Challenges and Prospects of Derivative Market in Nepal

A proposal report on “Challenges and Prospects of Derivative Market in Nepal” Page 1
Chapter-1
INTRODUCTION
1.1.Background
With the advent of liberalization, privatization and globalization with the free economy
environment, maximum efforts are made in strengthening the investor confidence. The basic
reason underlined is in context to free and regular flow of funds to the corporate sector along
with establishing a strong investor base by including more and more middle and small
investors with their investible funds. In one way, the stock market is an experienced platform
for the any existing investors to go for accumulating their wealth by means of diversification
without any hedging to the prevailing risk factors, while the new concept of derivative market
trading mechanism has helped them a lot in minimizing the risk factors to a greater extent.
This has also led to the redefining the economy of the nation to a significant status before the
global scenario (Mishra, 2008).
The past decade has observed the abundant growth in the volume of international trade and
business due to the wave of globalization and liberalization all over the world. Therefore, the
demand of international money and financial instrument increased endlessly at worldwide.
The derivatives first came into existence in Japan rice market in early 1650s, whereas, in
Nepal its origin goes back to 2006. It is an emerging concept of Nepalese financial market.
The present context of globalization has linked the entire world as a single global market;
neither Nepal nor its financial market is an exception to this fact. Revolutionary technological
development has made quick and easy access to every possible market, as a result of this
shrunken world, the financial and economic inter-connect has further continued to intensify.
Due to the advancement of technology and the rapidly increasing size of the financial market
worldwide, its structure has become more sophisticated, yet crucial for an economic growth
of a nation. With ever increasing market openness, development of new financial techniques
and financial engineering, new financial products are constantly being introduced in both the
banking and non-banking sector of Nepali financial sector.
Derivative is one of these financial innovations in Nepal during the years of the country’s
financial development. Historically, the demand for derivative products as a financial
instrument to manage risks inherent in various business activities has evolved over the years
as a result of increasing macroeconomic instability, associated risks and volatility since the
1970s following the collapse of the Bretton Woods System. Understanding the fact that the
availability of derivative products very much depends on the market status, financial sector
openness, regulatory requirements and financial soundness of a nation; the structure of the
derivative market is limited to the presence of commodity derivatives in the case of Nepal
since the past few years; though the commodity market, as an alternative platform for
investment has undoubtedly grown by leaps and bounds. Moreover, with the liberalization of
the Nepal’s financial sector, Nepal Rastra Bank has also allowed commercial banks to have

exposures to foreign exchange forward contracts. However, activities are not meant to be
speculative in nature and the purpose is to mitigate the currency fluctuation risks.
Nevertheless, the sophistication of derivative markets bring along the question of financial
stability. Much of the publicized news about the derivative market in general worldwide and
commodity market, in particular here in Nepal, is associated with the financial mess at the
macro and micro levels respectively, whereas its benefits being shadowed under the cover of
misconceptions and lack of public awareness as well as critical understanding at the level of
concerned authorities. It’s always imperative to remember that such products themselves are
not the problem; the problem lies in the way it is managed and strategically used as per the
need and importance of a nation. That makes it essential to understand the nature of
derivative products, perhaps it may contribute to some extent towards development of the
Nepali financial sector as Nepal embrace ever-evolving activities of market living at the age
of 21st century’s global village.
The International Monetary Fund (2001) defines derivatives as “financial instruments that are
linked to a specific financial instrument or indicator or commodity and through which
specific risks can be traded in financial markets in their own right. The value of a financial
derivative derives from the price of an underlying item, such as an asset or index. Unlike debt
securities, no principal is advanced to be repaid and no investment income accrues.”
Derivative is a security whose price is dependent upon or derived from one or more
underlying assets (http://www.investopedia). The derivative itself is merely a contract
between two or more parties. Its value is determined by fluctuations in the underlying asset.
The most common underlying assets include stocks, bonds, commodities, currencies, interest
rates and market indexes. Most derivatives are characterized by high leverage.
As Nepalese securities markets continue to evolve, market participants, investors and
regulators are looking at different ways in which the risk management may be efficiently met
through the introduction of Derivative markets. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking in asset prices. As instruments of
risk management, these generally do not influence the fluctuations in the underlying asset
prices. Derivatives are risk management instruments, which derive their value form an
underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest
etc. banks, securities firms, companies and investors to hedge risks, to gain access to cheaper
money and to make profit, uses derivatives. Derivatives are likely to grow even at a faster
rate in future.
Derivatives are defined as financial instruments whose value derived from the prices of one
or more other assets such as equity securities, fixed-income securities, foreign currencies, or
commodities. Derivative is also a kind of contract between two counter parties to exchange
payments linked to the prices of underlying assets (Sreenu, 2012).
The emergence of the market for derivative products most notably forwards, futures and
options can be traced back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very
nature, financial markets are markets by a very high degree of volatility. Through the use of

