The United Kingdom Derivative Markets - Research Proposal Example

An In-Depth study of the United Kingdom Derivative Markets By: XXXXXXXXXX Under the supervision of XXXXXX of XXXX September 2008 An in-depth study of the United Kingdom Derivative Markets Abstract The proposal being made here is to conduct a study about the increasing interest in the derivative markets. The derivative markets have seen immense growth over the past few years. The average daily turnover of the in the markets has been growing at unstoppable rates. This proposal is for a research to understand the derivative markets on the whole and a detailed understanding of the different instruments that are traded on the markets are also focussed on within this dissertation. This section aims at understanding the main details that will be touched upon within this proposal. The first section is an introduction section which will detail an introduction of the dissertation, following which the proposed method of the research and the research methodology being proposed for the dissertation will be discussed in detail. As it is very common that every research and papers always have a few difficulties based on collection of data, this will be discussed within this report. Following which a conclusion of the report based on the conclusion of the dissertation will be drawn. Also an approximate timescale has been chalked out to get a clearer view of the route being adopted for this dissertation and to ensure the dissertation is completed well before time. Introduction: Derivatives have been around for almost over 300 years, however, there are very few people who know and are a part of the derivatives. Farmers used them to hedge the risk of lowered prices of crops in the past. They would get into contracts with the buyers before the crop was ready, and fix a price at which the crop would be sold on a particular date. By doing this they would hedge the risk of lowered crop prices at a future date. The main question within this dissertation is to understand the basics of the derivative markets and to provide tips for new entrants into the market to ensure safe and sensible trading. The main objectives of the research are focused on four main aspects namely: The importance of derivatives instruments and understanding the various instruments Current trends of the United Kingdom markets and a possible improvements Risk and safety of the investors Possible improvements of the derivative markets on the whole The study is done to help the new comers gain knowledge about the markets from the experts in the field, so as to avoid the ‘rookie’ mistakes. This is a very common scene in the present time and investing into a market without having complete knowledge can cause serious financial damage to investors. There are a number of different studies that have been made of the derivative markets however this research aims at absolute basic questions of new comers within the market and is aimed to be answered by the experts of the markets. The literature review of the dissertation will be divided into two main chapters, a) An introduction to derivatives and b) Derivative markets in the UK. In the first chapter we discuss about derivatives in brief, after which we discuss in detail the growth and history of the derivatives. The different types of derivatives are discussed to provide the readers with a detailed understanding of the various types of derivative instruments like Forwards, futures, options, calls, puts, and swaps. Also a detailed explanation of the over the counter traded derivatives and the exchange traded derivatives are discussed. The main factors causing the growth of the derivative markets over the years are discussed to help the readers understand the boom in the derivatives sector. We also discuss in detail the main players in the derivative markets and the instruments used for trading in these markets. The statistics of the various instruments being traded in the markets is provided for a few years. The main players are then discusses. The hedgers invest in the markets to minimise their financial risk by assuming the future positions opposite the cash positions in the market. The next main player in the market are the speculators who are ready to take up high risks and generally use high leveraged instruments like futures and options (Investor Awareness, 2005). The third player in the market is the arbitrageurs. They are mostly money minded and look for any opportunity to make money; hence they take advantage of a discrepancy in prices in two different markets. Further a detailed explanation of the economic functions is discussed which helps understand the economic benefits of the derivatives. It is essential for the users of derivatives, to understand how their contracts are structured, the price and risk of the instruments and how the instruments would perform in stressful and volatile economic conditions (Kaur, 2002). The second chapter will be the focused on understanding the derivative markets in the UK. A detailed discussion of the History of the Derivatives market in the UK will be discussed. The discussion will include the long history of the markets which came into being during 1698, when John Castaing began to issue a list of stock and commodity prices called “The Course of the Exchange and other things”. All the events that take place in the market since 1898 will be discussed, further which a detailed understanding of the growth of the markets in UK will be discussed in detail. The regulatory framework of the markets also plays a very important role thus this will be discussed in detail. To further understand the UK markets it is essential to understand the main participant of the market. Also the trading mechanism is discussed in detail which helps understand the regular working of the markets and to understand better how the daily trading is done in the market