VIOP or each coupon may be rearranged with a new interest rate according to changing conditions.
Derivatives Exchange
The Derivatives Exchange (VIOP) is a Derivative Instruments Market opened in Izmir on February 4, 2005. On August 2013, Vadeli İşlem ve Opsiyon Borsası A.Ş.(VOBAŞ) and Istanbul Stock Exchange Derivatives Exchange (VIOP) trading platforms merged. All derivatives contracts in Turkey began transacting under the same platform at VIOP. Futures Contracts traded at the Derivative Instruments Markets are contracts bringing the obligation to the parties to purchase or sell a goods, stocks or financial indicator at a standard quantity and quality, at an agreed price and on a date determined today.
Intended Use of Futures Contracts
Contracts traded in our stock exchange can be used for a variety of purposes. In short, we can say the following: If you are thinking of the long term and prices are fluctuating, you need this stock exchange. As we are well aware, the price of many goods and financial instruments fluctuate in Turkey. Forward transactions are generally used for three purposes:
• Hedge • Investment • Arbitrage
Hedge
Businesses face many risks. Futures contracts assist them in taking measures against such risks. Much research indicates that hedging risks increase the market value of businesses. Now let us briefly see how hedging is achieved through derivative instruments. Let us continue with the example of currencies. Let us consider that an exporting country is to achieve revenue in currency after 3 months. The profit or loss of the company becomes dependent on the exchange rate in 3 months. The company shall make profit if the exchange rate increases (due to the difference in exchange rate) and shall make loss if it falls (due to the exchange rate). The company wish to fix its current profit or loss, no matter what the exchange rate becomes after 3 months. It is easy to achieve this through futures contracts. You may sell in our Stock Exchange a futures contracts that shall allow you to fix the exchange rate at the date you shall convert your export currency to the Turkish Lira. This shall allow you to guarantee the exchange rate of the sale of your currency after 3 months. The opposite party of this transaction may be an importer requiring currency after 3 months. The importer may also request to determine now the amount of Turkish Lira to pay for currency purchase after 3 months. It is a really justified request to determine future cash flows in this manner. Our stock exchange is operating to respond to such requests. However derivative instruments are not used solely for hedging. They may also be used for investment. Now let us see how these instruments may be used for investment.
Investment
We all make investment in various instruments to gain returns. Currency, stock, treasury bills, bank deposits, real estate and gold are the traditional investment instruments that first come to mind. Different investment instruments respond to different requests of investors. Each investor select one or more investment instrument according to its own risk perception and return expectations. Derivative instruments offers an effective investment alternative. Certain features not available in traditional investments can be found in derivative instruments: • Derivative instruments request less initial investment than traditional investment instruments. All return (or loss) of the relevant instrument is obtained by depositing as down payment 10% or less of the initial investment required by traditional instruments. • Investment can be made in traditional investment instruments only with the expectation that prices shall rise. It is possible to make investment in derivative instruments also with the expectation that prices shall fall. • We cannot find certain forms of investment in traditional investment instruments. For example we cannot make instant sales or purchases of stock index on the spot market. • It is very difficult to limit risk in traditional investment instruments. It is more probable to bring the level of risk in derivative instrument to desired levels (for example by purchasing the short term of a contract and selling the long term). • It is impossible to purchase or sell in traditional markets for investment purposes, commodities that may lower risk in a portfolio or that move differently from the general trends of financial markets. In these markets a commodity becomes an investment instrument and increases your investment options. • Transaction costs in these markets may be lower than that of traditional markets.
An Example Of Use For Investment
In this example, the daily achieved profit/loss and the end-of-the-day balance of the collateral account is indicated for an investor who has taken long position in a US Dollar futures contract The investor has estimated an increase in the US Dollar currency on January 15, 2006 and has taken a long position with TL 1.505 in an August 2006 term US Dollar contract. It has deposited TL 150, the initial margin for US Dollar futures contract, to the collateral account prior to taking position. The maintenance margin of the contract is 75% of the initial margin, equivalent to TL 150 × 0.75 = TL 112.5TL. The end of day settlement price of the futures contract, the profit or loss achieved by the investor, the balance of collateral account is indicated in the following table following this date.
January 14, 2013 The end of day settlement price of the US Dollar contract has been TL 1.5660/USD on the date the investor has purchased this futures contract. The investor with long position has achieved profit as the forward prices have increased during the day. The end of day profit of the investor has been TL (1.5660 −1.5605) / USD × 1,000 = TL 5.50. With this profit, the collateral account of the investor has increased to TL 155.50. The investor may withdraw the TL 5.50 from the account at the end of the day.