derivative products, it is possible to partially or fully transfer price risks by locking – in asset
prices. As instruments of risk management these generally don’t influence the fluctuations in
the underlying asset prices. Derivatives may be traded for a variety of reasons. A derivative
enables a trader to hedge some preexisting risk by taking positions in derivatives markets that
offset potential losses in the underlying or spot market (Sarkar, 2006).
Natural hedges, defined as situations in which aggregate risk can be reduced by derivatives
transactions between two parties (called counterparties), exist for many commodities, for
foreign currencies, for interest rates on securities with different maturities, and even for
common stocks where portfolio managers want to “hedge their bets”. Natural hedges occur
when futures are traded between cotton farmers and cotton mills, copper mines and copper
fabricators, importers and foreign manufacturers for currency exchange rates, electric utilities
and coal miners, and oil producers and oil users. In all such situations, hedging reduces
aggregate risk and thus benefits the economy (Brigham & Ehrhardt, 2008).
In the financial sector there are more new probable opportunities. There are no sufficient
financial instruments for trading. Investors have to be limited in some instruments. They
cannot diverse their portfolios in sufficient sectors. Due to the lack of diversification in
portfolio the investors have to bear huge loss if the market turns to the opposite direction of
the investor what he/she has expected and forecasted. In the context of financial sector there
one stock exchange for trading stock of listed commercial banks, development banks,
financial companies, some hotels and other few manufacturing companies. In the exchange
investors can trade stock, bonds, preferred stocks and other securities. To meet the necessity
in the investment sector the concept of commodities trading and its market has been
established with the establishment of Commodities and Metal Exchange Nepal Ltd.
(COMEN). It is just that commodities market has been enter in the financial hub of Nepal but
there is not any further development in the commodities market.
The objective of study is to analyze the growth pattern of derivatives, problems faced by the
instrument and future prospects of this significant device in Nepal. The present paper
highlights the history of derivatives market in Nepal, application of financial derivatives, key
players of derivative market and the uses of the derivative market.
1.2.Statement of the Problems
Capital market is one of the most important sectors of the financial system of any country as
it has a direct impact on the development of the country. Risk is the main feature of any
capital market as well as commodity market. The complex nature of financial structuring has
exposed corporate to newer types of risks such as exchange risk, interest rate risk, market
risk, inflation risk etc. Business activities are increasing day by day and are resulting in
increase magnitude and frequency of above mentioned risks. Financial markets are, by
nature, extremely volatile and hence the risk factor is major concern for financial agents
(Kumari, 2011). To reduce the risk, the concept of derivatives comes into picture.

