Mr.Aditya Kasana

The key focus has been on the sustainability and travel modes of the children and adults during the investigation. Table of Contents Introduction Destination travel plans were the start of the evolution of travel planning which mainly focused on the reduction of car Journeys to the workplace , tourist spots and schools were also considered to be particular destinations . An example can be taken from the structure of residential travel plans where Journey starts from house to the various destinations.Since travel plans has played a major role in delivering benefits to the regional and local authorities by enchanting accessibility and deducting the level of traffic has brought role of travel plans into a limelight of developing importance which can be achieved through a planning process under a national policy where travel plans can be monitored and improved (controversialists. Co. UK). ‘ School run' is one the key issues which gave rise to School Travel Plans in the wake of risi ng peak traffic congestion , security concerns and air pollution damaging the environment.If school run is eliminated through various travel policies , it can then provide opportunities to children benefit from a healthy habits achieved by cycling and walking to the school. (ghastliest. Gob. UK). In the UK , there are 1. 2 million cars are eyeing driven extra miles to cover the Journey to schools and a million extra on roads during the peak time congestion resulting in increase of carbon emissions and tones of carbon dioxide being produced.It is assumed that the school Journeys only account to a small percentage of total travel Journeys around the I-J and but has a major affect on the large scale (Birmingham. Gob. UK). Norfolk was the first one to achieve an award of being the only county with every school running a travel plan. Programmed were installed both in rural and urban parts of the region resulting in the decrease shift of 17% of car use throughout the area. Norfolk managed to achieve its goals by getting involved with around 6000 children into a habit of cycling , walking , bus use and car sharing (schools. Norfolk. Gob. UK).Literature Review Consolidating literature within the field of travel plans it was discovered that travel plans were first introduced in Government Green Paper in 1996 as part of national policy (Potter et al, 1999). Factors such as location, company cars and organizational policy are all considered when devising travel plans (Names and Sandburg, 1996; Banister and Gallant, 1999). In the sass the travel plans have been recognized significantly and this led to a increase in interest and reforms within departments such as Transport and the regions DETER , Department of the Environment (DETER , 1998 ).Regarding employer travel plans, Potter et al (1999) outlines negative traits in views and attitudes towards the travel plans and were more inclined to implement cycle facilities. However it has been noted that the cycle facility initi ative will not bring about any major change to the impacts suffered to the environment, although acknowledging the benefits in health and increase in safety levels Monoclinic and Shackle (1996). The encouragement of physical activities has been identified as essential to tackle the rise in obesity amongst children (Salmon et al 2004).Salmon et al suggest that schemes such as Walking School Bus' would assist in cultivating and changing behavioral habits and be beneficiary to health of pupils. They also indicate that active travel in no way raises any health risks and with the increase of various education programs, aimed at educating pupils on minimizing risks when taking public transport, walking and cycling. Often with regards to travel plans the focal point is placed upon the role of the employers to tackle the issue of minimizing car travel routines to work, to combat problem of peak hour congestion (Methamphetamine County Council, 1995).This is further exemplified through the ac tions of Brighton and Hove City Council assist companies by devising various travel plans to take an initiative on this influential problem. To put into perspective, travel plans are considered a priority in various countries, for example in Australia various studies have commenced measuring the correlation in the mode of travel to their schools, with a considerable rise from 25% o 89% within a 30 year period of pupils being driven to school (Consultation Planning Survey Services, 1974 and DOI 2005).Australia also takes a similar stance in educating their pupils about transport awareness by a national plan named ‘The School Travel Planning. Research conducted by Pied and Somerville Road & Transport Research (2006) suggested that within the periods in which this plan was implemented, 2007-2008, there was a decrease from 60% to 10% in Journeys to private travel to schools. This was a direct consequence as to the impetus and focus the Australian government placed on public transp ort, walking and cycling, which the search indicated substantially increased from 2007 to 2008.The United Kingdom soon followed suit, initially though the first conceptual travel plans devised by the UK government was regulated within 1997/1998. In 2010 the decision was made to further regulate travel plans with the aim to improve congestion flow around the public and private schools in the I-J. The travel plan has been proved successful. This lies in the fact that within the I-J there are more than 2000 schools which have implemented the ‘School Travel Program', making the UK a fore frontal focus on the creation and division of effective travel plans, attracting the attention of surrounding European countries.Yet with all this success has lead to large investments with a total of El 55 million spent on school travel plans between 2004 and 2009. However it is important to note that EYE million were spent on salaries of school travel advisor and about IEEE million went to the c apital investments. A particular scheme that was successful was the Walking School Bus scheme' which was installed in various schools in September 2000. By consolidating the literature within this field has provided the foundations in which to interpret the theories and notions that surround ‘School Travel Plans'.External factors that may influence school travel plans have been identified from the literature such as the demographical information, congestion, traffic flow, road works through the means of public transport, cycling and walking. Methodology Research aims – Desk research has been conducted in the project. It covers subject matter from all type of sources ranging from published articles to websites of county councils across The United Kingdom. The document of how to a write a successful plan published by Havening London Borough been taken as a base structure for the school travel plan analysis.The reason behind of this approach is to target specific areas of the research questions which are literary in nature. ProJect sets out with a broad introduction to the travel planning and its origin to understand the base of the investigation. Research questions have been arranged in an order to connect with the information as follows – Why school travel plans are important and what are the benefits ? Mainly focuses on the advantages of the school travel plans and benefits to the environment and the society.How to structure and what should be included in a School Travel Plan ? To recognize the structure and the requirement of school travel plans supported by examples from 5 different schools to understand every phase of the plan. Which travel policies under The School Travel Plan been successful in reducing congestion outside schools and promoting greater use of sustainable transport ? Two of the main travel policies has been brought into the light to examine issues related to traffic congestion. Which other countries took initiative in pr omoting school travel programmed ?Three western countries have been taken into account to acknowledge wider aspects of the school travel plans on an international level. What are relationships between school travel plans and other travel plans ? Residential and employer travel plans has been taken into consideration to examine and compare the characteristics of the School Travel Plan. Why school travel plans are important and what are the benefits? School run is the Journey parents make to and from school in order to provide transportation to their children by car.These school Journeys are significantly less compared to the total demand of transport but major effects the peak traffic flows leading in congestion and impact on the environment. In order to reduce congestion , t is required to promote walking and cycling to school within the youth which will going to enhance their social skills , independence and self confidence. This will not only going to benefit them in terms of bodi ly movement but also going to help children getting accustomed to their local environment (Birmingham. Gob. UK).According to Durham county council , it was necessary to create