January 15, 2013 End of day settlement price of the contract is TL 1.5470/ USD. The investor has made loss as the prices have decreased with respect to the settlement prices of the previous day. The loss of the investor has been TL (1.5660 -1.5470) / USD × 1,000 = TL 19.00. The balance of the collateral account has decreased to 155.50 -19.00 = TL 136.50 at the end of this day. The investor is not given a margin call, as the account balance has not reduced to below TL 112.5
January 18, 2013 The end of day settlement price has decreased with respect to end of day settlement price of January 17, 2006 and has fallen to TL 1.5230/USD. Thus the investor has made loss. The loss of the investor has been TL (1.5650 -1.5230) / USD × 1,000 = TL 42. The investor's collateral account has been reduced to 154.5 - 42 = TL 112.50 and has fallen below the maintenance margin. Therefore the investor has been given a margin call and request has been made to increase the margin to above initial level of margin. The investor has deposited TL 37.50 and increased its collateral account balance to TL 150. January 20 and 21 has coincided with official holidays and weekend and transactions have not been carried out on VIOP and there has been no profit/loss.
January 22, 2013 The investor has made TL 11.50 loss as the end of day settlement price has once again decreased with respect to the previous day and margin that was increased to TL 150 has decreased to TL 138.50. January 24, 2013 The balance of the collateral account of the investor has fallen below TL 112.5 at the end of day. The investor was given a margin call and has deposited extra TL 38 margin to increase the balance to the initial margin level of TL 150.
January 25, 2013 The predictions of the investor have begun to be fulfilled as of this date and the US Dollar futures contract prices have started to rise. The collateral account balance of the investor has started to increase as of this date. The investor is entitled to withdraw the amount above TL 150 in the collateral account at the end of day.
As a summary... The investor has purchased its US Dollar futures contract at a prices of TL 1.5605 / USD. The settlement price on February 13, 2006 has been TL 1.6360 / USD. The expected profit of the investor is TL (1.6360 -1.5605) / USD × 1,000 = TL 75.50. Let us examine if this profit has been realized: TL 150 has been deposited in the investor collateral account prior to purchase of futures contract, then has been given margin call twice and has deposited extra margin of TL 75.5. Total investment has been TRY 225.5. There is TL 301 balance at the end of the term. Investor earning has been TL 301 - 225.5 = TL 75.5.
Briefly ... In order to close position ... You do not have to wait until the end of the maturity term in order to close our your position that has been opened when you have purchased or sold a futures contract. Until the date of maturity, you may close out your position by selling the same futures contract if you have opened position through purchase transaction and by purchasing the same futures contract if you have opened position through sales transaction. You may close position or open new position through continuous trading until the maturity date of the contract.
In the cash settlement method ... Those with open position shall close out their position at the end of maturity over the maturity settlement price. In other words, you shall have repurchased the contracts you sold over the maturity settlement price, and sell your purchased contracts at this price. Thus margins are released without physical delivery by reflecting profits or losses to accounts.
The advantage of ability to carry out low-cost transactions...
It is possible to carry out very low costs transactions on the Derivatives Exchange. The cost is the brokerage fee you have to pay to the broker for performing your transaction. The amount of brokerage fee is determined at the discretion of brokers so as not to exceed 1% of the contract value. Also you have to deposit margin to perform your transaction. You may purchase or sell contract by depositing a margin much lower than underlying asset (approximately 10%). You shall retrieve the amount in your collateral account when you close out your position.
Lower margin in difference (spread) positions...
A difference (spread) occurs in case a long and short position is taken in different maturity terms of the same contract. In this case, it is adequate to deposit half of the initial margin for each of the two positions that consist of the difference transaction, rather than paying twice the amount of the initial margin, for the two contracts you purchase.
Withdrawal of realized profits ...
Profit/loss calculation is performed by Takasbank at end of day. This transaction is called update of accounts. You may withdraw the amount exceeding the initial margin of your collateral account after update of the accounts each day. You shall have to deposit extra margin in case your margin falls below maintenance margin at the end of each day.
The composition of the deposit ...
It is not necessary to deposit the whole margin in cash. Part of the margin can be deposited as non-cash, taking into account the rates of cash and non-cash margin rates. Canceling orders ...
You can cancel an order you enter into the system until it is realized, if it is not a market order. Also you can make changes on your orders within certain limits. The system does not check if your margin is sufficient until the order is realized. However your order shall be canceled by the system in case your margin balance in insufficient at the time of realizing the transaction. Price follow-ups...
Contract prices on the Derivatives Exchange (futures prices) can be monitored in real time through displays of various data broadcasting companies. Guarantees of transactions ...
It is not necessary for buyers and sellers to know each other on the futures exchange. The transactions in the exchange shall be addressed to the clearing house. The clearing house guarantees the profits and losses arising from contracts, within the limits of resources specified in the Stock Exchange Regulations. Takasbank has been specified as the clearing house of our exchange.