There is only one stock market in Nepal---Nepal Stock Exchange (NEPSE) while there are
five commodity exchanges currently operating - Commodities and Metal Exchanges Nepal
Limited, Mercantile Exchange Nepal Limited, Nepal Derivatives Exchange, Nepal Spot
Exchange and Wealth Exchange. The stock market has been operating in Nepal since the last
two decades while it has been just half a decade the concept of commodity market started to
materialize. It seems that the investors are looking upon the idea of commodity exchanges as
a promising investment avenue. Whenever the anomalies surface in the stock market, they
tend to channelize their investment into the commodity market for the security of their
equities.
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
together for gambling purpose and try to make out high returns with least investments.
It is generally stated that regulation has an important and critical role to ensure the efficient
and smooth functioning of the markets. According to Sahoo (1997) the legal framework for
derivatives trading is a critical part of overall regulatory framework of derivative markets.
The purpose of regulation is to encourage the efficiency and competition rather than
impeding it. Hathaway (1998) stated that, while there is a perceived similarity of regulatory
objective, there is no single preferred model for regulation of derivative markets.
Various researches have been done in case of derivative market in Nepal but there is still
some lacking for bringing out the actual figure of derivative market. Till date, Studies have
been conducted for theoretical development purpose only but the challenges, development
and future prospects regarding Nepalese derivative market are not properly traced out.
Therefore, this study tries to examine the challenges and future prospects of derivative market
in Nepal.
After analyzing and interpreting various facts, it has been come up to find the following
problems:
1. What are the challenges of derivative market in Nepal?
2. What are the future prospects of derivative market in Nepal?
3. What contribution does the derivative market have on Nepalese economy?
4. Does regulatory body play a significant role for developing derivative market?
5. Are all investors aware regarding derivative market in Nepal?
1.3.Purpose of the Study
The Major objective of this study is to assess the future challenges and prospects of
derivative market in Nepal. Other Specific objectives of the study are as follows:

1. To have an overview of Nepalese derivative market.
2. To trace the historical developments in derivative market in Nepal.
3. To study the types of derivatives traded in Nepalese markets.
4. To study about risk management with the help of derivatives.
5. To assess the regulations and policies framed in regard of developments of derivative
market in Nepal.
6. To understand the concept of the Derivatives and Derivative Trading.
7. To know the role of derivatives trading for Nepalese economy.
8. To analyze the performance of Derivatives Trading in Nepal.
9. To analyze pros and cons of derivative market in Nepal.
1.4.Significant of the Study
In recent times the Derivative markets have gained importance in terms of their role in the
economy. The increasing investment in derivatives (domestics as well as overseas) have
attracted the interest in this area. Through the use of derivative products, it is possible to
partially or fully transfer price risks by locking-in assets prices. As the volume of trading is
tremendously increasing in the derivatives market, this analysis will be of immense help to
the investors.
The study is conducted to know the future challenges and prospects of financial derivative
market in Nepal. It seems that the investors are looking upon the idea of commodity
exchanges as a promising investment avenue. This study covers the recent development of
derivative market so it is important to all investors for analyzing and making investment
decision. This study is also helpful to regulatory body and government for formulation of
legal provision regarding to derivative market of Nepal. At the same time, this study is also
significant to trace out the development, growth and challenges of derivative market in
Nepal.
1.5.Research Questions
The study focus to trace out following problems:
1. What factors pose challenges for the development of derivative market in Nepal?
2. Does the derivative market showing good indication for the investor?
3. Is there any legal provision for protecting investor fund in derivative market?
4. What are the future prospects of derivative market in Nepal?
5. How does the derivative market affect to the country economy?
6. What are the alternatives investments available in the derivative market for investors?

1.6.Limitation of the Study
The main purpose of the study is to examine the challenges and prospects of derivative
market in Nepal. The study has only made humble attempt at evaluating derivative market
only in Nepali context. The study is not based on international perspective of derivatives
markets, which exists in NASDAQ, CBOT etc. The limitations of the study are as follows:
1. The study is limited by time and cost factors.
2. The limited period of study may not be detailed and full-fledged in all aspects.
3. The development of derivative market in Nepal is a recent origin so it is be very
difficult to get authentic information.
4. The data provided by the prospects may not be 100% correct as they have their
limitations.
5. The lack of information sources for the analysis part.

