Question

Analyzing Abu Dhabi stock Exchange Markets (ADX) and Dubai Financial Market (DFM)

5. Determine whether both markets use any derivatives security in trading and determine the appropriate hedging strategies using future markets for reducing financial risk and evaluate the performance of different types of derivatives.

Answer 1

The iUAE iestablished iSecurities iand iCommodities iAuthority i(SCA) iin i2000 ito iachieve ithe ifollowing iobjectives:

1. To iprovide ithe iopportunity ito iinvest isavings iand ifunds iin iSecurities iand iCommodities iin ia imanner ithat iserves ithe iinterest iof ithe inational ieconomy, isecures ithe iintegrity iand iaccuracy iof itransactions, iensures iinteraction iof ithe iforces iof isupply iand idemand iin iorder ito idetermine iprices iand iprotection iof iinvestors iby iestablishing ithe ibases ifor isound iand ijust idealings ibetween ithe ivarious iinvestors

2. To idevelop iinvestment iawareness iby iconducting istudies iand ipresenting irecommendations

3. To iwork ito isecure ifinancial iand ieconomic istability

Two imain ifinancial isecurities iexchange imarkets ioperate iin ithe iUAE iunder ithe iSecurities iand iCommodities iAuthority i(SCA):

a. Abu iDhabi iSecurities iExchange

b. Dubai iFinancial iMarket

Both imarkets iare ilinked ito ithe iEmirates iSecurities iMarket i(ESM).

The iUAE's ifinancial imarkets ideal iprimarily iin iequities, isecurities, ibonds, ifutures, imutual ifunds, icommodities, icurrencies, imetals, istones, iderivatives, iand iSukuk i(Islamic ibonds).

Abu iDhabi iSecurities iExchange i(ADX)

ADX iis ia istock iexchange iin iAbu iDhabi, istarted iin i2000 iwith ithe ipurpose iof iproviding ifunds iinvestment iopportunities iin isecurities ifor ithe ibenefit iof ithe inational ieconomy.

It iaims iat ideveloping iinvestment iawareness ito iensure ithat isavings iare iinvested iin iproductive isectors, iand ito imaintain ifinancial iand ieconomic istability.

ADX ideals iin iequities, ifunds iand ibonds.

Dubai iFinancial iMarket i(DFM)

Dubai iFinancial iMarket i(DFM) iwas iestablished ias ia ipublic iinstitution iin i2000. iAs idecided iby ithe iExecutive iCouncil iDecree iof i2005, iDFM iwas iset iup ias ia iPublic iJoint iStock iCompany. i20 iper icent iof iDFM's ishares ioffered ifor ipublic isubscription; iand ithat iwas ithe ifirst iof iits ikind iin ithe iregion. iIt iis ithe ifirst ifinancial imarket iin ithe iworld ito icomply iwith iIslamic iSharia irules.

DFM ideals iin iequity iinstruments, idebt iinstruments, iExchange iTraded iFunds i(ETFs) iand isecurities ilending iand iborrowing.

1. Dubai iInternational iFinancial iCentre i(DIFC)

DIFC iis ia ifree izone iestablished iin i2002 iby iDubai iGovernment ito iprovide iphysical, imarket iand ifinancial iinfrastructure irequired ito iset iup iand ioperate ia ithriving icommodities imarketplace. iSeveral ileading ibanks, iasset imanagement icompanies, iinsurance icompanies, ilaw iservices iand iconsulting icompanies ihave iset iup ioffices iin iDIFC. iDIFC iaims ito iestablish iDubai ias ithe iglobal ifinancial ihub.

2. Dubai iMulti iCommodities iCentre i(DMCC)

DMCC istarted iin i2002 ias ia ipart iof iJumeirah iLakes iTowers ifree izone iand ia istrategic iinitiative iof ithe iDubai iGovernment iwith ithe ipurpose iof iproviding iphysical, imarket iand ifinancial iinfrastructure irequired ito iset iup iand ioperate ia ithriving icommodities imarketplace.

DMCC itrades iin ifour imain icommodity igroups: igold, idiamond, ipearl iand itea.

3. Dubai iPearl iExchange i(DPE)

DPE iis ian iinitiative iof iDMCC ifor isupporting ithe iglobal itrade iof iboth inatural iand ifarmed ipearls.

4. Dubai iDiamond iExchange i(DDE)

DDE iis ia iDMCC iplatform iand ia iDubai iGovernment iinitiative iand ithe ionly ibourse iin ithe iMiddle iEast iaffiliated iwith ithe iWorld iFederation iof iDiamond iBourses i(WFDB).

