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Derivative AnalysisAssignment Title: Pakistan Financial Market Structure

Prepared By:

Syed Imran Haider (10123027)

Muhammad Imran Mushtaq (11122003)Fahad Nadeem (11223022)

Fakhar Abbas (11122002)

Submitted To:

Mr. Faisal Munir


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Table of ContentsBasic Financial System: ................................................................................................................................. 3

Financial Market: .......................................................................................................................................... 3

Pakistan Financial Market Structure: ............................................................................................................ 4

Money Market .......................................................................................................................................... 4

Money Market Players: ............................................................................................................................. 5

Money Market Products: .......................................................................................................................... 5

Capital Market: ......................................................................................................................................... 5

Pakistan Debt Market ............................................................................................................................... 6

Equity Market: .......................................................................................................................................... 6

Equity Market Products: ........................................................................................................................... 7

Derivative Market: .................................................................................................................................... 7

Derivatives in Pakistans Capital Market:.................................................................................................. 8

Stock Index Futures: .................................................................................................................................. 8

Cash Settled futures: ................................................................................................................................. 8

Deliverable Futures: .................................................................................................................................. 9

Mutual Funds: ............................................................................................................................. 9

Types of Mutual Funds ............................................................................................................... 9

Open-ended Funds....................................................................................................................... 9

Closed-end Funds ........................................................................................................................ 9

Roles Among Financial Intuitions: ............................................................................................... 12


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Basic Financial System:

Main purpose of financial market is to facilitate the flow of funds lender to borrowers. When any

entity is needed finance, it will have two options, either to borrow finance directly from lender or

to approach an intermediary or market where it can get finance,

The funds from lenders to borrows are transferred via financial intermediaries or financial

market. A perfect example of financial intermediary is a bank which collects funds from borrows

in shape of deposits and lend those funds in shape of loan. In financial markets, the borrowers

collect the funds by sharing ownership of their companies in shape of securities or pay coupon

by issuing bonds. Furthermore, the financial intermediaries and financial market are also

interconnected to each other

Financial Market:

Financial is a marketplace where buyers and sellers participate in the trade of assets such as

equities, bonds, currencies and derivatives. The buyers comes in financial market in order for the

Purpose of investment and sellers comes here for the purpose of acquiring finance for the

businesses.


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Pakistan Financial Market Structure:

Following is the hieratical structure of Pakistans financial market:

Money Market

Money market refers to the market for short term assets that are close substitutes of money,

usually with maturities of less than a year.


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Money Market Players:

Central Bank (State Bank of Pakistan). Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and

lend.

Specified Pakistani Financial Institutions, Mutual Funds, and certain specified entities areallowed to access to Call/Notice money market only as lenders.

Individuals, firms, companies, corporate bodies, trusts and institutions can purchase thetreasury bills, CPs and CDs.

Money Market Products:

Following are some instruments used in money market:

Treasury Bills Certificate of Deposit Commercial Paper Local Authority Bills Bills of Exchange Call Deposit Term Deposit Floating Rate Notes

Capital Market:

Capital market is a financial market in Pakistan where long term debts and equity type securities

and derivatives are traded. Here long term means the security must have the maturity greater than

one year. The companies consider capital market for long term investment to their businesses.

The capital market securities have two major types, The debs security and equity type security.

In debts securities, the institutions issue bonds in order to borrow funds and in equity type

security, the institutions issue securities which let the owner of security to enjoy ownership of

that specific institution in order to share the profit and loss.

When a financial instrument is first issued, it is sold in the primary market. A secondary market

is such in which financial instruments are resold among investors. No new capital is raised by the

issuer of the security. Trading takes place among investors. Secondary markets are also classified

in terms of organized stock exchanges and over-the counter(OTC) markets. Stock exchanges are


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central trading locations where financial instruments are traded. In contrast, an OTC market is

generally where unlisted financial instruments are traded.

Pakistan Debt Market

A debt market establishes a structured environment where debt type securities can be tradedwith ease between interested parties. The debt market often known by other names, based on the

types of debt instruments that are traded in that market. In the event that the market deals mainly

with the trading of municipal, corporate and Federal bond issues or National Savings Bond, the

debt market may be known as a bond market. If mortgages and notes are the main focus of the

trading, the debt market may be known as a credit market. When fixed rates are connected with

the debt instruments like Fixed Income Securities, the market may be known as a fixed income

market. If TFCs are trading in the market, the market would be known as TFC Market.

The bond market in Pakistan covers debt and debt like securities issued by the government,

statutory corporations and corporate entities. The market is regulated under the Regulation

Governing Bonds Automated Trading Regulations.

Equity Market:

Equity market is a market where shares of the companies are traded. The share of a company

gives the ownership of the company to the share holder so shareholder can share the profit and

loss of a company.

When a financial instrument is first issued, it is sold in the primary market which is called Initial

Public Offering . A secondary market is such in which financial instruments are resold among

investors. No new capital is raised by the issuer of the security. Trading takes place among

investors.