Chapter-2
LITERATURE REVIEW AND THEORETICAL FRAMEWORK
2.1. Literature Review
The trading of financial derivatives has received extensive attention, while at the same time it
has led to a debate over its impact on the underlying stock market from various facets by the
academicians. The researchers all over the world have done research on derivative trading
and were able to find out various facts about derivative and its trading. In this literature
review efforts have been made to bring into the picture the research done about various issues
throughout the world and Nepalese case by the researchers.
The present context of globalization has linked the entire world as a single global market;
neither Nepal nor its financial market is an exception to this fact. Revolutionary technological
development has made quick and easy access to every possible market, as a result of this
shrunken world, the financial and economic inter-connect has further continued to intensify.
Due to the advancement of technology and the rapidly increasing size of the financial market
worldwide, its structure has become more sophisticated, yet crucial for an economic growth
of a nation. With ever increasing market openness, development of new financial techniques
and financial engineering, new financial products are constantly being introduced in both the
banking and non-banking sector of Nepalese financial sector.
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 everyone and every
sector like growers, traders, exporters, importers, financial institutions, industrialists,
investors and end.
The market liquidity crisis that ensued following the collapse of Lehman Brothers in July
2007 resulted in significant losses to seemingly sophisticated but unwary investors in
derivatives markets and caused substantial collateral damage in related markets (Wilmarth,
2009). The financial crisis resulted in various regulatory initiatives to reform the over-the
counter (OTC) derivatives markets, including the prescription that most derivative contracts
should be traded on exchanges or electronic trading platforms and cleared through central

counterparties. The effectiveness of these reforms to mitigate market liquidity risk requires
further investigation.
According to a study by Edwards (1995), OTC derivatives would cause a systemic crisis
because of the following hypothetical sequence: (1) an initial shock due to the failure of a
large end-user; (2) the failure of a large derivatives dealer; (3) counterparty spillover effects;
(4) market linkages spreading the “price break” (5) other dealers developing large credit
problems which could, if these dealers are banks, create a loss of confidence, causing bank
runs and bank failures; (6) deterioration in confidence, markets become less liquid, causing
price breaks and forced liquidations of securities by investors around the world (liquidity
crisis). The author however argues that, although a systemic crisis can never be ruled out, the
“notion that the expansion of OTC derivatives markets has somehow increased the likelihood
of a systemic crisis has no obvious factual basis” (Placeholder1) (Edwards, 1995) and that
there is no factual basis for additional regulation of this market. This is because pressures
from rating agencies and self-preservation incentives impose management and capital
discipline on dealers.
In a study by Scholes, (1996) in which the author argues that “there is no empirical evidence
that supports the conjectures that OTC derivative contracts can lead to massive failures and
create systemic risk” and that more restrictive regulatory rules in the derivatives markets may
destroy well-functioning markets, which would destroy market liquidity. The author argues
that dealers have, and continue to make infrastructure investments, and allocate or reserve
sufficient contingent capital to support their derivative businesses, and that these measures
are better alternatives to regulatory solutions.
According to Greenspan, (1997) “By far the most significant event in finance during the past
decades has been the extraordinary development and expansion of financial derivatives…”
Avadhani, (2000) stated that a derivative, an innovative financial instrument, emerged to
protect against the risks generated in the past, as the history of financial markets is repleted
with crises. Events like the collapse of the fixed exchange rate system in 1971, the Black
Monday of October 1987, the steep fall in the Nikkei in 1989, the US bond debacle of 1994,
occurred because of very high degree of volatility of financial markets and their
unpredictability. Such disasters have become more frequent with increased global integration
of markets. Sahoo, (1997) opines “Derivatives products initially emerged, as hedging devices
against fluctuation in commodity prices and the commodity-linked derivatives remained the
sole form of such products for many years. Marlowe (2000) argues that the emergence of the
derivative market products most notably forwards, futures and options can be traced back to
the willingness of risk-averse economic agents to guard themselves against uncertainties
arising out of fluctuations in asset prices. It is generally stated that regulation has an
important and critical role to ensure the efficient and smooth functioning of the markets.
According to Sahoo (1997) the legal framework for derivatives trading is a critical part of
overall regulatory framework of derivative markets. The purpose of regulation is to
encourage the efficiency and competition rather than impeding it. Hathway ( 1988) stated
that, while there is a perceived similarity of regulatory objective, there is no single preferred
model for regulation of derivative markets.