DDE ihas ia iunique imarket iand iplatform ifor itrading iand iexchange iof idiamonds iand iprecious igems. iLocated iin ithe iAlmas iTower iin iJumeirah iLakes iTowers ifree izone, iit iis ihome ito imany iregional iand iinternational iprecious igems icompanies.

5. Dubai iGold i& iCommodities iExchange i(DGCX)

Dubai iGold i& iCommodities iExchange i(DGCX) icommenced itrading iin iNovember i2005 ias ithe iregion's ifirst icommodity iderivatives iexchange iand ihas ibecome itoday ithe ileading iderivatives iexchange iin ithe iMiddle iEast. iIt ideals iin imetals, icurrencies, ihydrocarbons iand iequities.

DGCX iis ia isubsidiary iof iDubai iMulti iCommodities iCentre i(DMCC). iIt iis ian ielectronic iplatform ifor itrading icommodity iand icurrency iderivatives iand ihas i267 imembers ifrom iall iaround ithe iworld.

6. Dubai iMercantile iExchange i(DME)

DME iwas ilaunched iin iJune i2007 iwith ithe igoal iof ibringing ifair iand itransparent iprice idiscovery iand iefficient irisk imanagement ito ithe iEast iof iSuez. iIt ideals iin ienergy ifutures iand icommodities. iIt ilists ithe iOman iCrude iOil iFutures iContract i(DME iOman) ias iits iflagship icontract, iproviding ithe imost ifair iand itransparent icrude ioil ibenchmark ifor ithe iregion.

7. NASDAQ iDubai

NASDAQ iDubai iis ithe iMiddle iEast's iinternational ifinancial iexchange. iIt icombines iregional iand iinternational iwealth, imaking iit ia iglobally iunique iplatform ifor icompanies ito iraise imoney iand ifor iinvestors ito ifind iexciting iopportunities.

NASDAQ iDubai ilisted icompanies imay itrade itheir isecurities iglobally iwhich igives ian iinstant irecognition iand ivisibility iaround ithe iworld.

NASDAQ ideals iin:

a. equities

b. Sukuk iand iIslamic iproducts

c. conventional ibonds

d. futures iand iderivatives

e. exchange-traded ifunds

f. exchange-traded icommodities

g. Real iEstate iInvestment iTrusts i( iREITs).

NASDAQ iDubai iis ilocated iin iDubai iInternational iFinancial iCentre i(DIFC) iand iregulated iby iDubai iFinancial iServices iAuthority.

Dubai iFinancial iMarket iholds itwo-thirds iand iBorse iDubai iholds ione-third iof ithe ishares iin iNASDAQ iDubai.

Derivatives iare ifinancial icontracts iwhose ivalue iis ilinked ito ithe ivalue iof ian iunderlying iasset. iThey iare icomplex ifinancial iinstruments ithat iare iused ifor ivarious ipurposes, iincluding ihedging iand igetting iaccess ito iadditional iassets ior imarkets. iMost iderivatives iare itraded iover-the-counter i(OTC). iHowever, isome iof ithe icontracts, iincluding ioptions iand ifutures, iare itraded ion ispecialized iexchanges.

Types iof iDerivatives

1. iForwards iand ifutures

These iare ifinancial icontracts ithat iobligate ithe icontracts’ ibuyers ito ipurchase ian iasset iat ia ipre-agreed iprice ion ia ispecified ifuture idate. iBoth iforwards iand ifutures iare iessentially ithe isame iin itheir inature. iHowever, iforwards iare imore iflexible icontracts ibecause ithe iparties ican icustomize ithe iunderlying icommodity ias iwell ias ithe iquantity iof ithe icommodity iand ithe idate iof ithe itransaction. iOn ithe iother ihand, ifutures iare istandardized icontracts ithat iare itraded ion ithe iexchanges.

2. iOptions

Options iprovide ithe ibuyer iof ithe icontracts ithe iright, ibut inot ithe iobligation, ito ipurchase ior isell ithe iunderlying iasset iat ia ipredetermined iprice. iBased ion ithe ioption itype, ithe ibuyer ican iexercise ithe ioption ion ithe imaturity idate i(European ioptions) ior ion iany idate ibefore ithe imaturity i(American ioptions).