Secondary markets are also classified in terms of organized stock exchanges and over-the

counter(OTC) markets. Stock exchanges are central trading locations where financial

instruments are traded. Some major stock exchanges of Pakistan are, Karachi Stock Exchange,

Lahore Stock Exchange and Islamabad Stock Exchange

In contrast, an OTC market is generally where unlisted financial instruments are traded.


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Equity Market Products:

There are two major types of stocks issued by the companies

Common stocks

Preferred stocks

Common stocks are those stocks which give the voting rights to the share holder and shareholder

shares the profit and loss of the company not by a fix amount but according to his share. The

shareholders dividend may vary according to profits of the company

In preferred stocks, the shareholder does not have the voting rights and shares a fix amount of

profit of the company as dividend.

Derivative Market:Derivative is a financial instrument whose characteristics and value depend upon the

characteristics and value of an underlying asset, typically a commodity, bond, equity or

currency. Examples of derivatives include futures and options (Source: Investor Words.com)

Financial markets can be classified in terms of cash market and derivative markets. The cash

market, also referred to as the spot market, is the market for the immediate purchase and sale of a

financial instrument. In contrast, some financial instruments are contracts that specify that the

contract holder has either the obligation or the choice to buy or sell another something at or bysome future date

Pakistan equity derivatives products were launched on the Karachi Stock Exchange in 2001.

Initially one month deliverable single stock futures were introduced.


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Derivatives in Pakistans Capital Market:

Stock Index Futures:

Stock Index futures are traded in terms of number of contracts. Each contract is to buy or sell a

fixed value of index. Stock index futures contract settlement occurs 90 days after the contract is

purchased.

Cash settled futures:

A standardized contract to buy and sell certain underlying instrument at a certain date in future at

a specific price. All settlements occur purely on cash basis. Settlements occurs 30, 60 or 90 days

after the contract is purchased.

Derivatives

Financial

Deliverable Features

Cash Satteled

Features

Index Features

commodities

Deliverable Futures

(Gold Futures, Rice

Future,)


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Deliverable Futures:

Forward contract to buy and sell an underlying instrument with actual delivery of underlying

instrument. Settlement occurs 30 days after the contract is purchased.

Mutual Funds:A mutual fund is a collective investment scheme, which specializes in investing a pool of money

collected from many investors for the purpose of investing in securities such as stocks, bonds,

money market instruments and similar assets. A fund's portfolio is structured and maintained to

match the investment objectives stated in its prospectus.

One of the main advantages of funds is that they give small investors access to professionally

managed, diversified portfolios of equities, bonds and other securities, which would be quite

difficult (if not impossible) to create with a small amount of capital. The income earned through

these investments and the capital appreciations realized are shared by its unit holders in

proportion to the number of units owned by them.

Types of Mutual Funds

Funds can be open-ended funds or closed-end funds depending on their structure.

Open-ended Funds

These funds are in a continuous process of issuing shares/ units on demand and redeeming

shares/ units on demand. The shares/ units do not trade on a market. The number of shares/ units

outstanding varies each time the net asset valuation calculation is carried out, which is daily for

most open-ended funds.

Closed-end Funds

Closed-end funds issue a specific number of shares. Their capitalization is fixed. The shares are

not redeemable, but are readily transferable and traded on either a stock exchange or the over-

the-counter market. The price of a closed-end fund share fluctuates based on investor supply and

demand. Closed-end funds are not required to redeem shares and have managed portfoliosProducts of Mutual funds:

Stock Funds Income and Money Market Funds


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Hybrid Funds Pension Funds Islamic Funds Specialty Funds

Depositaries:

Central Depository Company of Pakistan Limited (CDC) is the only depository in Pakistan. The

Company started operations in September 1997. CDC is the sole entity handling the electronic

(paperless) settlement of transactions carried out at all three stock exchanges of the country.

Non Banking Financial Institutions:

A non-bank financial institution (NBFI) is a financial institution that does not have a

full banking license or is not supervised by a national or international banking regulatory agency

but facilitates bank-related financial services.

In Pakistan, Following are some non banking financial intuitions:

Leasing Companies Investment Banks

Modarba Companies Housing Finance Companies

Pakistan Financial Regulation:

There are two main regulatory authorities in Pakistan which regulate and control the financial

institution according to prescribed laws:

State Bank of Pakistan Security and Exchange Commission of Pakistan

The following table is displaying the role of these authorities in order to control financial

institutions:
http://en.wikipedia.org/wiki/Financial_institutionhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Bankhttp://en.wikipedia.org/wiki/Financial_institution


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State Bank of Pakistan

Public Sector Banks

Private Banks Foreign Banks

Investment Banks

Development Banks

Micro Finance Banks

Islamic Banks

Securities and Exchange Commision of Pakistan

Insurance Companies

Stock Exchanges

Leasing

Modarba

Mutual Fund


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Roles Among Financial Intuitions:

Financial Intermediaries perform intermediary role between surplus unit and deficit units in

financial market. The funds from surplus units, policy holders and employee and employers are

transferred to depository institutions, finance companies, mutual funds, insurance companies and

pensions funds and ultimately reach to deficit units which can be firms, government, agencies or

some individuals as shown in following figure:

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