a travel plan by 2010 and following to that , target was achieved by 97% of schools in Durham , obtaining one million pounds to be disburse on the refinement of school Journey projects and promotion of sustainable mode of transport. Enhancement of current parking facilities and better pedestrian access points are one of the few examples of these schemes. Let is important to install school travel plans and encourage active travel through campaigns, initiatives and promotions to teach students about travel sustainability from their childhood (Durham. Ova. UK). The key victims to the school run are usually people living next to schools as they are affected by difficulties created by the drivers by parking in inappropriate places , generating pollution and risking safety of cyclists and pedestrians around the area of the school. During the peak ours , 1 out of 5 Journeys are made by drivers on the school run and usually these journeys are short with a cold engine which produces an excess amount of pollution inside a car which is calculated to be thrice the level of pollution on the pavement which can be quite harmful for children walking to the school(schools. Reform. Gob. UK). As stated by Brighton and Hove city council † A School Travel Plan ( STEP) is a document which sets out how a school will promote safer , active and sustainable travel to school , with the main emphasis being on reducing the number of children being driven to and from school† . Discussion with parents , local people, governors, teachers and students is vital in developing a good STEP and to overcome the problem changing situations , the plan should be assessed and reformed on a regular basis.A school travel plan stimulates active travel which results in reduced congestion and traffic which can be advantage ous to people living around the area of a school , school community and the entire city . School Travel Plan can be benefited by different sections of society (Brighton-hove. Gob. UK). Today's period , obesity is a major issue and it is crucial to promote physical exercise within the youth and make them ware of benefits of sustainable transport and exercise which will help them to make healthy decisions in the future and ameliorate their fitness levels.As suggested in studies , children suffering from anxiety and stress are the ones who are driven and the children likely to be more alert during the class are the ones to choose walking and cycling to the school. It is important for a school to Implement sustainable travel habits such as road safety skills and hazard awareness within the children. Advantages of not being driven to school will provide children with an opportunity to enhance their social skills by interacting with their parents and guardians along the journey and get to know more about the community.By shifting to sharing a car , cycling and walking from short car Journeys will help families to be more economical and save cash over a year or a term (schools. Norfolk. Gob. UK). Students will benefit in better fitness levels by indulging in physical activities such as cycling, scooting and walking. It will refine their knowledge about road user skills and travel awareness and enhance their perception of their surrounding.Schools will see a boost in better feet and less congestion around the campus with the implementation of schemes which will initiate safer cycling routes and walking areas and be part of policies such as Healthy and CEO-schools in of various other schools in the region(Brighton- hove. Gob. UK). For parents , it will help them develop greater connection with schools and better relationship their children with the increase in interaction time and relieve the tension of facing congestion while driving to and from the school.Local Commu nities will take advantage of reduction in noise and air pollution and enchanted road safety and walking routes(Brighton-hove. Ova. UK). Worldwide , it has clearly been recognized by transport planners around in Japan , Europe and Australia , the need of changing travel habits of an individual from private to public mode of transport . It is realizes because of negative impacts being held on social life and health due to increase in congestion in traffic , land use patterns , reduction in use of public services such as rail and buses and increase in the air ; Attaining,A. 2006). How to structure and what should be included in a School Travel Plan? According to Transport of London , the concept of School Travel Plan commonly now as Steps is to benefit the community by implementing travel plan in schools across the country. Steps contain various information and ideas to strengthen areas of transportation across the school with an aim of bringing a change to the environment and the soc iety.The key endeavourer to achieve by Steps is reduction in car Journeys to and from schools , motivating adults and young people to adapt the idea of active travel over the private transportation and to develop appreciation between school communities towards options of travel available to them . The reason Enid the existence of STEP is not only to achieve these aims of improving the flow of travel around school but also to provide benefits to the environment by reducing congestion and pollution by promoting sustainable transport . T has already been proven the advantages of including School Travel Plan in schools (Transport For London). According to Leister council , travel plans has no definite national format and each plan is considers type of developments and sites as it reveals characteristics such as unique location , accessibility and operation which are required to be carried out on that site. Aim of a travel plan is not only to cover traveler's Journey but also address peo ple commuting between residences and business premises (laics. Gob. K). Stages in development of a School Travel Plan – Characteristics of a school Step – 1 It is first required to identify in which area school specializes which means whether it is primary , secondary independent/voluntary or school for special needs . Then moving on to considering the size of the school by finding out how many students are enrolled and what are the age groups and number of staffs employed(havening. Gob. UK). Step- 2 This step would include the description about the location where the school is established .Some key information required are description of the area including a map , school entrances , local public transport links for an example bus routes and stations(havening. Gob. UK). Step- 3 It is required in this section to focus on existing policies of the school which can be for instance school trip and healthy and safety policies and how they can be link to the school travel pla n. If school is involved in promoting environmental activities and considered to be healthy can also be highlighted (havening. Gob. K). Step- 4 In this step , details of any activities in which school take part regularly and relates to the School Travel can be included for an example : Walk to School Week activities, cycle storage , student's cycle training , sustainable transport policies , walking bus and other related activities (havening. Gob. UK). An example of phase 1 can be seen in the school travel plan prepared by the Devon county for The Manor Primary school in Jan 2005 where it mentions about the characteristics of the school.First part of the step can relate to the school introduction where it mentions that it is a primary level situated in the middle of a sousing development in Bridge. It holds a capacity of 35 staff members and 300 students. As shown in their school travel plan , there are 12 car parking space and a single entrance but there is no initiative taken to p romote walking school bus, no CATV , cycle storage or cycle training plans which can relate to step 2 and 4 of the phase 1 (Devon. Gob. K) Phase-2 Issues at the School Step-I This part of step would identify issues by carrying out survey results of the entire school which should answer the following main questions : What date survey was undertaken? How many students were surveyed? How do students travel to school? Besides this , extensive surveys with pupils and parents can be included and any relevant data from the previous surveys conducted which could present progress report would be beneficial in the creating a plan. Surveys should be not be older than 12 month period (havening. Gob. UK).For instance , to get clear view of step-I , an example of Randal Cramer Primary School's survey analysis can provide a basic understanding of survey results. In their STEP, findings are shown of two different surveys being carried out with a gap of two years to monitor progress. The survey cond ucted in the year 2008 proves that the liking is a dominant method over car use and 31% of students are willing to adapt cycle travel. Survey was conducted again in 2010 where it shown a difference in the figures rising Upton 13. 3% for the walking method and a drop of 14. 