Nepali derivative market entry

INTRODUCTION TO DERIVATIVE MARKET:

Derivatives are financial contracts or financial instruments whose prices are derived from the price of something else (known as the underlying). The underlying price on which a derivative is based can be that of an asset (e.g., commodities, equities (stock), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) i.e. inflation derivatives), or other items. Credit derivatives are based on loans, bonds or other forms of credit. Derivatives allow risk about the price of the underlying asset to be transferred from one party to another. The main types of derivatives are forward, futures, options, and swaps.

The word “Derivative” is a magic word. There can be derivative of everything e.g., commodities, equities (stock), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) i.e. inflation derivatives), or other items. So there is scope for every one and every sector like growers, traders, exporters, importers, financial institutions, industrialists, investors and end users.

HISTORY OF DERIVATIVE MARKET (IN NEPAL):

Markets for futures trading were developed initially to help agricultural producers and consumers manage the price risks they faced harvesting, marketing and processing food crops each year. Today, futures exist not only on agricultural products, but also on a wide array of financial, stock and forex markets.

Eighty-Two Chicago merchants founded the world's oldest established futures exchange, the Chicago Board of Trade, in 1848. The first of what were then called "to arrive" contracts were flour, timothy seed, and hay, which came into use in 1849.

Meanwhile, what is now the USA's largest futures exchange, the Chicago Mercantile Exchange, was founded as the Chicago Butter and Egg Board in 1898.

In 2007, CME and CBOT officially merged, and are now collectively known as CME group Inc., the worlds largest and most diverse derivatives exchange.

In the 21st century, online commodity trading has become increasingly popular, and commodity brokers offer front-end interfaces to trade these electronic-based markets. A commodities broker may also continue to offer access to the traditional pit-traded, or open-outcry, markets that established the commodity exchanges.

In Nepal, three commodities exchanges — Commodities & Metal Exchange Nepal Ltd (COMEN), Mercantile Exchange Nepal Ltd (MEX) and NDEX — are working to provide investment opportunities to around 2,000-3,000 people. The majority of transactions of community exchange are in gold and crude oil, products not produced in Nepal.

In Nepal, Commodities Exchange Nepal Ltd (COMEN) introduce commodity market. COMEN have been providing trade services in agriculture goods. It will build warehouses to improve services. It also applied to Securities Board of Nepal (SEBON) on November 11, 2009 for starting a new stock exchange.

Now with new vision and new technology Mercantile Exchange Nepal Ltd. (MEX) has been established. MEX has also made immense contribution in raising awareness about and catalyzing implementation of policy reforms in the commodity sector. MEX is the first Exchange to take up the issue of differential treatment of speculative loss. It is also the first Exchange to enroll participation of high net-worth corporate securities members in commodity derivatives market.

BENEFITS OF THE DERIVATIVE MARKET (OF NEPAL)

1.     Growers, traders, exporters, importers can insure their risk from the    

      fluctuating product prices by taking futures position in the derivative   

      market.

2.     Financial institutions can mitigate or even eliminate the interest rate risk by locking their interest rate with derivative exchange.

3.     Investors can invest in the products and can get attractive returns.

4.     End users can buy the goods at a pre-determined price so that they can get away from the risk of increase in price.

5.     Utilizing this market, investors have the advantage to determine the conditions of the contract they wish to enter, develop tailor-made contracts, while they secure a certain degree of confidentiality in respect to their transactions.

THE PRESENT SITUATION OF THE NEPALESE DERIVATIVE MARKET

The Nepalese Derivative Market is very young. The investors haven’t been able to analyze the situation properly. They are not smart enough to study the situation and take good judgments. There is no regulating body in the Nepalese derivative market. Most of the investors find the derivative market as some sorts of gambling place where people gather for gambling purpose and try to make out high returns with least investments. But it is very important that one must realize that there is a difference between gambling and speculation and the future markets are not like “Satta” markets.

Participants in physical markets use futures market for price discovery and price risk management. In fact, in the absence of futures market, they would be compelled to speculate on prices. Futures market helps them to avoid speculation by entering into hedge contracts. It is however extremely unlikely for every hedger to find a hedger counterparty with matching requirements. The hedgers intend to shift price risk, which they can only if there are participants willing to accept the risk. Speculators are such participants who are willing to take risk of hedgers in the expectation of making profit. Speculators provide liquidity to the market; therefore, it is difficult to imagine a futures market functioning without speculators.

So there comes a question like what is the difference between a speculator and a gambler. Speculators are not gamblers, since they do not create risk, but merely accept the risk, which already exists in the market. The speculators are the persons who try to assimilate all the possible price-sensitive information, based on which they can expect to make profit. The speculators therefore contribute in improving the efficiency of price discovery function of the futures market.

