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When to Start Financial Derivatives Trading? The Example of Istanbul Stock Exchange

Oral Erdoğan and Murad Kayacan

Istanbul Stock Exchange Review, 1998, vol. 2, issue 5, 23-44

Abstract: A fundamental step in the development of financial markets is the introduction of derivative products, which are structured to facilitate hedging. By integrating the expectations on the future prices of securities into the market transactions, the resultant liquidity increases the trust-worthiness of the exchange for the individual traders. Emerging rapidly since the 1970’s, the subject of derivatives market has been attracting much debate both in the markets that currently host derivatives trading and financial centers that are on the verge of launching such market segments. In this paper, the choice of financial instruments and the timing for the initiation of derivatives trading in the securities markets are briefly assessed and the compatibility of a derivatives market to the ISE’s spot market is evaluated in terms of volatility, the representative aspect of the systematic risk as well as the market depth within Ederington’s (1979) portfolio approach. In conclusion, futures and/or options, based on the stock indices, are deemed as necessary for hedging purposes in the capital markets. However, since the basic risk factor is a result of interest volatility, it should be adequately discussed if there should be a priority for derivative instruments based on interest rates.

Date: 1998
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