91 in the use of car .These surveys included in STEP helps school to address their issues efficiently (hackney. Gob. UK). This Step addresses the problems and issues of a school in a written description which explains the need of developing a plan . This section should be separated from the survey results. Issues mainly to acknowledge can be ones identified by arenas , staff , students and from surveys. Some of the issues are such as ones related to school gate parking , barriers to sustainable transport or road Junctions which are considered to be not safe for pupils (havening. Gob. UK).Phase-3 Involvement Step- 1 This step covers evidence of everyone's involvement from individuals to groups within and outside th e school in bringing plan into action. Section must include the people who were interviewed and how their ideas and opinion were directed towards the plan . Details can be sought by mentioning about the meeting of governors/PTA here plan was discussed and about any procedure or involvement of School Council which has been conducted. Other key information to be involved are about any discussions in the classroom or assemblies and curriculum projects.This can be not very easy with students with various learning difficulties and effort should be put in getting as much opinion as possible (havening. Gob. UK). This section carries out any relevant information about letters being sent to local residents or parents or newsletters shared and displays being projected to actively persuade people to share their opinions regarding the travel plan . It should be clearly understood and noted that evidence would not consider hands up surveys on favored means of Journey (havening. Gob. UK).An examp le of this Phase-I can be vividly understood by the School Travel Plan of Hill Top First Community School for the age group of 3 to 9 years. This school majority focuses on the well being of its pupils and has involved itself with their opinions and suggestions. Here are the few examples of children and parents sharing their thoughts about the school travel :- Comments by children- â€Å"The best thing about going to school ( by car ) is listening to the radio. The worst thing is the traffic lights because I like going to school .I'd like to come to school on a bike† â€Å"The best about my Journey(walking) is I get to see lot of different things. My journey is safe but not always when I cross the road† Comments by parents- â€Å"Too many cars pull up by the school gates† † We've nearly been run over by cars reversing out of the school drive at drop off time† These are one of the few comments of the pupils studying in Hilltop school . This proves tha t the school is involving children and parents in initiating their travel plan and tackle any issues (rubs. Gob. UK). Phase-4 What are Plan's objective?This step identifies various objectives, project is intend to achieve such as reduction in number of car trips and during peak hours and promote use of public transport walking/cycling to and from school . These initiatives will result in improvement of health of people within school communities (havening. Gob. UK). To explain the criteria of this phase of a plan , Bishop's Hull Community Primary School's school travel plan can be considered as an example. By evaluating their objectives set up after carrying out survey results. They concluded that cycling needs to be safer for children and remote greater use of walking instead of use of car.Parents should be motivated to share private vehicles to avoid congestion during peak times. These ideas are held together in a their school travel plan to overcome travel issues and promote susta inable mode of transport for the well-fare of the community and children (environmentalism's. Co. UK). Phase-5 Action Plan This part of the step sets out actions required in the plan to achieve these objectives. Actions required can be described in an action plan at the stage of approval (havening. Gob. UK). This section covers about the key ingredients required to establish an action plan.

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People go to school to get an education. What individuals make of school is what they are going to take with them when they are on there own and for the rest of their life. There are two different types of students, passive and active. Attitude, the amount of energy you put into your classes, and the quality of work determines the type of student you are going to be. Attitude is the first element that determines the quality of a student. A passive student is almost always negative. Normally his or her attitude is that they have something better to do then study; they just do not care about how well they do in the class. Often passive students tend to think that when they receive a poor grade, it is because the teacher does not like them. On the other hand an active student has a very positive attitude. He or She is a â€Å"go getter? often optimist always looking for the best in every situation. They try to learn as much as possible about what they are studying. The second component that helps determine the type of student is the amount of energy he or she puts into their work for their classes. A passive student is lazy. Since he or she†s attitude is poor, they tend to put only enough energy in to just get by. An active student does just the opposite they always study. They have their priorities straight. They make the time to study instead of going out and having fun. Such as not going out with their friends when they know that a quiz or test is coming up. They are usually willing to help others. Finally, the quality of work also determines the type of student. A passive student often turns in poor and unfinished work. He or She does not take time to fully understand the directions, so in turn the assignment will not meet the instructor†s standards. An active student tries His or Her best to turn in complete work on time. They strive for top-quality work, which they are proud of. By striving for good work that is what gets them a good grade. The type of student you are can be a major decision for the rest of your life. If you at a young age develop good study habits and really care about your work then you will benefit from it for the rest of your life. Not only when you are in highschool is this important, but if you continue into higher education. I am sure that it is everyone†s goal to be an active student. But it is all up to the student, hopefully He or She will realize how important it is. Knowing and learning the components that it takes to be either a passive or active student. Passive and Active Students People go to school to get an education. What individuals make of school is what they are going to take with them when they are on there own and for the rest of their life. There are two different types of students, passive and active. Attitude, the amount of energy you put into your classes, and the quality of work determines the type of student you are going to be. Attitude is the first element that determines the quality of a student. A passive student is almost always negative. Normally his or her attitude is that they have something better to do then study; they just do not care about how well they do in the class. Often passive students tend to think that when they receive a poor grade, it is because the teacher does not like them. On the other hand an active student has a very positive attitude. He or She is a â€Å"go getter? often optimist always looking for the best in every situation. They try to learn as much as possible about what they are studying. The second component that helps determine the type of student is the amount of energy he or she puts into their work for their classes. A passive student is lazy. Since he or she†s attitude is poor, they tend to put only enough energy in to just get by. An active student does just the opposite they always study. They have their priorities straight. They make the time to study instead of going out and having fun. Such as not going out with their friends when they know that a quiz or test is coming up. They are usually willing to help others. Finally, the quality of work also determines the type of student. A passive student often turns in poor and unfinished work. He or She does not take time to fully understand the directions, so in turn the assignment will not meet the instructor†s standards. An active student tries His or Her best to turn in complete work on time. They strive for top-quality work, which they are proud of. By striving for good work that is what gets them a good grade. The type of student you are can be a major decision for the rest of your life. If you at a young age develop good study habits and really care about your work then you will benefit from it for the rest of your life. Not only when you are in highschool is this important, but if you continue into higher education. I am sure that it is everyone†s goal to be an active student. But it is all up to the student, hopefully He or She will realize how important it is. Knowing and learning the components that it takes to be either a passive or active student.

