"Implementation of Stock Index Futures on Istanbul Stock Exchange"

 Master Thesis by Ali Coskun, Fatih University, Istanbul, 1999, Thesis Advisor: Assoc. Prof. Hasan SELÇUK
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ABSTRACT

Although introduced only a short time ago, stock index futures have become an extremely important trading instrument throughout world financial sectors. In our country, Turkey, a decision has recently been made to launch a Futures & Options Market within the Istanbul Stock Exchange. The first instrument that is planned for trading in this market is stock index futures.
In this thesis I discuss the legal, financial, and structural framework of stock index futures contract trading on the Istanbul Stock Exchange. I offer a summary of the regulatory and institutional foundations required for successfully implementing futures trading in Turkey.
Any study on stock index futures trading must include a discussion of the theoretical framework of futures markets-institutions, operation mechanisms, and other features of a well-organized futures market must also be analyzed. Stock indexes require special attention, as they represent the underlying assets of stock index futures. I review the techniques of constructing an index and the various factors that influence it. I operate on the assumption that stock indexes are suitable instruments for serving as a foundation of futures contracts. I explain specification and pricing techniques of stock index futures and argue that they may indeed represent a good alternative for managing stock market risk.
I also investigate the current situation of derivatives in Turkey. Although derivatives are not highly traded, they offer great potential as risk management tools in Turkish financial sectors. A well-structured and organized futures market may represent great opportunity for both Turkish and foreign investors; stock index futures contracts come are available at a low cost, yet they are highly effective alternatives for risk management in the Turkish market.


ÖZET (ABSTRACT IN TURKISH)

Hisse senedi endeksi vadeli islemleri, yakin zamanda ortaya çikmasina ragmen, dünya finans sektöründe önemli bir ticari enstruman durumuna gelmistir. Son zamanlarda, Türkiye'de Istanbul Menkul Kiymetler Borsasi bünyesinde Vadeli Islemler ve Opsiyonlar Pazari kurulmasina karar verilmistir. Bu pazarda ilk islem yapilmasi düsünülen enstrumanlar da vadeli islem kontratlaridir.

Bu tezin amaci Istanbul Mankul Kiymetler Borsasi'nda islem görecek olan vadeli islem kontratlarinin yasal, finansal ve yapisal altyapisini tartismaktir. Türkiye'de vadeli islemlerin basarili bir sekilde uygulamaya konulmasi için gerekli olan düzenleyici ve yapisal kurumlasma özetlenmektedir.

Çalisma vadeli islemler piyasasinin teorik altyapisi tartisilarak baslamaktadir. Iyi teskilatlanmis bir vadeli islem piyasasinin kurumlari, faaliyetleri, mekanizmalari ve diger özellikleri ile hisse senedi endeksi vadeli islemlerine esas teskil edecek endeksler incelenmektedir. Çalismada bir endeksin kurulma teknigi ve onu etkileyen faktörler gözden geçirilmistir. Hisse endeksleri vadeli islem sözlesmelerine esas teskil etmeye uygun bir enstruman oldugu gözlemlenmektedir. Hisse senedi endeks sözlesmelerinin özellikleri ve fiyatlama teknikleri açiklanmakta ve bu sözlesmelerin hisse senedi piyasasi riskini yönetmede iyi bir alternatif olabilecegi savunulmaktadir.

Çalisma, Türkiye'deki türevlerin mevcut durumunu arastirmaktadir. Türevler, halihazirda yüksek miktarda kullanilmamakla birlikte, Türk Finansal Sektörü içinde risk yönetim araci olarak büyük bir potansiyele sahiptir. Iyi kurulmus ve yapilanmis bir vadeli islem piyasasi Türk ve yabanci yatirimcilar için büyük imkanlar sunabilir. Ek olarak, özellikleri dolayisiyla, endeks vadeli islem sözlesmeleri, Türk pazarindaki risk yöneticilerine düsük maliyetli ve etkin alternatiflerdir.


Implementation of Stock Index Futures on Istanbul Stock Exchange

CONTENTS

ABSTRACT
ÖZET
ABBREVIATIONS
LIST OF TABLES
LIST OF FIGURES
TABLE OF CONTENTS

INTRODUCTION

PART I: FUTURES MARKETS
1.1. Definition
1.2. History of Futures Markets
1.3. Mechanics of Futures Trading
1.3.1. Futures Exchanges
1.3.2. Clearinghouse
1.3.3. Initiating a Trade
1.3.4. Closing a Futures Position
1.3.5. Types of the Futures Traders
1.4. Pricing of Futures Contracts
1.5. Hedging with Futures
1.6. The Economic and Social Role of Futures Markets
1.7. The Regulation of Futures Markets

PART II: STOCK MARKET INDEXES
2.1. Types of Stock Market Indexes
2.2. Calculation of Stock Market Indexes
2.3. Major Stock Market Indexes
2.3.1. American Indexes
2.3.2. European Indexes
2.3.3. Asian and Australian Indexes
2.4. Costruction of an Index
2.5. Fundamental Factors Affecting Stock Indexes

PART III: STOCK INDEX FUTURES
3.1. Stock Index Futures Contracts
3.2. Stock Index Futures Pricing
3.2.1. Fair Value of Stock Index Futures
3.2.2. Price Quotation
3.3. Index Arbitrage and Program Trading
3.3.1. Stock Index Futures Arbirtage
3.3.2. Program Trading
3.4. Managing Stock Market Risk with Futures
3.4.1. Hedging with Stock Index Futures
3.4.2. Asset Allocation
3.4.3. Portfolio Insurance

PART IV: IMPLEMENTATION OF STOCK INDEX FUTURES ON
ISTANBUL STOCK EXCHANGE
4.1. Current Examples of Derivatives in Turkey
4.1.1. Over-the-Counter Market
4.1.2. Agricultural Commodity Futures in Turkey and Izmir Futures and Options Market
4.1.3. Istanbul Gold Exchange Gold Futures and Options Market
4.2. Istanbul Stock Exchange
4.2.1. Historical and Financial Background
4.2.2. Market Performance
4.3. Capital Markets Board (CMB) and Legal Framework for Stock Index Futures Trading
4.4. ISE National-30 Index
4.5. Trading in Futures and Options Market
4.5.1. Market Membership
4.5.2. Execution of the Orders
4.6. Clearing System
4.6.1. ISE Settlement and Custody Bank (Takasbank)
4.6.2. Membership to the Clearing Center
4.6.3. Clearing the Trades

CONCLUSION

REFERENCES

APPENDIX 1. PRICE FLUCTUATIONS OF MAJOR STOCK INDEXES
APPENDIX 2. FUTURES TRADING VOLUMES IN 1997-1998 DIVIDED INTO COMMODITY GROUPS
APPENDIX 3. WORLD STOCK MARKET INDEXES, 1800-1998
APPENDIX 4. STOCK MARKET INDEXES
APPENDIX 5. STOCK INDEX FUTURES TRADING VOLUMES ON WORLD EXCHANGES
APPENDIX 6. NOTIONAL VALUES OF THE STOCK INDEX FUTURES IN 1996, 1997 AND 1998
APPENDIX 7. CAPITALIZATION, VOLUME, LISTED COMPANIES AND INDEX CHANGE FOR THE WORLD STOCK MARKETS IN 1997
APPENDIX 8. MONTHLY CLOSING VALUES OF THE ISE NATIONAL-100 PRICE INDEX. US$ BASED