Derivatives include a wide range of financial contracts, including forwards, futures, swaps
and options. Forward contract is an agreement between two parties calling for delivery of,
and payment for, a specified quantity and quality of a commodity at a specified future date.
The price may be agreed upon in advance, or determined by formula at the time of delivery or
other point in time” (Definition of Forward Contract, 2012). Just like other instruments, it is
used to control and hedge currency exposure risk (e.g. forward contracts on USD or EUR) or
commodity prices (e.g. forward contracts on oil). Patwari & Bhargava (2006) explain it in
simple words and further add that one of the parties to a forward contract assumes a long
position and agrees to buy the underlying asset at a certain future date for a certain price and
the other agrees to short it. The specified price is referred to as the delivery price. The parties
to the contract mutually agree upon the contract terms like delivery price and quantity.
Sirisha (2001) explain the Types of Futures which are Foreign Exchange, Futures Currency
Futures, Stock Index Futures, and Commodity Futures etc.
The Nepalese Derivative Market is very young. Only few researches for theoretical
development purpose are found in this field. 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
together 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.
The survey and review of literature about the financial sector reforms in world and Nepal
reveals that the reforms have been pursued vigorously and the results of the reforms have
brought about improved efficiency and transparency in the financial sector. The reforms also
brought into inter-linkage of financial markets across the globe leading to new product
development and sophisticated risk management tools. Derivatives in general perform as an
instrument to hedge the risk arising from movement in prices not only in commodity markets
but also in securities market.
The need for such a study was felt as previous studies relating to the impact of derivatives
securities on Nepalese Stock market do not cover the future prospects of derivative market in

Nepal. In the financial sector there are more new probable opportunities. There is no
sufficient study regarding derivative market in Nepal.
The objective of study is to analyze the growth pattern of derivatives, problems faced by the
instrument and future prospects of this significant device in Nepal. Further, the study also
highlights the historical development of derivative market, various alternatives available for
trading, and economic impact of derivative market in Nepal.
2.2. Theoretical Framework
Capital market is one of the most important sectors of the financial system of any country as
it has a direct impact on the development of the country. Risk is the main feature of any
capital market as well as commodity market. The complex nature of financial structuring has
exposed corporate to newer types of risks such as exchange risk, interest rate risk, market
risk, inflation risk etc. Business activities are increasing day by day and are resulting in
increase magnitude and frequency of above mentioned risks. Financial markets are, by
nature, extremely volatile and hence the risk factor is major concern for financial agents
(Kumari, 2011). To reduce the risk, the concept of derivatives comes into picture.
In the financial sector there are more new probable opportunities. There are no sufficient
financial instruments for trading. Investors have to be limited in some instruments. They
cannot diverse their portfolios in sufficient sectors. Due to the lack of diversification in
portfolio the investors have to bear huge loss if the market turns to the opposite direction of
the investor what he/she has expected and forecasted. In the context of financial sector there
one stock exchange for trading stock of listed commercial banks, development banks,
financial companies, some hotels and other few manufacturing companies. In the exchange
investors can trade stock, bonds, preferred stocks and other securities. To meet the necessity
in the investment sector the concept of commodities trading and its market has been
established with the establishment of Commodities and Metal Exchange Nepal Ltd.
(COMEN). It is just that commodities market has been enter in the financial hub of Nepal but
there is not any further development in the commodities market.
The study is conducted to explore the trend of derivative market in Nepal. To identify the
future prospects, the study considers current development of capital market, investors’
awareness, and present performance of existing derivative companies in Nepal.
To know the future prospects of derivative market in Nepal, the dependent and independent
variables are taken into consideration. The dependent variables consist of the Average Daily
Volume of Trading and the independent variables consist of price volatility, investor
awareness, alternatives available for trading, and size of cash market etc.

Conceptual Framework
Average Daily
Volume of Trading
Investor Awareness
Alternatives
Available for Trading
Size of Cash
Market
Price Volatility
Figure: 1, Schematic Diagram of Dependent and Independent Variables
In the above schematic diagram, the dependent variable is Average Daily Volume of Trading
in Derivative market and independent variables are price volatility, investor awareness,
alternatives available for trading and size of cash market.
Variable definition
a. Average Daily Volume of Trading(ADVT)
It is measured as the average volume of trading in a day. The trading volume is measured
in rupees. Higher the trading volume per day, greater will be the possibility of future
growth of derivative market and vice-versa.
b. Price volatility
The price volatility measures the fluctuation in price of underlying assets in the market.
The proxy variable of price volatility is simply the standard deviation of price of
underlying assets. Higher price volatility indicates that the market growth is uncertain.

