Classification of Derivatives Market

Derivative markets can broadly be classified  as

1. Commodity Derivative Market
2. Financial Derivative Market

As the name suggest, commodity derivatives markets trade contracts for
which the underlying asset is a commodity. It can be an agricultural commodity like wheat,
soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc.
Financial derivatives markets trade contracts that have a financial asset or variable as the underlying. The more
popular financial derivatives are those which have equity, interest rates and exchange rates as the underlying. The most commonly used derivatives contracts are forwards, futures and options
which we shall discuss in detail later.

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Participants of Derivatives Market

Derivative contracts are of different types. The most common ones are forwards, futures, options
and swaps. Participants who trade in the derivatives market can be classified  under the following
three broad categories – hedgers, speculators, and arbitragers.
1. Hedgers: The farmer's example that we discussed about was a case of hedging. Hedgers face risk
associated with the price of an asset. They use the futures or options markets to reduce or eliminate
this risk.
2. Speculators: Speculators are participants who wish to bet on future movements in the price of an
asset. Futures and options contracts can give them leverage; that is, by putting in small amounts of
money upfront, they can take large positions on the market. As a result of this leveraged speculative
position, they increase the potential for large gains as well as large losses.

Introduction of Derivatives

The origin of derivatives can be traced back to the need of farmers to protect themselves against

fluctuation in the price of their crop. From the the time it was sown to the time it was ready
for harvest, farmers would face price uncertainty. Through the use of simple derivative products,
it was possible for the farmer to partially or fully transfer price risks by locking–in asset prices.
These were simple contracts developed to meet the needs of farmers and were basically a means
of reducing risk.
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A farmer who sowed his crop in June faced uncertainty over the price he would receive for his
harvest in September. In years of scarcity, he would probably obtain attractive prices. However,
during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly
this meant that the farmer and his family were exposed to a high risk of price uncertainty.
On the other hand, a merchant with an ongoing requirement of grains too would face a price
risk – that of having to pay exorbitant prices during dearth, although favourable prices could be
obtained during periods of oversupply. Under such circumstances, it clearly made sense for the
farmer and the merchant to come together and enter into a contract whereby the price of the grain
to be delivered in September could be decided earlier. What they would then negotiate happened
to be a futures–type contract, which would enable both parties to eliminate the price risk.

A derivative is a product whose value is derived from the value of one or more underlying
variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish to sell their
harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction
is an example of a derivative. The price of this derivative is driven by the spot price of wheat
which is the “underlying” in this case
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List of ''A'' Commercial Banks in Nepal

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SN	Name of Commercial Bank	Year of Est. (AD)	Head Office
1	Nepal Bank Ltd.	1937	Dharmapath Kathmandu
2	Rastriya Banijya Bank	1966	Kathmandu
3	Agriculture Development Bank	1968	Ram sha Path Kathmandu
4	Nabil Bank Ltd	1984	Nabil House, Kamaladi, Kathmandu
5	Nepal Investment Bank	1986	Durbar Marga Kathmandu
6	Standard Chartered Bank	1987	Baneshor, KTM
7	Himalayan Bank	1993	Tridevi Marg, Thamel
8	Nepal SBI Bank	1993	Hattishar, Kathmandu
9	Nepal Bangladesh Bank	1993	New Baneswor, Kathmandu
10	Everest Bank Ltd	1994	Baneshwor Main Branch Kathmandu
11	Bank of Kathmandu	1995	Kamal Pokhari,kathmandu
12	Nepal Credit Commerce Bank Ltd	1996	NB Building, Bagbazar, Kathmandu,
13	Lumbini Bank Ltd	1998	Durbar Marg, Kathmandu, Nepal.
14	Machapuchre Bank	2000	Naya Bazar, Pokhara
15	Kumari Bank	2001	Putali Sadak, Kathmandu
16	Laxmi Bank	2002	Hattisar, Kathmandu
17	Siddhartha Bank	2002	Hatissar, KamaladiKathmandu
18	IME Global Bank	2007	Panipokhari Kathmandu
19	Citizens Bank International	2007	Kamaladi Kathmandu
20	Prime Commercial Bank	2007	Bira Complex, New Road
21	Sunrise Bank	2007	Gairidhara Crossing, Kathmandu, Nepal
22	Grand Bank Nepal Ltd	2008	Kathmandu Plaza, First Floor, Kamaladi
23	NMB Bank	2008	Babarmahal, Kathmandu
24	Kist Bank	2010	KIST Building ,Anamnagar, Kathmandu
25	Janata Bank	2010	New Baneshor, Kathmandu
26	Mega Bank	2010	Mega Mahal, Kantipath, Nepal
27	Commerz and Trust Bank	2010	Tindhara Road, Kamaladi, Kathmandu.
28	Civil Bank	2010	Classic Complex, Tindhara Road, Kamaladi, Kathmandu-31
29	Century Bank	2010	Putalisadak, Kathmandu,
30	Sanima Bank	2012	Naxal, Kathmandu
31	NIC Asia	2013	Kamaladi, Kathmandu

