Why Financial Derivatives Markets in Malaysia Underperformed: Swot Analysis

Topics: Futures contract, Derivatives, Derivatives market Pages: 14 (3826 words) Published: May 18, 2012
Underperformance of Financial Derivatives Market in Malaysia: SWOT and TOWS Analysis



1. Introduction

In the age of globalization, a lot of corporations penetrate into global market, and on one hand penetration into new market have improved the corporation’s prosperity, and on the other it has also increased a range of financial market risks. Corporations face a variety of financial market risks, which in some cases can be controlled and some cannot be controlled. Corporations must be able to manage their risks either to maximising company value or maximising management efficacy. To remain competitive and rising awareness to manage these risks, corporations now focusing on risk management by financial derivatives products. The use of financial derivatives to hedge interest rate and foreign exchange exposure has become a commonplace nowadays.

In recent years, market deregulation, expansion in global trade, and progressing technological developments led to a consequent increase in demand for risk management products. This demand is reflected in the development of financial derivatives from the uniform futures and options products of the 1970s to the ample spectrum of over-the-counter (OTC) products accessible and sells today. Numerous products and instruments are frequently express as derivatives by the monetary press and market participants. In this management, financial derivatives are generally defined as instruments that mainly derive their value from the performance of an underlying asset or item, usually interest or foreign exchange rates, equity, or commodity prices.

Examples of financial derivatives consist of futures, swaps, options, structured debt obligations and forward rate agreements. Lately, credit derivatives have been used progressively more by financial institutions to moderate potential financial problems experienced as a result of the breakdown of borrowers to perform in terms of loan transactions.

Derivatives have grown to be an essential part of the financial markets because they can provide a number of economic functions. When used accurately, derivative products can turn into efficient tools in managing business risks. In the marketplace, derivatives can be used to develop product offerings to customers, deal with capital and funding costs, and modify the risk-reward profile of a particular item or an entire balance sheet. Most importantly, derivative transactions offer the prospect for financial institutions to diminish risks in the marketplace.

In Malaysia, financial derivatives have been introduced, since 1980's, when The Kuala Lumpur Commodity Exchange (KLCE) was structured to develop the marketing efficiency of crude palm oil. The first futures contract traded on the KLCE was palm oil which was launched on October 23, 1980. A derivative market in Malaysia is a plays significant role in the financial sector and it also helps to enhance economic growth. In Malaysia, growth of the derivatives market may be attributed to three contracts: the CPO futures, KLCI Index futures and 3-Month KLIBOR futures. The Malaysia market for derivatives has seen phenomenal growth over recent years. According to The World Bank, The Korean Stock Exchange has become the largest derivatives exchange in the world, and extremely rapid growth rates in Brazil, Mexico, China, India and Malaysia have propelled their exchanges to the world’s top-2. Malaysia has improved in the growth of derivatives, although Malaysia was one of earlier markets introduced derivatives instruments, there are several Asian exchanges have outperformed compared to Malaysia. In term of trading activity, exchanges in Korea, India, China and Taiwan have all outperformed Malaysia. The amount of trading on derivatives exchanges in the Asia-Pacific region grew by 42.8% in 2010 and most of the increase in volume came from exchanges in China, India and Korea[1]....
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