Derivatives: An attractive investment channel

Vietnam derivatives market started operation in 8/2017. Photo: ST.

Liquidity in the market continuously increased

Recently, while the basic market was gloomy, the derivatives market was quite active and attracted many investors. The liquidity in the derivatives market is constantly breaking and creating new records, the volume is many times as much as the liquidity of the basic market.

According to the State Securities Commission of Vietnam, in the first half of 2018, the derivatives market continued to maintain steady growth with average contract volume of 48%. For the first 6 months of 2018, the average trading volume reached over 45 thousand contracts/ session. So far, more than 35,000 derivatives trading accounts have been opened, twice as many as that at the end of 2017.

Remarkably, in the second quarter of 2018 alone, the derivatives transaction volume was more than 4.1 million contracts, equivalent to the transaction value by nominal scale of over 417,784 billion VND, which is double compared to Q1/2018. Together with that, the volume of Open Interests (OI) in the whole market remained steady throughout the first half of 2018 and by this time it has increased by nearly 50% compared to the end of 2017.

According to Mr. Nguyen Tuan Cuong - Director of Product Structure of VNDIRECT Securities Corporation (VNDS), like other countries in the region and the world, when the basic market was strong enough both in size and stability, the establishment of the derivatives market is indispensable to increase new opportunities for investors, as well as attract more foreign professional investors to participate in the market.

"Watching the market, we see that whenever there is a strong fluctuation in the basic and VN-Index markets, the trading volume on the derivatives market is also quite large. Although this does not reflect everything, it partly shows that derivatives have been gradually becoming a risk preventing tool for many investors who are involved in trading, because the nature of these two markets is interrelated; they are proportional in terms of evolution. In my opinion, this is the role of derivatives when contributing to reduce strong fluctuations in the basic market,” said Mr. Nguyen Tuan Cuong.

The evidence is that in recent trading sessions, while the basic market has been down due to profit-taking pressure, the derivatives market has been positive and narrowed the gap with the basic index.

For example, at the session on 7th August, while the basic market dropped slightly because of the profit-taking pressure and the VN Index closing down to 956.79 points (-3.44 points, -0.36%) due to influence from VNM, VHM, GAS, VIC; VN30 Index fell 2.92 points (-0.31%) to 936.92 points, most futures contracts on the derivatives market increased. With the exception of F1808, the rest of the contracts rose slightly at the close. The F1808 reversed and slightly decreased 0.1 points at the last minute, but it was still more positive than the basic index.

However, many commented that this is a new market, so it still needs more time to confirm its role of risk prevention. When the market is strong enough to attract the participation of investors, especially institutional investors, this role will be more pronounced.

Expectations on long term contracts

Derivatives are becoming an attractive investment channel by leveraging two-way trading to create more opportunities. In other words, whether the index is down or up, investors can make profit if they forecast the right trend. The faster the fluctuation is, the greater profit they get.

However, many investors said that the attraction of the derivatives market at this stage is not in the role of preventing risk, but rather as a short-term investment channel replacing the basic market. This is reflected in the fact that the trading volume increased sharply but the quantity of open contracts did not increase and remained at a low level. Most futures contracts are closed in the session.

"With the leverage ratio much higher than the basic market (1:5 vs. 1:1) and the index recently fluctuated sharply in the session, this investment channel was assessed to be much more "fierce" than the basic market,” an investor said.

Derivatives are new, complex and highly leveraged. Therefore, if investors participate in this market without understanding the operation and conditions of the product, the risk to an individual investor is great. A representative of the VNDS stated that investors who want to invest in derivatives need to understand the product and its trading methods clearly before joining, and the purpose of participating in the derivatives market is to prevent risks for the portfolio they are holding on the basic market instead of speculating.

Forecasting in the coming time, Mr. Nguyen Tuan Cuong said that the derivatives market will continue to develop, especially with the participation of professional investors such as institutional investors or foreign institutional investors in the coming time. At the moment, the liquidity concentrates 98-99% on the monthly contract, but when institutional investors enter the market and prevent risk for their basic portfolio, the liquidity of long-term contracts will increase.

Vietnam derivatives market started operations in 8/2017 with only the current futures contract product (VN30-Index). After a year, the derivatives market has had nine securities companies participating and maintained stable operation continuously.

Compared to the basic market, the commodity on the derivatives market does not depend on the issuer, but reflects the expectation of investors with the movement of the market in the future, namely VN30 Index. In other words, investors will open long positions if the VN30 is expected to increase in the future, or open a short position if the index is expected to go down.