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What Are Good Industrial Relations - Essay Example Industrial relations involve efforts to create workable solutions between conflicting objectives and values, between incentive and economic security, discipline and industrial democracy, authority and freedom, and between bargaining and cooperation (â€Å"Industrial Relations†, 2012). They not only affect the interests of labor and management but also the economy addressed by the government. They denote matters such as the right to organize, freedom of association, and collective bargaining and arbitration between various levels of the economy (Sivarethinamohma, 2010). As seen in the above definitions, industrial relations are chiefly the relations between employers and employees, reflecting the outcome of human resources management. Their main emphasis is to accommodate the interests of other parties and maintain a harmony through problem solving between employers and employees. Industrial relations are governed by policies, rules, regulations, agreements, mediations, acts an d awards concerning workplace and working community. Industrial relations analysts have described three major theoretical approaches that are different in explaining and analyzing relations at workplaces. These are pluralist theory, unitarism, and radical perspectives. Each one provides a unique understanding of relations at workplaces and therefore, uniquely interprets factors such as conflicts, the role of trade unions, and work regulation (Barbash & Barbash,

Winston Churchills Role in World War 2 Essay Example for Free

Winston Churchills Role in World War 2 Essay Sir Winston Leonard Spencer-Churchill, shortly known as Winston Churchill was born on the 30th of November 1874 to parents Lord and Lady Randolph Churchill. He was born into the aristocratic family of the Duke of Marlborough in a bedroom in Blenheim Palace, Oxfordshire, two months prematurely. Winston is best known for his leadership during World War 2. He is regarded as one of the best war time leaders in the 20th century and served as Prime Minister to the United Kingdom twice, between 1940-45 and 1951-55. Winston Churchill was well known for being a statesman and orator but was also an officer in the British Army, a historian, a writer and an artist. He is the only British Prime Minister to receive the Nobel Prize in Literature and was the first person to be made an Honorary Citizen of the United States. Churchill gained fame as a war correspondent and wrote books about his campaigns. Churchill was important to Britain in World War 2 for many different reasons, mainly because he was just such a good leader and because of the choices he made whilst in power. One of the main reasons was that he gave the British public belief, belief that they would win the war and by making optimistic speeches he inspired them and told them what they needed to hear. But as well as being this inspirational figure he was also quite harsh. He basically harassed the military commanders in the Middle East and North Africa for action and he gave them hell when they did not achieve the results he wanted. Field Marshall Alan Brooke spent most of the war fighting Churchill, although they actually got on really well! It was his job to ensure that none of Churchill’s ideas ‘saw the light of day’ and he tried to shield the military from him. One of the major things that Churchill did, between 1940-41 was gain the support of the United States. This was vital as Britain were essentially alone at resisting the Germans. It wasn’t until then that he actually formed a war strategy. Churchill adopted two goals: to defeat the Germans, and avoid unnecessary carnage. His grand strategy was to weaken Germany by attacking its more vulnerable borders, opening up new fronts in distant sites. He wanted to make new allies like France and Russia to make the Triple Entente while forcing Germany and other central powers to rearrange their military and economic resources to their western defenses. He thought that an action that brought a new ally to the cause could be as important as an action that won a battle. Churchill believed this would allow a coordinated offensive that would overwhelm German defenses and break the stalemate of trench warfare and ultimately, end the war. Attacking the Germans on multiple fronts would weaken the ir most decisive one. On 15th of January 1965, Churchill suffered a severe stroke that left him gravely ill. He died at his London home nine days later, at the age of 90 on the morning of Sunday 24th of January exactly 70 years after his father’s death. His funeral was the largest state funeral in world history up to that point in time, with representatives from 112 nations. Only Ireland did not broadcast the service live on television in Europe, where 350 million people watching including 25 million in Britain. By the command of Queen Elizabeth II, his body lay in state for three days and a state funeral service was held at St Paul’s Cathedral on the 30th of January, 1965.