and the number of days it takes for a trade. The recent trends are discussed in regards to the current working situation in the market which allows a better understanding of the markets and the recent challenges that the market might be facing. In short this chapter would include in detail the growth, history, major players and laws relating to the markets. Also the trading mechanism of the market is discussed followed by the recent trends in the markets and the possible future prospects. The main aim of the literature review is to understand the UK market in detail and analyses the current market conditions. It also allows a good understanding to the new comers in the market to understand the trading mechanism and to know the basics of the markets. Since the literature review contains an explanation of the laws as well it will allow the readers to understand the market better and trade completely under the laws. The two chapters will contain a detailed explanation of the laws and the trading of the different instruments. The main purpose of this is to understand the basics of the market and the different instruments that are traded within the markets. Proposed Method: The research methodology used within this dissertation is a qualitative one. There are two types of research methods: Quantitative and Qualitative. Quantitative methods deal with numerical data obtained from data collection and analysing those using statistical methods and models to give consolidated results. Data collection can be carried out in many ways such as attitude surveys, secondary research on available data, etc. (Jobber, 2004; Hussey & Hussey, 1997). Qualitative research focuses mainly on obtaining detailed answers and in depth views from the participants. They are mostly conduced by methods, which include group discussions and depth interviews. This type of research is to understand the customer attitudes and beliefs and is aimed at understanding why a customer behaves in a particular fashion, or how the customer might behave to a possible change (Jobber, 2004 and Hussey & Hussey, 1997). The main reasons for choosing qualitative research for this dissertation are many. Firstly as the objectives mentioned earlier are descriptive in nature it is important to collect detailed responses from the market participants to get their perspective about the market. Secondly, using a quantitative method will not be possible as the response rate from the market participants would not be good enough to analyse the results. Sending out questionnaires to a random sample in the UK will not give correct results keeping in mind the factors like response rate and number of respondents. Hence if the numbers of respondents are not high enough the results obtained through this form of research will not be statistically significant. Finally, one of the best qualities of a qualitative research is that unlike quantitative research, qualitative methods have an element of flexibility in the responses that can be collected. It is possible to obtain views that would not have normally come to the respondent’s mind in the case of a questionnaire survey. The dissertation will be based out of results and responses received by in - depth interviews. . This method helps get invaluable information and knowledge from the experts and helps getting a better understanding of the recent trends and the working of the derivative markets (Jobber, 2004). The questions of the interview will be designed in a pattern where they are open ended which allow the respondents to give their views on the subject without any restrictions and also gives the interviewee a chance to probe further to get all the relevant information for the dissertation. It is an open-ended and discovery oriented method that helps getting the perspective of the key stakeholders or the target audience (Guion, 2006). The questionnaire will be designed very carefully ensuring that every question within covers any one or more of the objectives of the research. This is to ensure that all the objectives are correctly covered to get the most precise answers. Reflection: This section aims at understanding the obstacles and issues faced by the author while working on collecting the data for the topic as well as the issues in the research – in depth interviews. The dissertation topic is to understand the markets of the UK however the research that has been proposed is based more towards understanding the basics of the derivative markets on the whole. This is due to the fact that the interview that has been planned will involve a 40-45 minutes in depth interview. This could be a difficult to ask from experts as the individuals are generally extremely busy during the market open timings and would be almost difficult if not impossible to get the experts and current market players to spare too much time during the day. The other constraint of the interviews would also be strength for the interview in a few aspects. The questions of the interview being open ended does allow the interviewer to collect a lot of information however there are times where the interviewee might deviate way too much from the topic hence increasing the time taken for the interview as well as not providing focused answers to the questions. As for the literature review, the availability of recent statistics for a few of the parts of the literature is quite difficult to get making some of the data a little outdated (as old as 2004-2006). The other aspects of the literature review will include all the recent information and research of the current trends. Conclusion: This proposal has given a brief insight on the dissertation proposed to be started. The dissertation’s main aim is to understand the basics of derivative markets, and then analyse the markets in the United Kingdoms. Also the research is based to help new comers understand the markets a little better and avoid ‘rookie’ mistakes. The first step that will be taken to begin this dissertation will be the introduction to derivative chapter. This part of the dissertation will be started on and aimed to be completed along side this chapter is identifying at least ten to fifteen experts in the industry who are willing to participate in the interview. A research of works from different authors like Davies, Gieve, Gorham, Thomas, Shah, Kanter, Kaur, Meier, Remolona, Tett, Westrup etc., will be conducted to understand the basics of the markets better. Also a lot of different news articles which provide information of the current events within the markets will also be utilised. Timetable: The dissertation is aimed to be sub divided into a total of six chapters (please see proposed table of contents below). Chapter No. Chapter Name Estimated time to complete Start Date End Date Chapter 1 Introduction 3 days 7-11-08 10-11-08 Chapter 2 An Introduction to derivatives 10 days 11-11-08 21-11-08 Chapter 3 The derivative markets in UK 13 days 21-11-08 04-12-08 Chapter 4 Research Methodology 3 days 04-12-08 07-12-08 Chapter 5 Analysis of finding 30 days 07-12-08 07-01-09 Chapter 6 Conclusion 2 days 07-01-09 09-01-09 Buffer Period of 5 days is kept to cover any kind of unforeseen circumstances. Bibliography: A few of the books that will be utilised for the dissertation are as follows (this list however is not exhaustive and a few variations of books and also some other books might also be utilised to complete the dissertation with high standards of quality for the literature review): Futures, Options and Swaps (Robert W. Kolb and James A. Overdhal, March 2007) Futures and Options Markets: An introduction ( Colin Andre Carter, May 2007) Fundamentals of futures and options – 6th Edition (John Hull, Jun 2007) Options on Futures: New trading Strategy (John F Summa and Jonathan W. Lubow, Jan 2002) Option Essentials [VHS] Futures Stock and Index options trading with Michael Halloran ( Micheal Halloran, 2002) Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options (Andrew, M. Chisholm, August 2004) Property derivatives: An emerging market – (Westrup, L., 2007, The Expo Real News Letter) Mind-boggling growth in derivatives – (Warner, J., 2006 , The independent , London, retrieved from http://findarticles.com/p/articles/mi_qn4158/is_20061118/ai_n16861943) The Recent Growth of Financial Derivative Markets – (Remolona, Eli M., 1992, Federal reserve bank of New York, P28-43) Changes in the derivatives market, seen through the eyes of the Bürgenstock – (Meier, P., retrieved from http://www.exchange-handbook.co.uk/index.cfm?section=articles&action=detail&id=60630) In Londons Financial World, Carbon Trading Is the New Big Thing - (Kanter, J., 2007, New York Times, July 2007) Options Futures and Other Derivatives (John Hull, 2006) The City’s Growth: The Crest of a Wave or Swimming with the Stream – (Gieve , J., 2007, London Society of Accountants) Gambling on Derivatives Hedging Risk or Courting Disaster – (Davies, R., 2007, retrieved from http://www.ex.ac.uk/~RDavies/arian/scandals/derivatives.html) Dangerous Derivatives – (Davies, L., 2007, Retrieved from: http://www.ex.ac.uk/~RDavies/arian/fire.html, twenty first Century Publishers Limited) Commodity Derivatives Market: Development, Regulation and Future Prospects (Ahuja, N., 2006, International Research Journal of Finance and Economics, Issue 2) The above mentioned books and articles are a few of the references that have been collected. A further more number of articles and books will be utilised in the dissertation. Proposed Table of Contents: The table of contents is designed with the proposed chapters. The sub headings are yet to be decided. Table of Contents Contents Page Nos. Declaration i Dedication ii Acknowledgements iii Table of Contents iv List of Tables vi List of Figures vii Abstract viii Chapter 1 – Introduction xxxx 1.1 Sub Heading xxxx 1.2 Sub Heading xxxx 1.3 Sub Heading xxxx 1.4 Sub Heading xxxx 1.5 Sub Heading xxxx Chapter 2 – An Introduction to Derivatives xxxx 2.1 Sub Heading xxxx 2.2 Sub Heading xxxx 2.3 Sub Heading xxxx 2.3.1 Title of first subsidiary heading xxxx 2.3.2 Title of next subsidiary heading xxxx 2.3.3 etc ... xxxx 2.4 Sub Heading xxxx 2.4.1 Title of first subsidiary heading xxxx 2.4.2 Title of next subsidiary heading xxxx 2.4.3 etc ... xxxx 2.5 Sub Heading xxxx Chapter 3 – The Derivatives Market in UK xxxx 3.1 Sub Heading xxxx 3.2 Sub Heading xxxx 3.3 Sub Heading xxxx 3.3.1 Title of first subsidiary heading xxxx 3.3.2 Title of next subsidiary heading xxxx 3.3.3 etc ... xxxx 3.4 Sub Heading xxxx 3.4.1 Title of first subsidiary heading xxxx 3.4.2 Title of next subsidiary heading xxxx 3.4.3 etc ... xxxx 3.5 Sub Heading xxxx Chapter 4 – Research Methodology xxxx 4.1 Sub Heading xxxx 4.2 Sub Heading xxxx 4.3 Sub Heading xxxx 4.3.1 Title of first subsidiary heading xxxx 4.3.2 Title of next subsidiary heading xxxx 4.3.3 etc … xxxx 4.4 Sub Heading xxxx 4.4.1 Title of first subsidiary heading xxxx 4.4.2 Title of next subsidiary heading xxxx 4.4.3 etc ... xxxx 4.5 Sub Heading xxxx Chapter 5 - Analysis of Findings xxxx 4.1 Sub Heading xxxx 4.2 Sub Heading xxxx Chapter 6 – Conclusion xxxx 4.1 Sub Heading xxxx 4.2 Sub Heading xxxx Bibliography xxxx Appendices xxxx References Guion, L.A, 2006, ‘Conducting an In depth interview’, available at: http://edis.ifas.ufl.edu/FY393, Retrieved on 5 October 2008 Hussey, J. and Hussey, R., 1997, Business Research: A Practical Guide for Undergraduate and Postgraduate Students, Macmillan, Chippenham Jobber, D., 2004, Principles and Practice of Marketing, 4th Edition, McGraw – Hill, Berkshire Investor Awareness, 2005, Financial Glossary, available at: http://www.investorawareness.com/glossary.html - Accessed on 30 October 2008 Kaur, P., 2002, financial derivatives: Potential of derivative market in India and emerging derivatives market structure in India Read More