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Investment

1) What is Investment?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment. Investment of one investor is the income of another.

2) Why should one invest?
One needs to invest to:
§ earn return on your idle resources
§ generate a specified sum of money for a specific goal in life
§ make a provision for an uncertain future
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3)When to start Investing?
The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules
for all investors are:
§ Invest early
§ Invest regularly
§ Invest for long term and not short term

4) What is meant by Interest?
When we borrow money, we are expected to pay for using it – this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender’s money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate
may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.
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5) What factors determine interest rates?
When we talk of interest rates, there are different types of interest rates -
rates that banks offer to their depositors, rates that they lend to their
borrowers, the rate at which the Government borrows
The factors which govern these interest rates are mostly economy related
and are commonly referred to as macroeconomic factors. Some of these
factors are:
§ Demand for money
§ Level of Government borrowings
§ Supply of money
§ Inflation rate
§ The Central Bank of Nepal the Government policies which
determine some of the variables mentioned above

6) What are various options available for investment?
One may invest in:
§ Physical assets like real estate, gold/jewellery, commodities etc.
and/or
§ Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds,
debentures, derivatives etc
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Some Economic Indicator

The following is an economic indicator glossary. It’s important for our traders to know and understand market terminology. Comprehension is vital when interpreting Fundamental news and analysis.

Auto Sales

The number of cars sold during a particular ten-day period. The timeliness of this indicator (released three days after the 10-day period) makes this the most current piece of US economic data. The size of the item in question and the timeliness of the release allow auto sales to be a useful leading indicator of retail sales and personal consumption expenditures data.
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Balance of Payments

Complete summary of a nation’s economic transactions and the rest of the world including merchandise, services, financial assets and tourism. The balance of payments is separated into two main accounts: the current account and the capital account.

Balance of Trade (Merchandise Trade Balance)

The difference between a nation’s exports and imports of merchandise. A positive balance of trade, or a surplus, occurs when a county’s exports exceed its imports. A negative balance of trade, or a deficit, occurs when imports surpass exports. Rising exports add to GDP while falling imports are subtracted from it. The US merchandise trade balance has been in a deficit since the mid-1970s. Rising deficits can be reflective of increased consumption, which can be a sign of a strengthening economy.

Beige Book Fed Survey

Officially known as the Survey on Current Economic Conditions, the Beige Book, is published eight times per year by a Federal Reserve Bank, containing anecdotal information on current economic and business conditions in its District through reports from Bank and Branch directors, and interviews with key business contacts, economists, market experts, and other sources. The Beige Book highlights the activity information by District and sector. The survey normally covers a period of about 4-weeks in duration, and is released two weeks prior to each FOMC meeting, which is also held eight times per year. While being deemed by some as a lagging report, the Beige Book has usually served as a helpful indicator to FOMC policy decisions on monetary policy.