Demand of Derivatives Investment in Malaysia

Demand of Derivatives Investment in Malaysia ABSTRACT This research investigates the demand of derivatives investment by Malaysia. On the whole the main purpose of this dissertation is to study, analyse and discuss about the usage of derivatives by Malaysian company or individual resident. The research paper is divided into five chapters. Chapter 1 introduces derivatives and identification of the research problems. Research objectives and questions are given briefly. Chapter 2 provides an overview of the literature reviewed throughout the research. A detailed description by past researchers is presented. The further detail of each derivative contract are summarised. Chapter 3 deals with the work flow of this study. The research methodologies includes research design and procedure, data collection method, and statistical data analyses method. Data collection from secondary data is analysed to form a theoretical framework. Chapter 4 present the analysis and result of research topic. Tables, diagrams, charts are use to illustrates the findings. Finally, Chapter 5 concludes the dissertation with summary all of the chapters. CHAPTER 1 INTRODUCTION Introduction A derivative is a financial instrument that is derived from assets, indexes, events, value or condition (known as the underlying asset). Rather than trading or exchanging the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. (David, 2003) From definition taken from International Accounting Standards 39 (IAS39) Financial Instruments Recognition and Measurement, a derivative is a financial instrument whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rate, a credit rating or credit index or similar variable. (IAS, 2009) Forward contracts, futures contracts, options and swaps are the most common types of derivatives. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative. (Khanna, 2010) Research Problem The research problem of this study is to uncover the derivative investment as a financial instrument for business and gaining capital. The usage of derivatives is getting larger nowadays. However, there is some criticism regarding the derivative in negative aspect as well. Research Objectives The following are the specific objective to achieve under this research To study the factor influence Malaysian to invest in the derivatives investment. To identify the method of reduction in risk under the usage of derivatives. Research Questions Questions that are bound to be answered throughout the research are: Why do investors select derivative investment? How can derivatives instrument be use? What is the types of derivative that are highly demanded in Malaysia? How does reduction in risk achieve by using derivatives instrument? How do traders speculate in order to make profit via derivatives? Scope of Study The scope of study for this research focuses on the derivative instruments. Significance of Study The significance of this study is to give the investors an idea as how the derivative instruments work in the business world. It also a study that helps businessman to reduce their risk and speculator to gain short-term money through derivatives. CHAPTER 2 LITERATURE REVIEW Introduction of Derivatives The first derivatives contract was listed in the year 1865 by the Chicago Board of Trade (CBOT) in USA. Those exchange traded derivatives contracts were called futures contracts. In April 1973, the Chicago Board of Options Exchange (CBOE) was set up for the purpose of options trading. The Standard Poors 500 Index in USA currently is the most popular stock index futures contract in the world. (HSBC Invest Direct, 2010) There are two distinct groups of derivative contracts, which tell apart the way they traded in the market. Over-the-counter (OTC) derivative is a type of financial derivative that negotiated directly between two parties rather than through an exchange centre. The OTC derivative market is the largest market for derivatives, and is unregulated with respect to disclosure of information between the parties. (Essaddam, et al., 2008) Exchange-traded derivative (ETD) is a type of financial derivative that has its transaction traded via specialised derivatives exchanges or other exchanges, such as Bursa, CBOE, Eurex etc. Derivatives exchange act as an intermediary to all related transactions, ETD is usually traded in standardised derivative contracts. (ISDA, 2009) There are few major derivative contracts which consist of forward, future, option and swap contract. Forward Contract A forward contract is a contract negotiated at present that gives the contract holder both the right and full legal obligation to conduct a certain asset transaction at a specific future time, amount, price and other terms. (Schweser, 2002) The party to the forward contract that agrees to buy the financial or physical asset has a long forward position and is called the long. The party to the forward contract that agrees to sell or deliver the asset has a short forward position and is called the short. (David, 2003) For instance, Lam Soon Company signed a contract under which they agree to buy a tonne of crude palm oil (CPO) from their supplier 30 days from now at a price of RM2,500. Lam Soon Company is the long and the supplier is the short. Both parties have removed uncertainty about the price they will pay or receive for the CPO in the future date. If 30 days from now CPO are trading at RM2,580 per tonne, the short (supplier) must deliver the CPO to the long (Lam Soon) in exchange for a RM2,500 payment. If CPO are trading at RM2,420 on the future date, the long must purchase the CPO from the short for RM2,500, the contract price. Forward contract is usually negotiated directly between the two parties, therefore it is an OTC market forward contract. The forward contracts have the advantage of being flexible (the parties design the contract to meet their specific needs). However, Stalla (2000) had concluded that forward contracts have three major disadvantages: They are illiquid. Because the terms of a forward contract are usually designed to meet the specific needs of the contracting parties, it is difficult for either one of them to close out its side of the contract, either by selling it to a third party or by getting the counterparty to cancel the agreement without demanding an excessive buyout price. They have credit risk. Forward contracts usually require neither party to the agreement to post collateral, make any mark-to-market transfers of funds over the life of the contract, or make any margin deposits to give assurance that it will be able fulfil its obligations under the terms of the agreement (although such clauses could be inserted into a forward contract by mutual consent of the parties). Consequently, a typical forward agreement is based on trust, each party to the agreement must trust that its counterparty will perform in the agreed-upon manner. This exposes both contracting parties to the risk that the counterparty might default on its obligation. They are unregulated. No formal body has the responsibility of setting down rules and procedures designed to protect market participants. Generally, the only protection given to parties involved in the OTC forward market is that of contract law. Future Contract A futures contract is a forward contract that has been highly standardised and closely specified. As with a forward contract, a futures contract calls for the exchange of some goods at a future date for cash, with the payment for the goods to occur at the future delivery date. The purchaser of the contract is to receive delivery of the good and pay for it, while the seller of the contract promises to deliver the goods and receive payment. The payment price is determined at the initial time of the contract. (Adhar, 2006) Futures contracts are usually traded on futures exchanges (ETD), rather than in an OTC environment. Hence, futures contracts are unique forms of forward contracts that designed to reduce the disadvantages of forward contracts. The future contracts terms have been standardised so that can be traded in a public marketplace. Due to standardisation, futures contracts are lesser flexible than forward agreements, hut it also makes them more liquid. (Copeland, et al., 2004) According to Schweser (2006) points, in order to safeguard the clearinghouse, which act as the buyer to every seller and the seller to every buyer, the exchange requires traders to post margin and settle their accounts on a daily basis. Before trading, the trader must deposit funds, called