Generally, investors prefer less price volatility. There is negative relationship between
price volatility and average volume of trading per day.
c. Investor awareness
Investor awareness is measures in terms of number of investors participated in trading of
derivative securities. Higher the number of people involve in trading shows they deserve
the derivative knowledge and aware of market mechanism. Higher the investor awareness
shows higher will be the average volume of trading per day, indicating the future
prospects of derivative market and vice-versa.
d. Alternatives available for trading
This is the pool of choice available to investor for derivative trading. Various alternatives
such as future, forward, swaps etc. provides choice to investors. Higher the availability of
alternatives, higher will be the average daily volume of trading and vice-versa.
e. Size of cash market
It is measured in term of market value capitalization of underlying assets. Higher the size
of cash market, higher will be the average trading volume and vice-versa. The higher cash
market shows there will be the better prospects of derivative market in days to come.

Chapter 3
METHODOLOGY
3.1. Research Plan and Design
A research design is the "blue print" of the study. Research design is the determination and
statement of the general research approach or strategy adopted for the particular project.
Research designs help researchers to lay out their research questions, methodologies,
implementation procedures, and data collection and analysis to conduct a research project.
Research design is a road map for the researcher. If the design adheres to the research
objective, it will ensure that the client needs will be served. Research is the plan, structure
and strategy of investigation conceived so as to obtain answers to research questions and to
control variance. It is the specification of methods and procedures for acquiring the
information needed. It is the overall operational pattern or framework of the project that
stipulates what information is to be collected from which source by what procedure. In this
research we have two type of research design.
3.1.1. Descriptive Research Design
Descriptive research is used to describe characteristics of a population or phenomenon being
studied. It does not answer questions about how/when/why the characteristics occurred
(Wikipedia.org, 2012). The characteristics used to describe the situation or population is
usually some kind of categorical scheme also known as descriptive categories. Descriptive
research is a fact –finding operation searching for adequate information. It is a type of study,
which generally is conducted to assess the characteristics of given population or phenomenon
being studied. Descriptive research is a process of accumulating facts. It does not necessarily
seek to explain relationship, test hypothesis, make predictions, and get at implication of
study. It involves gathering data that describes events and then organizes, tabulates, depicts
and describe the data collection. Descriptive statistics is used to reduce the data to
manageable form.
3.1.2. Comparative Research Design
Comparative research, simply put, is the act of comparing two or more things with a view to
discovering something about one or all of the things being compared. This technique often
utilizes multiple disciplines in one study. When it comes to method, the majority agreement is
that there is no methodology peculiar to comparative research. It aims to show cause-and-
effect relationships between two or more variables. One variable is considered as the cause
(independent variable) and the other variable is considered as the effect (dependent variable).
In this research Average daily volume of trading is taken as dependent variables and price
volatility, Investor awareness, alternatives available for trading, and size of cash market, are
taken as independent variables.

