The development of capital markets is critical for the evolution of a region's economy. It enables trading in financial securities (bonds and equities) to facilitate mobilisation of funds for investment. Equity markets provide the structure for corporates to divest stake in order to fund investments for exploring new business opportunities and expansion of existing capacity.
The Middle-East and North Africa (MENA) as well as the Asian markets have witnessed the fastest growth of capital markets in the world. Stock exchanges facilitate trading of shares (also referred to as the secondary market), thereby, providing liquidity to shares issued by companies (referred to as the primary market). Stock markets are the barometers of a nation's economy. When a country's economy is performing well with increasing business investments, consumption and manufacturing demand, cash liquidity, low inflation and high employment, then the profits of companies also increase resulting in the increase in the value of their shares.
A stock market index is a derived value of the price (or market capitalisation) of specific shares that are listed in the stock exchange. For example, the Dow Jones SAFE India Index represents a select group of stocks in the Indian equity markets. When these stock prices increase, the value of the index also increases, indicating the robustness of the underlying securities.
Since the stock market index is representative of a select group of securities that are listed, investors who prefer to invest in a specific sector or region can leverage using Stock Index Futures contracts as compared to investing in the underlying stock. With increasing volatility in International Securities Markets, the index futures contracts provide the facility to diversify a portfolio of investments. For example, if an investor based in Bahrain would like to obtain exposure to the Indian stock market, then instead of transferring funds to India (where regulatory restrictions may need to be adhered to), he or she can invest in the Dow Jones SAFE India Index futures to be listed on the BFX. With a lot size of five, the investor can obtain exposure up to five times the index value by buying or selling one futures contract on the underlying index.
Similarly, the Dow Jones MENA (Middle East North Africa) ex-SA(Saudi Arabia) Index enables investors to obtain exposure to the MENA region's economy. With a lot size of twenty, this index can be leveraged by investors who would like to diversify their portfolio with an exposure to the MENA region.
According to the Futures Industry Association (FIA), the volume (number) of Equity Index Futures contracts traded in the world was 3.64 billion during the period between January and June 2010. This was a 15.98% increase over the corresponding period in the previous calendar year 2009, when 3.13 billion contracts were traded. The growth in the futures market on equity indices is indicative of the global investors' preferences for diversifying portfolio risk.
For more information on the BFX Dow Jones SAFE India Index Futures product booklet, please click here