margin with their broker (who, in return, will post margin with the clearinghouse). The purpose of margin is to ensure that traders will perform their contractual obligations. There are three types of margin. The first deposit is called the initial margin which had been explained above. Any losses for the day are removed from the traders account and any gains are added to the traders account. If the margin balance in the traders account falls below a certain level (called the maintenance margin), the trader will get a margin call and have to deposit more money (called the variation margin) into the account to bring the account back up to the initial margin level. (Stalla, 2000) For instance, Lam Soon buys a 30 days future contract of CPO at RM2,500 per tonne. The initial margin was RM2,500. The next day the price of CPO plummetsRM50. Therefore Lam Soon has just lost RM50. At the end of the day, the daily settlement process marks Lam Soons margin account to market by taking RM50 out of the account leaving a balance of RM2,450. Now, assume the maintenance margin level is at 70%. If Lam Soons margin balance falls to or below RM1,750, Lam Soon gets a margin call and has to bring their account back up to the initial RM2,500 level. There are several advantages to using forward or futures contracts as a substitute for trading in the spot markets of commodities: (Sorid, n.d) Transaction costs are much lower and liquidity is better in the futures markets than in the spot markets. There is no need to store or insure physical assets if forward or futures contracts are used. Forward and futures contracts may be sold short, as well as bought long. This may not always be possible if one were trading the actual underlying assets themselves. There is a great deal of leverage in forward and futures contracts. A trader can control on a large position with only a small initial deposit. If the futures contract with a value of RM100,000 has an initial margin of RM10,000 then one percent change in the futures price which is RM1,000, would result in a 10 percent change relative to the traders initial costs. Since there is no margin is required with a forward contract, control can be obtained with no money down. There is flexibility, especially with forward contracts, that can be used to create specialized risk/return patterns. Price risk can be accepted or eliminated by using forward or futures contracts without compromising any holdings of an underlying asset. Thus, a jeweller can sell the price risk associated with holding an inventory of gold without actually disturbing the physical inventory itself. This makes it easy to adjust ones financial exposure to commodity markets, even if ones physical exposure must be maintained for business purposes. The primary disadvantage of using futures contracts for speculative trading would involve a great deal of leverage, so that large losses can occur. In effect, holding a futures position with only the margin requirement on deposit in a brokerage account is the same thing as having purchased the underlying asset on margin. Another closely related disadvantage is that futures (but not forward) contracts subject the trader to margin calls to meet daily settlement obligations. This requires participants to have a cash reserve that can be drawn upon to meet these demands for additional cash. (Sorid, n.d) Option Contract According to the Chicago Board Options Exchange (CBOE) 2008, an option is a contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. The owner of a call option has the right, but not the obligation to purchase the underlying good at a specific price for a specified time period. While the owner of a put option has the right, but not the obligation to sell the underlying good at a specific price for a specified time period. To qualify these rights, the options owner has to pay a premium to the seller of the option for buying the option. (CBOE, 2008) The seller of the option is called an option writer. Options have four possible positions: (CBOE, 2008) Call option buyer Call option writer or seller Put option buyer Put option writer or seller In these contracts, the rights are with the owner of the option. The buyer that pays the premium receives the right to buy or sell the underlying asset on specific time and price. The writer or seller of the option receives payment and obligates to sell or purchase the underlying asset as agreed in the contract of the option owner. (Akmeemana, n.d.) For instance, BAT share is selling at RM50 while its call option is at RM10. The call option can be exercised for RM45 with a life span of 5 months. The exercise price of RM45 is called the options strike price. The RM10 price of the option is called the option s premium. If the option is purchased for RM10, the buyer can purchase the stock from the option seller over the next 5 months for RM45. The seller, or writer of the option gets to keep the RM10 premium no matter what the stock does during this time period. If the option buyer exercises the option, the seller will receive the RM45 strike price and must deliver to the buyer a share of BAT stock. If the price of BAT stock falls to RM45 or below, the buyer are not obliged to exercise the option. Note that the option holders can only exercise their right to act if it is profitable to do so. The option writer, however, has an obligation to act at the request of the option holder. A put option is the same as a call option except the buyer of the put has the right to sell the put writer a share of BAT at any time during the next five months in return for RM45. The owner of the option is the one who decides whether to exercise the option or not. If the option has value, the buyer may either exercise the Option or sell the option to another buyer in the secondary options market. (Tatum, 2010) For short-term investment horizons, options trading can produce lower transaction costs than the outright purchase and sale of the underlying assets themselves. Besides, options can he used to execute some tax strategies. (Skousen, 2006) Swap Contract A swap is an agreement between two or more parties to exchange sets of cash flows over a period in the future. The parties that agree to the swap are known as counterparties. The cash flows that the counterparties make are generally tied to the value of debt instruments or the value of foreign currencies. Therefore, the two basic kinds of swaps are interest rate swaps and currency swaps. (Schweser, 2006) Unlike the highly structured futures and options contracts, swaps are custom tailored to fit the specific needs of the counterparties. The counterparties may select the specific currency amounts that they wish to swap, whereas exchange traded instruments have set values. Similarly, the swap counterparties choose the exact maturity that they need, rather than maturity dates set by the exchange. This flexibility is very important in the swap market, because it allows the counterparties to deal with much longer horizons than can be addressed through exchange-traded instruments. Also, since swaps are not exchange traded, it gives the participants greater privacy, and they escape a great deal of regulation. (Hodgson, 2006) According to Hodgson (2996), the advantages of swap agreements over conventional traded derivatives can be summarised as below: Swaps are highly flexible and can be custom made to fit the requirements of the parties entering into them. The swap market is virtually unregulated, in contrast to the highly regulated futures market. This could change, however, since regulators usually abhor a regulation vacuum and probably will, eventually, seek to bring the market under their protection. The cost of transacting in the swap market is low. Swaps are private transactions between two parties. Often, swaps are off-balance sheet transactions that can be used, for example, to enable a firm to reposition its balance sheet quickly without alerting competitors. The disadvantages of swaps include: Because swaps are agreements, a party who wants to enter into a particular swap must find a counterparty that is willing to take the other side of the swap. Swaps can be illiquid; once entered into, a swap cannot easily be terminated without the consent of the counterparty. Because there are no margin deposits or a clearinghouse that help ensure, or will guarantee, that the agreements will be honoured, the integrity of swaps depends solely upon the financial and moral integrity of the parties that have entered into them. In other words, the swaps have more