC, by means of a lottery among the registered arbitrators in the lists kept by the Center for Commercial Arbitration and Conciliations of said Chamber. The Court thus constituted shall be subject to the provisions contained in its Regulations and its internal organization shall be subject to the rules provided for that purpose by the Center for Commercial Arbitration and Conciliations of said Chamber of Commerce. The Referees will rule in law.
In proof of the foregoing, it is signed between the parties, explicitly accepting it in all its terms, on the ______ day of the month of________ of 2005.
THE COMMISSIONER THE COMMITTEE
Legal Representative Legal Representative
Below is a video-seminar, from the ENyD Business and Management School, in which the main characteristics of derivatives markets are explained. (2 videos - 2 hours, 13 minutes)
