Exploring Development of Financial Derivative in Pakistan

Abstract

Karachi Stock Exchange (KSE) shows a better growth rate in perspective of financial derivatives but KSE also faces high degree of volatility. Now days, KSE is considered highest volatile market in derivative all over the world. Main user of derivatives is Telecom Sector, transportation Sector, Banking Sector, financial institution and power sector in Pakistan during 2007-2012. If we use such derivative for purely hedging purpose such instrument are very helpful but excessive speculation on such instrument lead the market toward volatility which hampers not only the market but also the derivative prospective. Better policy in this concern not only will increase the size of stock market but also will provide the depth of market, tax advantage, investor confidence and business growth Statutory restriction on different institution also hinder the pace of derivative progress in Pakistan like mutual fund only may use only 10% of assets in derivatives. Fragile economy is also major problem which hinder the true spirit of derivatives in recent era. There are many factors which increase need of derivative day by day i.e. Financial ease, limited access to sources of funds and multi-national business emergence. It should also be noted that many crises are owing to high investment in derivative like East Asia crises 1990 and 2005 in Pakistan.