Swot Analysis - Malaysian Derivative

1.0 INTRODUCTION

More formally, a derivative is a financial contract between two parties to transact an asset at a fixed price at a future date. The person selling the contract is usually called the writer of the contract. The person buying yhe contract is usually called the buyer of the contract. Both parties are called the counter parties of each other. The buyer who holds the derivative contract is said to have a long-position in the contract, while the seller who sold the derivative contract is asaid to have a short-position in the contract. The future date where cash flows would be exchanged is called the expiry date.

The asset to be transacted is called the underlying asset. The transaction price of the asset, which is fixed up front when the derivative contract is originated, is called the strike price of exercise price. That is the basic definition of a derivative contract. As modern derivatives evolve in sophistication, there are now derivatives that involve more than two parties, allow the transaction of the underlying asset before the expiry date, and even allow a varying strike price.

Besides, there are forwards, futures and options are probably the three most common derivative instruments. As in the case of any other product, derivative instruments involved as a result of product innovation. Innovation which was in response to increasingly complex needs. As business environments became increasingly sophisticated, new and better financial products were needed to manage changed needs. The requirement that every newly envolved product must provide increased benefits or value added over existing products in order to survive applies equally to derivatives.

2.0 MALAYSIAN DERIVATIVE

While most modern day derivatives are exchange traded, many are not . Exchange traded means that the instrument is designed by, listed and traded on a formal centralized exchange. Though most exchanges have a centralized physical structure such as the Bursa Malaysia, increasingly exchanges are becoming more electronic and virtual with minimal physical size. The LFX

(Labuan International Exchange Inc. ) would be a good example of an electronic exchange with minimal physical infrastructure. Thus, derivative instruments may be either exchange traded or traded Over-the-Counter(OTC).

2.1 Trading Methods

Trading methods on derivative exchanges can be divided into two broad categories. There are, i) The Open-Outcry or Auction Method and ii) The Computerized or Screen based method. Though the Open-Outcry method of trading has historically been the mainstay of exchanges, computerized electronic trading is now fast gaining prominence. While the older exchanges, like the Chicago and London exchanges, which have always had open-outcry systems have been forced to also introduce electronic screen based systems, the newer exchange