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Financial Instruments in Iranian Markets: Age of Derivatives
Economy, Business And Markets

Financial Instruments in Iranian Markets: Age of Derivatives

Financial instruments are the backbones of modern economies. With an over $700 trillion market, derivatives–financial instruments whose value depend on the value of an underlying asset–have become an integral part of global finance. But in Iran, they have been nonexistent until recently.

Derivatives can be used for a number of purposes, including insuring against price movements, increasing exposure to price movements for speculation or getting access to otherwise hard-to-trade assets or markets.

The Economist has reported that as of June 2011, the over-the-counter derivatives market amounted to approximately $700 trillion, and the size of the market traded on exchanges totaled an additional $83 trillion. For perspective, the total expenditure of the United States government during 2012 was $3.5 trillion, and the total current value of the US stock market is an estimated $23 trillion. The world annual gross domestic product is about $65 trillion.

Expanding Pool

As Iran's financial markets open, new financial instruments and firms that handle them are being created. The first investment bank started work in 2013, the first mutual fund in 2009. Gold futures have seen trading for a few years, but trade volume is still too low. Corporate bonds, in the form of sukuk, have appeared. Iranian government officials are talking of a government bond market to expand their revenue base. But the newest addition will be index derivatives.

The Securities and Exchange Organization is allowing for the introduction of stock derivatives in Iran's equity markets. The sharia committee of the SEO approved sharia-compliant versions of futures and index options on June 10.

"Tehran Stock Exchange started studies to introduce instruments that resembled index derivatives last year," said Ali Abbas Karimi, the development deputy of the company.

A futures contract is a standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today with delivery and payment occurring at a specified future date, or the delivery date, making it a derivative product.

On the other hand, an option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on or before a specified date.

The index option's sharia-compliant version is called "Portfolio Option" by the SEO, according to the organization's news website SENA.

Islamic Compliance

As indices are considered mere numbers and not assets by the sharia committee, basing a financial asset on them is non-Islamic. Thus, the derivatives will be based on an index's underlying portfolio, creating financial instruments with similar characteristics and making them sharia compliant at the same time. As with normal options and futures, the contracts can be settled in cash or stock on the delivery date.

On this basis, futures and call-and-put options on any portfolio of assets can be created and traded in the markets.

"We hope regulations about the derivatives will be finalized in the coming month," said Karimi. "So we can see their trading on Tehran's bourse."

The introduction of derivatives is a welcome sight as they increase market depth. Furthermore, they add to the assortment of securities where foreign investment firms can put their money in. The new regulations for removal of manufacturing obstacles, currently in process in the parliament, are seeking to ease channels of foreign investment.

 

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