credit risk than futures contracts. The Demand of Derivatives Based on the statistics of the Bursa Malaysia Derivatives Berhad, the total exchange of derivatives during the year 2009 was up to 6,137,827 contracts. The crude palm oil futures (ETD) is the most liquid future in Malaysia, total of 4,008,882 contracts with average of 334,074 contracts traded monthly during year 2009. (Bursa Malaysia, 2010) Figure 2.1 shows the monthly price traded and the monthly volume of crude palm oil futures (FCPO) traded in Bursa Malaysia from year 1985 until March 2010. The green colour bar represents the price close on the month end was above the open price open on the beginning of the month, while red colour bar indicates the closing price is below the open price. Figure 2.1 indicates that there was less transaction traded during the eighth decade of the 20th century until 2002. The number of FCPO contract traded keep on increasing especially start from year 2002, and is quite popular in recent year, the volume of transaction exceeded 150,000 contracts each month. FCPO is extremely high volume in 2008 because the global oil price is at its peak at USD145 per barrel. FCPO traded at its pinnacle in November 2006 which recorded 360,650 contracts in a month. This showing that the FCPO is high in demand in Malaysia as compare to previous years. Figure 2.2 shows the history chart of FTSE Bursa Malaysia Kuala Lumpur Composite Index Futures (FKLI) traded in Bursa Malaysia from December 1995 until March 2010. There was a high trading volume during the 1997 Asian Financial Crisis due to the high fluctuate of the Kuala Lumpur Composite Index (KLCI). 148,318 future contracts were traded in September 1998. There were at least 40,000 future contracts traded in the following years of 1998. The volume traded increasing rapidly in 2007 as Malaysian economy recovers. KLCI went as high as 1400 points during the last 3 years. 302,321 future contracts were trade in August 2007, which is the highest volume recorded in history. Based on Figure 2.2 trading volume trend, it can be concluded that speculators were heavily involve in trading FKLI in 1997, where the Asian Financial Crisis tragedy occurred and in its peak in 2007 . KLCI fluctuation was elevated during these two event (circled in the chart). For the global market, the market for options developed rapidly in early 80s. The number of option contract sold each day exceeded the daily volume of shares traded on the New York Stock Exchange. According to the Bank for International Settlements, the total OTC derivative outstanding notional amounted to USD605 trillion as of June 2009. Factors That Influence Derivatives Trading Mike Singh (2010) said that trading derivatives will have lesser risk than other trades because investor are not buying into the company or buying the underlying product. Instead, the risk is placed on performance. Due to its low risk factor, investment and commercial banks, end users such as floor traders, corporations, and mutual and hedge funds, are major types of firms that utilize derivatives. A much lower initial investment start up in derivatives trading, derivatives give an edge to those who decline or do not want to invest as much as is required to purchase stock. Derivatives can be a good way to balance ones total portfolio by spreading the risk throughout a variety of investments, rather than putting all eggs into a basket. Besides that, trading derivatives can be a good short term investment. Compared to some stocks and bond, derivatives is an financial instrument that can pay off in a shorter time frame such as days, weeks, or a few months. Stock and bonds are long-term investments and may over the course of many years. As the shorter turnaround time, derivatives can be a good way break into the market and mix short and long-term investments. (Siems, 1997) Numerous resources are available for learning about derivatives trading and many options are available. Hence derivatives are variety and flexibility, this point of view was supported by Mike Singh, 2010. Derivatives can derive profit from changes in equity markets, currency exchange rate, interest rates around the world. It also include the commodities changes in global supply and demand such as precious and industrial metals, agricultural products, and energy products such as petroleum and natural gas. This show that derivatives trading are available on a global scale. Getting involved in the global economy opens international options that may not be available through the traditional stock market. From the points given above, he concluded that there are three reasons for derivatives trading. First, trading derivatives are lesser risk than other trades. Second, trading derivatives are a good short term investment. Third, trading derivatives are variety and flexibility. Hence, derivatives trading may be a good trading option if someone are looking outside of trading traditional stocks and bonds. The International Swaps and Derivatives Association, Inc. (ISDA) announced the results of a survey done on the derivatives usage by the worlds 500 largest companies. According to the survey, 94% of these companies use derivative instruments to hedge and manage their financial risks in business. The foreign exchange derivatives are the most widely used instruments with total 88% of the sample, followed by interest rate derivatives which is 83% and commodity derivatives. There are two benefits which are most widely recognised attributed to derivative instruments, risk management and price discovery. Risk management could be the most vital purpose of the derivatives market. Derivatives also used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect, bearing extra risk by speculations. (Kuhlman, 2009) Price discovery is the prediction of information about future cash market prices through the futures market. There is a relationship between an assets current (spot) price, its futures contract price, and the price that people expect to prevail on the delivery date. By using the information contained in futures prices today, market observers can form estimates of what the price of a given commodity will be at a certain time in the future. Futures markets serve a social purpose by helping people make better estimates of future prices, so that they can make consumption and investment decisions more wisely. (Sorid, n.d) The derivatives market are broadly classified into three uses: Hedging Speculation Arbitrage Hedging Hedging is a way to enter into transactions that expose the entity to risk and uncertainty that fully or partially offsets one or more of the entitys other risks and uncertainties. (Elliot Elliot, 2005) One reason why companies attempt to hedge these price changes is because they are risks that are peripheral to the central business in which they operate. Hedging also refers to managing risk to an extent that makes it bearable. (Kameel, 2008) Equity Hedging Traders can use derivatives to hedge or mitigate risk in the stock market. Entering into a derivative contract can cover part or all of the losses if the value of their underlying position moves in the opposite direction. For equity forward contracts, where the underlying asset is a single stock, a portfolio of stocks, or a stock index, work in much the same manner as other forward contracts. An investor who wishes to sell 100 shares of BAT stock 90 days from now and wishes to avoid the uncertainty about the stock price on that date, could do so by caking a short position in a forward contract covering 100 BAT shares. A dealer might quote a price of RM48 per share, agreeing to pay RM4,800 for the 100 shares 90 days from now. The contract may be deliverable or settled in cash as described above. The stock seller has locked in the selling price of the shares and will get no more if the price (in 90 days) is actually higher, and will get no less it the price actually lower. (Sharma, 2009) For equity future example, an individual stock trader can minimise the stock trading risk by hedging using futures market (Exchange-traded derivatives). A stock trader is extremely aware of economy downturn. If the trader expected an economy downturn is coming which will cause the share price to drop, the trader can protect against down fall of stocks equity by opening a short position of the FTSE Bursa Malaysia KLCI Futures (FKLI) to hedge against his stock portfolio. So if the economy downturn does happen, the trader will gain profit from the FKLI. However, there will be a loss if the trader close the position of the stock