Introducing derivative exchange: Asia's emerging markets experiences

Mugo, Freshia Wangari
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Sogang University
What makes some derivatives exchange as well as products successful while others fail is a puzzle that is yet to be fully solved. Some derivatives markets become very successful while others fail to record any significant trading. This dissertation attempts to shed light on introducing successful derivatives exchanges especially in emerging markets which lag far behind developed markets in introducing derivatives instruments. The paper critically analyzes some of the necessary factors (requisites) prior to and after the establishment of derivatives exchange. Indicators that a derivatives market has a high likelihood of being successful when established as discussed include; economic development, political stability, strong legal and regulatory framework, sound infrastructural systems, developed capital markets, products traded, education to market participants, large and active investors as well as a detailed feasibility study. These indicators were analyzed through a comparative case study and were found to clearly distinguish successful and unsuccessful derivatives markets. Further, to determine the success of derivatives products, an empirical analysis on the factors influencing contracts’ success was conducted. Confirming our hypothesis, we found the size of the underlying market, the price variability of the spot market, as well as the cash market liquidity to significantly influence contracts success. In conclusion therefore, prior to introducing a derivatives exchange, an emerging market should first examine whether the indicators of a successful derivatives exchange are favorable and then introduce those products with high probability of being successful.
A thesis submitted to the Faculty of Sogang University In Fulfillment of the Requirements for the Degree of Doctor of Philosophy Major in International Finance
Derivative Markets, Emerging Markets, Derivative Exchanges