3.1.2.1. Causal-comparative Research
A causal-comparative design is a research design that seeks to find relationships between
independent and dependent variables after an action or event has already occurred. The
researcher's goal is to determine whether the independent variable affected the outcome, or
dependent variable, by comparing two or more groups of individuals. It aims to establish the
direction, magnitude and form of observed relationships. It permits investigation of variables
that cannot or should not be investigated experimentally, facilitate decision making, provide
guidance for experimental studies, and are less costly on all dimensions. In causal
comparative research the random sample is selected from two already existing populations,
not from a single population as in experimental research. The impact is tested by designing
multiple regression models and analyzing the model with the help of SPSS. For the study
purpose, quantitative data are collected from the secondary source. In this study following
regression model is used:
Average Daily Trading = β0 + β1 PV+ β2 IWR + β3 AVT + β4 SCM + ℮
Where,
PV = Price Volatility
IWR = Investors Awareness
AVT = Alternatives Available for Trading
SCM = Size of Cash Market
3.2. Description of Sample
In the theory of finite population sampling, a sampling design specifies for every
possible sample its probability of being drawn( (Wikipedia.org, 2014). Sampling is a method
of selecting experimental units from a population so that we can make decision about the
population. In large population it is very difficult to study whole sample hence a random
selected sample are tested to generalize conclusion of whole population. Out of 12 derivative
exchanges, six derivative exchanges are chosen as representative sample for conducting the
analysis using observations from 2012 to 2014.
The samples taken for study are as follows:
Table: 1, Sample derivative exchanges
S.N. Derivative Exchanges
1. Mercantile Exchange Nepal Ltd. (MEX)
2. Commodity & Metal Exchange Nepal Ltd. (COMEN)
3. Nepal Derivative Exchange Ltd. (NDEX)
4. Wealth Derivative Exchange Ltd. (WEX)
5. Commodity Future Exchange(CFX)
6. National Spot Exchange(NSE)

3.3. Data Collection Procedure and Time Frame
Data collection is the process of gathering and measuring information on variables of interest,
in an established systematic fashion that enables one to answer stated research questions, test
hypotheses, and evaluate outcomes. Data are collected through the reports of derivative
exchanges (monthly, quarterly and annually). The study use secondary data for analysis of
current performance of derivative exchanges. The secondary data are collected through
reports, newspapers, exchange websites etc. Last 2 years data are collected for the study. This
is short-term research work which is estimated to take two to three months. Data collection
for derivative exchanges is a challenging job due to the raw stage of derivative market in
Nepal.
3.4. Analysis Plan
Every dissertation methodology requires a data analysis plan. The plan is critical because it
tells the reader what analysis will be conducted to examine each of the research hypotheses.
In the data plan, data cleaning, transformations, and assumptions of the analyses should be
addressed, in addition to the actual analytic strategy selected. In this study, descriptive
statistical tools such as min, max, average, standard deviation, goodness of fit and standard
error are used to find out results. Price volatility is measured in terms of standard deviation of
market price of underlying assets. Similarly, investors awareness is measures in terms of
number of investors participated in trading of underlying assets. Availability of derivative
alternatives is measured in terms of number of alternatives. Likewise, size of cash market is
measured in terms of market capitalization (amount). Regression model is used to analyze the
effect of independent variables on dependent variables.

Bibliograp
Avadhani, S. (2000). Investment Management and Mutual Funds (2 ed.). India: Cambridge
University Press India Pvt. Ltd.
Brigham, E. F., & Ehrhardt, M. C. (2008). Financial Management. Delhi: Cengage Learning
India Private Limited.
Definition of Forward Contract. (2012, November). Retrieved from www.ers.usda.gov
Edwards, F. R. (1995). Off-exchange derivatives markets and financial fragility. Journal of
Financial Services Research , 3 (9), 259-290.
Greenspan, J. (1997). Fincncial Futures and Options in Indian Perspective. Jaico Publishing
House , 12 (5).
Hathway, A. (1988). Regulatory Parameters Associated with Successful Derivatives.
Charactered Secretary , XXVII (10), pp. 918-988.
Investopedia. (2015, March 03). Retrieved from Investopedia: http://www.investopedia.com
Kumari, S. (2011). AN Insight into Derivative Markets: Indian Perspective. International
Journal of Research in Finance & Marketing , 1 (6).
Marlowe, J. (2000). Hedging Currency Risk and Options and Futures. Delhi: Cengage
Learning India Private Limited.
Mishra, S. K. (2008, January 1). Thrends and Prospects of Derivative Markets in India.
Journal of Economics and Finance .
Patwari, D., & Bhargava, A. (2006). Options and Futures An Indian Perspective. Jaico
Publishing .
Sahoo. (1997). Financial Derivatives and its products (Vol. 5). Delhi: Cambridge University
Press India Pvt. Ltd.
Sarkar, A. (2006). Indian Derivatives Markets. The Oxford Companion to Economics in India
.
Scholes, M. S. (1996). Global Financial Markets, Derivative Securities, and Systematic
Risks. Journal of Risk and Uncertainty , 12 (2), 271-286.
Sirisha, E. (2001). Stock Market Derivatives: Role of Indices (2 ed.). Delhi: Cengage
Publisher Pvt. Ltd.
Sreenu, N. (2012). A study on Technical Analysis of Derivative Stock Future and The Role
for Debt Market Derivatives in Debt Market Development in India. International Journal of
Business Economics & Management Research , 2 (3).
Wikipedia.org. (2014, March 25). Descriptive Research. Retrieved March 25, 2015, from
Wikipedia.org: http://en.wikipedia.org/wiki/Descriptive_research
Wilmarth, A. (2009). The dark side of universal banking: Financial conglomerates and the
origins of the subprime financial crisis. Connecticut Law Review , 4 (41), pp. 963-1050.