However, it doesn’t mean that the speculation is always good for the economy of a country. Over-speculation needs to be curbed because it can lead to distortion of price signals. For this in case of the Nepalese Derivative Market, the positions held by speculators are subject to certain margins.

In the Nepal’s economy, various factors are having a real negative impact on the overall performance of the Nepalese markets. First comes is the power supply problem. With the increasing temperature and drought in the country, the power supply is getting poor. Until the month of Magh-2066, the country is facing 11 hrs of load shedding. Because of this, the manufacturing and other industries are suffering a heavy loss everyday. In addition, the global economic crisis has forced the industries to cut off the number of employees and thus prevent them from the probable future crisis. The continuous political instability has also hit hard to the market.

About Third Eye Investment

Third Eye investment & Trade  Pvt ltd  is the leading commodities trading Broking Company in Nepal. It was incorporated in 2009 as a non-clearing member on associated with Mercantile Exchange Nepal Ltd. and registered as a company Third Eye is a zero-debt company.
MEX who has the right to execute transactions in the trading system of the exchange and the right to have contracts in its own name. As a member, Third Eye can deal on behalf of the clients. All the trades have to be executed only through the Trading facilities provided by the Exchange. QCI will settle the transactions through Clearing Members (CM).

Third Eye is required to maintain a separate account for client transactions and is required to maintain the margin deposit and money belonging to clients in segregated accounts. Third Eye is responsible for all the transactions of their clients.

Third Eye will clear their trades through Clearing Members.

Our main objective is quality future brokerage service to individual and institutional traders in future market; following widely accepted prudent accounting and auditing practices. It also established fair and transparent rule based procedures and demonstrated total commitment towards eliminating any conflicts of interest. One powerful future trading experience is the way life at Third Eye. Third Eye provides full help to trade in commodity market.

Vision:

"To be the most prominent financial services organization in Nepal."

Mission:

"To provide a complete range of financial products with thorough understanding of our customers and their risk profile with a sole motive of creating wealth and financial security for them."

Our Core Strengths

·         Team of experienced and knowledgeable professionals.

·         Client oriented service with round-the-clock support.

·         Regular investments in comprehensive knowledge based training programs.

·         Dedicated back office support and technical assistance.

·         Regular internet and SMS updates on market and current happenings.

·         Above all, utmost priority to investor safety and integrity.

Salient Features

-         Up to date computerized transactions and records

- Highly trained staff & professional management

- Highly productive deposit schemes

- Convenient, hassle-free loans

- Convenient location with ample parking space

- Free statement of accounts on demand

How to start trading

Trading commodities online is a simple process to get started, but it is not something that should be entered into lightly. The traditional method of calling your commodity broker to place orders and waiting for a callback to give you a filled order price is quickly ending. Therefore, if you want to trade commodities online, we will cover the process of how to start.

Choosing a Commodity Broker

The first thing you want to do is choose a commodity broker. Almost all commodity brokers offer online trading, but there are some that specialize in online trading. We Third Eye Investment is the best choice for you all. We have an excellent trading platform for charts, quotes, strategy analysis and order entry. We offer a good product, good service and low commission rates.

Commodities Account Paperwork

Every commodity broker will require you to complete the account forms to open an account. The forms mostly consist of your financial information and the risks involved in trading commodities. Your financial information is important as commodities are highly leveraged and there is a chance you can lose more money than you invest. Therefore, the broker wants to know your income, net worth, and credit worthiness.

Not everyone who completes the account forms will be allowed to open a commodities account. The broker may use its discretion on whether they deem you an acceptable risk and whether they feel you are suited to trade commodities. The greater your income, trading experience and credit worthiness, they had better chance you have for approval.

Important Papers

n  You need to open a saving account in Laxmi Bank or Bank Of Kathmandu.

n  You must fill up Client Registration Form and Member Client Agreement

n  Read Risk Disclosure Document

n  Identity Certificate and Address Prove.

n  Bank Statement Certificate

Papers needed For International Client

·        Citizenship of the related country

·        or Passport

·        or Ration Cards

·        or Election certificate

·        or PAN Certificate

Before You Start Trading Commodities Online

Once you chose a Third Eye Investment & Trade to trade online and get your account approved for trading, you will have to fund the account. There are many theories on the account size you should begin with, but it is completely up to your comfort level and risk tolerance.

Now, before you begin trading real money, we would strongly suggest that you have a well-researched trading plan in place before you risk any money. We would also recommend using simulated trading platform before you start with live trading. This will get you familiar with placing orders and it could save you from making some critical order entry errors with real money.

Our final word of advice before you begin trading commodities online is to choose your trades wisely and avoid overtrading. If you find yourself placing a flurry of trades and look, back at the end of the day wondering what happened – you are overtrading. That is one of the greatest downfalls of most commodity traders.