Experts and financial authorities have apparently come to the conclusion that promoting futures contracts is a must to help improve the struggling capital market, the managing director of Iran Fara Bourse said.
Addressing a meeting on the key challenges of Iran’s derivative market, Meisam Fadaee said futures are the best financial instruments to [help] protect the share market during times of steep volatility.
“Given the existing economic turbulence, futures contracts can be used as financial instruments to help investors make a profit irrespective of market conditions,” Fadaee was quoted as saying by IRNA.
A futures contract is a standardized, legal agreement to buy or sell an asset at a predetermined price at a specified time in the future. At this specified date, the buyer must purchase the asset and the seller must sell the underlying asset at the agreed-upon price, regardless of the current market price at the expiration date of the contract.
Fadaee took stock of the historic decline in the share market in 2014 and 2020 in Iran when millions of retail investors lost their life savings, noting that the damage would be less if they invested in futures.
Futures are used to hedge the price movement of an underlying asset to help prevent losses from unfavorable price changes. When an investor uses futures contracts as part of their hedging strategy, their goal is to reduce the likelihood that they will experience a loss due to an unfavorable change in the market value of the underlying asset, usually a security or another financial instrument.
On the key challenges vis-à-vis developing derivative markets, Fadaee pointed to constraints in the dilapidated trading platform in Iran’s capital market, which is not designed to handle futures trading.
“The existing trading platform is designed for a spot market and is obviously unsuitable for futures and option contracts.”
The main problem with the existing trade platform is its inability to calculate futures margin. To cope with the problem, he said, futures investors must put up shares as collateral.
Futures margin is the amount of money investors must have in their brokerage account to protect both the trader and broker against possible losses on an open trade. It generally represents a much smaller percentage of the contract, typically 3-12% of the notional futures contract value.
In the same vein, Ali Naqavi, managing director of Iran Energy Exchange (IRENEX) underlined the critical need to expand the derivatives market both in terms of technical infrastructure and improving awareness of potential investors about the merit of futures trading.
In March, IRENEX launched its first futures contracts backed by Naphtha and Methanol. Naqavi said futures trade is being planned for LPG and natural gas condensate and IRENEX is conducting feasibility studies for gasoline futures.
He referred to the lack of energy-backed certificates of deposits as one main impediment in expanding derivatives instruments.
Launching energy CDs has its own intricacies given the monopoly of the Oil Ministry and its affiliated companies in offering oil products, he concurred.
Observers say the scheme could be a milestone in energy trade in Iran’s capital market.