ANNEX
MEX Futures Products
02 APR 2015
Item Open High Low Close
BRCMAY15 4571 4590 4319 4386
CCOMAY15 219.8 223 219.7 220.9
COFMAY15 236.5 249.5 236.3 249.1
CONMAY15 12 12.24 11.9 12.12
COPMAY15 484.7 487.7 479 481.6
COTMAY15 110.32 112.68 110.32 112.1
CRUMAY15 3995 4024 3847 3902
GOLJUN15 30987.5 31052.5 30725 30897.5
HEAMAY15 36.98 37.09 35.18 35.58
MCOPMAY15 485.2 488.2 479.5 482.1
MCOTMAY15 110.42 112.78 110.42 112.2
MGOLJUN15 30992.5 31057.5 30730 30900
MNAGMAY15 209.4 218 207.6 216.1
MRGOLJUN15 31002.5 31067.5 30740 30910
MRSILMAY15 437.7 438.8 427.6 431.6
MSILMAY15 436.7 437.8 426.6 430.6
NAGMAY15 208.9 217.5 207.1 215.6
PALJUN15 19258 19416 19038 19212
PLTJUN15 30012.5 30025 29587.5 29747.5
SBOMAY15 53.94 54.76 53.94 54.66
SGOLJUN15 30997.5 31062.5 30735 30905
SILMAY15 436.2 437.3 426.1 430.1
SOYMAY15 29.04 29.18 28.82 28.97
SSILMAY15 437.2 438.3 427.1 431.1
SUGMAY15 21.76 22.48 21.7 22.4
WHTMAY15 15.5 16 15.35 15.72
(Source: http://www.mexnepal.com)

Local Agro Commodities (Daily Wholesale Selling Price Bulletin)
S.No. Name of Commodity Unit नेपालीनाम Minimum Maximum Average
1 Apple Kg स्याउ 100.00 110.00 105.00
2 Chili Dry Kg सुके को खुसाानी 200.00 200.00 200.00
3 Garlic Dry Chinese Kg लसुन सुके को चाइननज 130.00 135.00 132.33
4 Garlic Dry Nepali Kg लसुन सुके को नेपाली 80.00 90.00 85.00
5 Garlic Green Kg लसुन हरियो 40.00 45.00 42.50
6 Ginger Kg अदुवा 85.00 95.00 90.00
7 Green Peas Kg हरियो मटि 32.00 42.00 37.25
8 Mushroom Kg च्याउ 110.00 130.00 120.00
9 Onion Dry Kg सुके को प्याज 31.00 33.00 32.20
10 Potato Red Kg िातो आलु 15.00 18.00 16.80
11 Potato White Kg सेतो आलु 10.00 12.00 11.20
12 Sweet Orange Kg गुललयो सुन्तला 50.00 60.00 55.00
(Source: http://www.mexnepal.com)

Challenges and Prospects of Derivative Market in Nepal

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (20)

Similar a Challenges and Prospects of Derivative Market in Nepal

Similar a Challenges and Prospects of Derivative Market in Nepal (20)

Último

Último (20)

Challenges and Prospects of Derivative Market in Nepal