Maturıty Settlement Prıce For All Contracts
The daily settlement price is the price taken as basis for the re-evaluation of open positions in relevant contracts. Daily settlement price is calculated as follows at the end of session:
- The average of weighted prices according to amount, of all transactions performed within the last 10 minutes before the end of session, is determined as daily settlement price.
- In case less than 10 transactions have been carried out in the last 10 minutes, then the weighted average of the last 10 transactions of the session is taken. In case daily settlement price cannot be calculated according to the aforementioned methods at the end of session or the Settlement Price Committee is convinced that the price calculated as such does not reflect the market, then the daily settlement price can be determined by using one or more of the following methods
- The average of weighted prices of all transactions carried out during the session.
- The previous day's settlement price
- The average of the best sale and purchase quotations at the end of the session
- Theoretical future prices to be calculated using the interest rate valid until the maturity term of the contract and determined by the Exchange, the spot price of the underlying asset, daily settlement price valid for other maturity months of the contract. POSITION LIMITS The position limits implemented in our exchange are tracked in two ways as, the absolute value and the percentage value of the total number of open contracts. Percentage limits are checked only after absolute limits are exceeded Absolute position limit is 10,000 and relative position limit is 10% for contracts of VIOP-İMKB 30, VIOP İMKB 100, VIOP-DİBS 91, VIOP-DİBS 365, VIOP-G-DİBS, VIOP-Egepamuk and VIOP-Anadolu Kırmızı Buğday. Absolute position limit is 20,000 and relative position limit is 10% for VIOP-TLDolar and VIOP-TLEuro contracts. Position limits are applied on an account basis. However, position limits may be increased for portfolio accounts of members that fulfill equity capital adequacy af a certain amount and perform a transaction volume larger than a certain value.
Guarantees
We had seen in the previous sections that the margin required for taking position in our exchange. The amount of margin determined by the Exchange for each contract can be changed again by the Exchange according to developments in the market. Please contact us to learn the latest state of the initial margin.
Arbitrage
There are certain relations between future prices and spot prices and the different maturity terms of the same futures contract. In case one of these prices disrupts this relation, it shall be possible to achieve risk-free returns by trading the spot asset. Arbitrage operations assist in determining prices as expected. Examples on Currency Futures Contracts and Transactions in the Derivatives Exchange There are two types of currency futures transaction contracts traded in our Exchange. These are:
- Futures contracts based on US Dollars
- Futures contracts based on Euro # Currency futures contracts can be used for protection, investment and arbitrage purposes. # The value of one US Dollars or Euros in terms of TL are quoted by four digits after the decimal point in currency futures contracts. For example, such as April futures US Dollar contract TL 1.4590 /USD or February futures TL/Euro contract TRY 2.0355 /Euro. # The size of one US Dollar contact is USD 1,000 and the size of one Euro contract is Euro 1,000. For example an investor who has purchased a US Dollar contract for April 2007 at TL 1.4670 price level, shall have determined TL 1.4670 as the cost of each dollar for purchasing USD 1,000 at the end of April. Or, for example an investor selling a US Dollar contract for February at TRY 1.5035 shall have fixed the price at TL 1.5035 to USD 1,000 for sale of each dollar at the end of February. # The value of the contract is determined by multiplying transaction price of the contract with 1,000. For example an April TL/USD contract transacting at TL 1.4670 /USD shall have a value of TL 1.4670 / USD × 1,000 USD = TL 1,467. The Exchange share to be payable by brokers to the exchange shall be determined by a ratio over the contract value. # Physical delivery of US Dollars or Euros is not performed in the Derivatives Exchange. At maturity, the difference between the spot currency rate of that day and the contract price is reflected as profit or loss to the investor. # Parties that have purchased contract (long) shall achieve profit in care futures prices rise and shall bear loss in case they decrease; and parties that have sold contract (short) shall achieve profit in case futures prices fall and bear loss in case they rise. An investor requesting to purchase or sell one TL/USD contract is obliged to have TL 150 in its account (initial margin) in order to carry out its transaction. This amount is TRY 200 for TL/Euro contracts. A margin call is given to an investor with position in TL/USD contract in case the collateral account balance falls to or below TL 112.5 (maintenance margin). The investor is requested to rise the balance to TL 150. # An investor purchasing a contract in one maturity term of a TL/USD contract and selling a contract in another term (establishing a difference or spread position) is obliged to not to bay 150 x 2 = TL 300 but TL 150 (difference or spread margin) as the total initial margin for the two positions. The total initial margin required for two positions is TL 200 for an investor with a difference position in a TL/Euro contract. # Investors may withdraw the amount exceeding the initial margin of their collateral account, after accounts are updated each date, when there is an increase in their collateral account balances due to their daily profits. # Currency futures contracts traded in the Derivatives Exchange have maturity dates of February, April, February, August, October and December. Contracts of the nearest three maturity dates are traded simultaneously. December maturity is opened for transaction in case December is not one of these three maturity months.