UNDERSTANDING DERIVATIVE MARKET: THEORY VS PRACTICE. Sujan Dhungana This article attempts to explore the theory and practice of derivative instruments and market in Nepalese context. Although it may not be a comprehensive one but still you will get some idea if you go through the end of this article- of that I’m sure. We know that there is always a vast difference between theory and practice but a strong theoretical foundation always proves beneficial especially to boost the confidence of the user in practical dealings.
In today’s dynamic and complex global financial markets, traders and investors are looking for various innovative ways to generate returns. Commodities and derivatives trading offer exciting opportunities. The history of professional Trading started from “Hat Bazar” and the current financial exchanges are the modern and advanced concept of the same “Hat Bazar” trading. Three commodities exchanges namely— Commodities & Metal Exchange Nepal Ltd. (COMEN), Mercantile Exchange Nepal Ltd. (MEX), and Nepal Derivative Exchange Ltd. NDEX) — are working in Nepal to provide investment opportunities to around 2,000-3,000 people. The majority of transactions of commodity exchange are in gold and crude oil products not produced in Nepal. “Over 90 per cent people want to invest in gold and crude oil,” said Krishna Giri of Kashtamandap Clearing House. Nepal has only a recent history of derivative market, which opened with COMEN at the end of 2006. MEX was established in 2007 and NDEX on November 20, 2008. According to Santosh Pradhan of NDEX, “The existing exchanges haven’t been able to explore the real potential of the commodities market. They expect to fill the gap. “For example, our exchange is based on local price base and we will introduce mobile trading as well,” he added. In the meanwhile, investors have been complaining about government’s negligence over the commodity and derivative market. Currently, there are 50 brokers and about 1,500 regular investors engaged in the commodities exchanges in Nepal, according to Pradhan, Managing Director of Emerging South Asia, a broker associated with COMEN. THE THEORETICAL PERSPECTIVE: