Assignment

On
Prospects and problems of derivatives in Bangladesh

Course Title: Financial Engineering and Alternative Investment

Course Code: FIN-5215

Submitted to:
Roushanara Islam
Associate Professor
Department of Finance
Jagannath University, Dhaka.
Submitted by:
Arfan Pias-Us-Zaman
ID: M200203011
11th Batch
Department of Finance
Jagannath University, Dhaka
 Problems and prospects of derivatives in Bangladesh

Abstract:
Bangladesh is a developing country. It has an emerging economy. It is necessary to establish
derivative market in Bangladesh. Derivative markets protect bonds, currency, equity, and short-
term interest rate assets from various risks. In this report it is tried to show how derivatives
market can help to accelerate the economic growth, minimized the risk associated with different
investment. Though bringing derivatives market can create some problem. Overall derivatives
market can be a blessing for emerging economy like Bangladesh.

Introduction:
The derivatives can be defined as a financial instrument whose value is dependent on an
underlying asset or group of assets. Over the last 4 decades derivatives become important
throughout the world. Derivative contracts are traded in exchange traded as well as over the
counter market. Forward, Future, Option and Swap are some of the major types of derivative.
The value of the assets underlying outstanding derivatives transactions is several times the world
gross domestic product (HULL, 2022 ). So there is a saying that whether you love derivatives or
hate them, you cannot ignore them! (HULL, 2022 ).
It is said that derivatives was even existed in Mesopotamia civilization but obviously not as
today’s kind. During the nineteenth century, America was at its pinnacle of economic
progress. Farmers of America realized that finding buyers for their commodities had become a
problem. They created a joint market called the “Chicago Board of Trade”. Later, This market
become first ever derivatives market. Now in modern economy we face different sorts of
complex problem. It create door for different kinds of derivative instrument with unique feature.
After 2008 financial markets collapse now derivatives become more regulated.

Derivatives in Bangladesh:

Derivatives have become very vital tools for transferring risks from one entity to another.
Bangladesh do not have derivative market till now. Security and Exchange Commission (SEC) has
the power to establish derivatives market in Bangladesh. It will provide alternative investment
opportunity to the investor and also will provide risk reduction tools to investors.
Problem and Prospect of derivatives in Bangladesh:
Once Bangladesh was labeled as a basket case by Henry Kissinger. Now it is said as a land of
opportunity. In spite of some major drawback our economy is growing. As per as the report of
World Bank 2021, Gross domestic product (GDP) of Bangladesh is 416.3 Billion USD. In terms of
Purchasing Power Parity (PPP) GDP is $1 trillion. GDP growth rate is 6.9%. Bangladesh is now 33nd
largest economy in the world (World Bank national accounts data, and OECD National Accounts
data files, 2021). Our population is over 160 million. Population demographic shows that most of
the population is young. They are a part of labor force. Bangladesh have only two stock exchange.
Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) are the two stock exchange in
Bangladesh. Market capitalization of Dhaka stock exchange is $47.56 billion USD. Market
capitalization of Chittagong Stock Exchange is $42.52 billion USD (DSE Trading Hours & Market
Holidays, 2022). Along with the economy those two stock exchange is also growing. In 2011 stock
market of Bangladesh collapsed. Within 1 year period stock index become 5500 from 8900. It is
more than 40% decrease. Almost every investors lose their money in that period because of some
miscreant. This is where derivative can make a change. Derivative market can minimize the risk
of investor. Option can provide holder the right to buy or sell the asset at a specific price at a
specific period. Other types of derivatives may also help the investor to minimize the risk. Using
swap investor can turn a fixed rate asset into a floating rate assets and vice versa. Derivatives
instrument can also be used as arbitrage and speculative opportunity in order to earn profit. In
addition to that derivative market provide liquidity to the investor. As Bangladesh don’t have an
established derivatives market investors have to bear more risk. Derivative market can be source
of short term financing for the investor. Any investor can use his or her intelligence to earn profit
from the derivatives market. Establish derivative market provide liquidity to the participant. It
provide the opportunity to buy or sell at any time as per as the wish of the participant.
More than 10 million people work in outside of the country. Every month they send remittance
to the county. In 2021-2022 total inward remittance was $21031.68 million. In 2020-2021 total
inward remittance was $24777.71 million (Wage Earners' Remittance Inflow, 2022). On the other
hand, Total export during 2020-2021 was US $ 33969 million it was US $ 29966 million in 2019-
2020 (Review of Export Receipts of Goods and Services, 2020-2021, 2022). Total import during
2020-2021 was US $61609.1 million. It was US $55634.9 million in 2019-2020 (Review of import
payments of goods and services 2020-2021, 2022). Those amount are always subject to foreign
exchange risk. Because of change in exchange rate expatriate, importer and exporter always
exposed to risk. A derivatives market can reduce this risk. By entering into the derivatives
contract any person can lock the exchange rate and be free from exchange rate risk. Establish
derivative market can help those participate and boost those sectors.

One of drawback for derivative market in Bangladesh would be won peoples’ trustworthiness. In
recent past many huge financial fraud activities are happened in Bangladesh. Every day in
newspaper this kind of news circulate. Our capital market isn’t well established. It won’t be easy
to win the trust of people. Any new things need times to gain people trust. Another drawbacks
might be lack of educated investor. Majority of the investor in capital market invest without
proper research or analyzing. They are prone to invest based on market rumors. It lead them to
bear unnecessary risk.

Conclusion:

Financial derivatives provide risk management tools as well as can be used as alternative
investment opportunity for the investor. A derivative market can be a blessing for Bangladesh. It
will help to reduce the risk as well as increase the liquidity of the market. It will motivate more
people to participate in the financial market. As our economy is growing, people are looking to
invest in innovative financial instrument with minimum risk. There is no denying of the fact that
our existing institutional set up and regulatory framework might not be adequate for
sophisticated instruments like derivatives. In spite of those problems derivative would be
beneficial for emerging economy like Bangladesh.
References
DSE Trading Hours & Market Holidays. (2022, 10 2).

HULL, J. C. (2022 ). OPTIONS, FUTURES, AND OTHER DERIVATIVES. Harlow: Pearson.

(2022). Review of Export Receipts of Goods and Services, 2020-2021. Dhaka: Bangladesh Bank.

(2022). Review of import payments of goods and services 2020-2021. Dhaka: Bangladesh Bank.

(2022). Wage Earners' Remittance Inflow. Dhaka: Bangladesh Bank.

(2021). World Bank national accounts data, and OECD National Accounts data files. New York: World
Bank.