3. iSwaps

Swaps iare iderivative icontracts ithat iallow ithe iexchange iof icash iflows ibetween itwo iparties. iThe iswaps iusually iinvolve ithe iexchange iof ia ifixed icash iflow ifor ia ifloating icash iflow. iThe imost ipopular itypes iof iswaps iare iinterest irate iswaps, icommodity iswaps, iand icurrency iswaps.

i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i iDerivatives iare iinvestment iinstruments ithat iconsist iof ia icontract ibetween iparties iwhose ivalue iderive ifrom iand idepend ion ithe ivalue iof ian iunderlying ifinancial iasset. iHowever, ilike iany iinvestment iinstrument, ithere iare ivarying ilevels iof irisk iassociated iwith iderivatives. iAmong ithe imost icommon iderivatives itraded iare ifutures, ioptions, icontracts ifor idifference, ior iCFDs, iand iswaps. iThis iarticle iwill icover iderivatives irisk iat ia iglance, igoing ithrough ithe iprimary irisks iassociated iwith iderivatives: imarket irisk, icounterparty irisk, iliquidity irisk, iand iinterconnection irisk.

Nasdaq iDubai’s iderivatives imarket iinitially ioffers iequity ifutures ion ishares ithat iare ilisted iin ithe iUAE. iOther iequity ifutures

i i i i i i i i i i i i i iA ifutures icontract iis ia istandardized, ilegal iagreement ito ibuy ior isell ian iasset iat ia ipredetermined iprice iat ia ispecified itime iin ithe ifuture. iAt ithis ispecified idate, ithe ibuyer imust ipurchase ithe iasset iand ithe iseller imust isell ithe iunderlying iasset iat ithe iagreed-upon iprice, iregardless iof ithe icurrent imarket iprice iat ithe iexpiration idate iof ithe icontract. iUnderlying iassets ifor ifutures icontracts ican ibe icommodities–such ias iwheat, icrude ioil, inatural igas, iand icorn–or iother ifinancial iinstruments. iFutures icontracts–also ijust icalled ifutures–are isometimes iused iby icorporations iand iinvestors ias ia ihedging istrategy. iHedging irefers ito ia irange iof iinvestment istrategies ithat iare imeant ito idecrease ithe irisk iexperienced iby iinvestors iand icorporations.

1. A ifutures icontract iis ia istandardized, ilegal iagreement ito ibuy ior isell ian iasset iat ia ipredetermined iprice iat ia ispecified itime iin ithe ifuture. i

2. Futures icontracts iallow icorporations–especially icorporations ithat iare iproducers iand/or iconsumers iof icommodities–and iinvestors ito ihedge iagainst iunfavorable iprice imovements iof ithe iunderlying iassets.

3. When icorporations iinvest iin ithe ifutures imarket, iit iis iusually ibecause ithey iare iattempting ito ilock iin ia imore ifavorable iprice iin iadvance iof ia itransaction ithey iare irequired ito imake iin ithe ifuture.

4. The imain iadvantage ifor iinvestors ilooking ito iparticipate iin ithe ifutures imarket iis ithat iit ican iremove ithe iuncertainty iabout ithe ifuture iprice iof ia isecurity ior ia ifinancial iinstrument.

When icorporations iinvest iin ithe ifutures imarket, iit iis iusually ibecause ithey iare iattempting ito ilock iin ia imore ifavorable iprice iin iadvance iof ia itransaction. iIf ia icorporation iknows ithat iit ihas ito ipurchase ia ispecific iitem iin ithe ifuture, iit imay idecide ito itake ia ilong iposition iin ia ifutures icontract. iA ilong iposition iis ithe ibuying iof ia istock, icommodity, ior icurrency iwith ithe iexpectation ithat iit iwill irise iin ivalue iin ithe ifuture.

EQUITY iFUTURES iTRADABLE iON iNASDAQ iDUBAI

Nasdaq iDubai iwill iprovide iinvestors iand ibrokers iwith ifacilities iand iinfrastructure ito iinitially itrade iequity ifutures ion ishares iof ia inumber iof ihousehold iname iUAE icompanies. iMarket iparticipants ifrom ithe ioutset iwill iinclude ileading iUAE ibrokers. iMarket imaking iservices iwill ibe iprovided ito ipromote iliquidity.

Nasdaq iDubai iEquity iFutures iare ithe ionly iequity iderivatives itraded ion-exchange iin ithe iregion. iInvestors itrading ithe ilocal iequity imarkets imay inot ibe ifamiliar iwith ithese iproducts iand ithe irisks iassociated iwith itrading ithem. iBelow iare isome irecommendations ibefore iyou istart ito itrade.

1. Understand ithe iproducts iand irisks iassociated iwith ithem iby idoing isome isimulated itrading. iPick ia ifew iequity ifutures icontracts iand ipractice.

2. Pick ithe iright imaturity imonths ito isuit iyour itrading. iNasdaq iDubai iis iplanning ito ioffer i

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