during the economy downturn, but the gain from the FKLI will cover some or over the losses from the stock market. Thus, this can reduce the risk by FKLI futures hedging. (Copeland, et al., 2004) For stock option contracts, one call priced at RM6 with a strike price of RM30 gives the holder the right to purchase 100 shares of the stock at RM30 per share until the exercise date. The contract has a money value of RM600 (RM6 x 100 shares). For put options. the concepts are the same, except that the option gives the holder the right to sell 100 shares of the stated stock at RM30 per share through the exercise date. Commodity Hedging Commodity is a physical substance which there is demand, such as basic resources and agricultural. The most popular commodities in Malaysia include CPO, gold, tin, rubber and latex. (Amadeo, 2003) For instance, an airline company which the fuel is the biggest cost item for an airline taken care of, might want to get protection against the fuel price crisis. The airline company might enter into a future contract to hedge the fuel price. They will sign up a future contract with the fuel supplier (OTC derivative), promising that they will buy a certain amount of fuel at a certain price for the next certain months. The contract will definite the price that the airline company to pay for buying the fuel in future. In case the fuel price go higher than the contract price, then the fuel will have a cheaper price. If the fuel price gone down without the airline company expectation, which mean the contract price is higher than the market price, in that incident, the airline company might not want to exercise the contract price. In return, the airline company need to pay certain of fund to the fuel supplier as the contract fee. (Larry, 2005) Malaysian Airline System Berhad (MAS) announced a RM1.34 billion fuel hedge gain in the second quarter ended 30 June 2009. (Francis, 2009) Idris Jala (2009), the Managing Director and Chief Executive Officer of Malaysia Airlines said that he had decided not to unwind the fuel hedges so that the company can remain protected against the volatile fuel prices. MAS had hedged 47% of its fuel requirement at USD103/ bbl WTI for the year ended 2009 from 31 March 2009. Further highlighting the volatility of fuel prices, the fuel price increased 47% since April 2009, those airlines that did not hedge will be affected by the fuel price increasing, said Idris Jala, 2009. While MAS fuel bill increasing in tandem with the fuel price, MAS total fuel bill will be lower as the gains from the fuel hedges will partly offset the higher fuel cost. Foreign exchange (Forex) Hedging In international trading, dealings with forex play a significant role. There will be a significant impact on business decisions and outcomes if got any fluctuations in the forex rate. Many international trade and business dealings are shelved or become unworthy due to significant exchange rate risk embedded in them. Therefore, companies will use forex hedging with forwards, future, option. (Joseph Nathan, 1999) Forex hedging with forwards Forex forward rate is an agreement between two parties (OTC derivatives) to fix the exchange rate for a future transaction. In Malaysia, there are some banks do provide Forward Rate Agreements (FRA) service such as Bank Islam Malaysia, Maybank, EON Bank Group, CIMB Bank Group, HSBC Bank Malaysia, etc. A company simply transfer the risk to the bank when they entering into a FRA with a bank. Of course the bank internally will do some kind of arrangement to manage the risk. (Currencies Direct, 2010) For instance, a Malaysian construction company, Ban Lee Hin Engineering Construction Sdn Bhd just won a contract to build a bridge road in Philippines. The contract is signed for 10,000,000 Peso and would be paid for after the completion of the work. This amount is consistent with Ban Lee Hin minimum revenue of RM750,000 at the exchange rate of RM7.50 per 100 Peso. However, since the exchange rate could fluctuate and end with a possible depreciation of Peso, Ban Lee Hin enters into a forward agreement with Philtrust Bank in Philippines to fix the exchange rate at RM7.50 per 100 Peso. The forward contract is a legal agreement, and therefore constitutes an obligation on both parties. The Philtrust Bank may have to find a counter party for such transaction, either a party who wants to hedge against the appreciation of 10,000,000 Peso expiring at the same time, or a party that wishes to speculate on an increasing the value of Peso. If the Philtrust Bank itself plays the counter party, t hen the risk would be borne by the bank itself. By entering into a forward contract, Ban Lee Hin is guaranteed of an e Demand of Derivatives Investment in Malaysia Demand of Derivatives Investment in Malaysia ABSTRACT This research investigates the demand of derivatives investment by Malaysia. On the whole the main purpose of this dissertation is to study, analyse and discuss about the usage of derivatives by Malaysian company or individual resident. The research paper is divided into five chapters. Chapter 1 introduces derivatives and identification of the research problems. Research objectives and questions are given briefly. Chapter 2 provides an overview of the literature reviewed throughout the research. A detailed description by past researchers is presented. The further detail of each derivative contract are summarised. Chapter 3 deals with the work flow of this study. The research methodologies includes research design and procedure, data collection method, and statistical data analyses method. Data collection from secondary data is analysed to form a theoretical framework. Chapter 4 present the analysis and result of research topic. Tables, diagrams, charts are use to illustrates the findings. Finally, Chapter 5 concludes the dissertation with summary all of the chapters. CHAPTER 1 INTRODUCTION Introduction A derivative is a financial instrument that is derived from assets, indexes, events, value or condition (known as the underlying asset). Rather than trading or exchanging the underlying asset itself, derivative traders enter into an agreement to exchange cash or assets over time based on the underlying asset. (David, 2003) From definition taken from International Accounting Standards 39 (IAS39) Financial Instruments Recognition and Measurement, a derivative is a financial instrument whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rate, a credit rating or credit index or similar variable. (IAS, 2009) Forward contracts, futures contracts, options and swaps are the most common types of derivatives. Derivatives are often leveraged, such that a small movement in the underlying value can cause a large difference in the value of the derivative. (Khanna, 2010) Research Problem The research problem of this study is to uncover the derivative investment as a financial instrument for business and gaining capital. The usage of derivatives is getting larger nowadays. However, there is some criticism regarding the derivative in negative aspect as well. Research Objectives The following are the specific objective to achieve under this research To study the factor influence Malaysian to invest in the derivatives investment. To identify the method of reduction in risk under the usage of derivatives. Research Questions Questions that are bound to be answered throughout the research are: Why do investors select derivative investment? How can derivatives instrument be use? What is the types of derivative that are highly demanded in Malaysia? How does reduction in risk achieve by using derivatives instrument? How do traders speculate in order to make profit via derivatives? Scope of Study The scope of study for this research focuses on the derivative instruments. Significance of Study The significance of this study is to give the investors an idea as how the derivative instruments work in the business world. It also a study that helps businessman to reduce their risk and speculator to gain short-term money through derivatives. CHAPTER 2 LITERATURE REVIEW Introduction of Derivatives The first derivatives contract was listed in the year 1865 by the Chicago Board of Trade (CBOT) in USA. Those exchange traded derivatives contracts were called futures contracts. In April 1973, the Chicago Board of Options Exchange (CBOE) was set up for the purpose of options trading. The Standard Poors 500 Index in USA currently is the most popular stock index futures contract in the world. (HSBC Invest Direct, 2010) There are two distinct groups of derivative contracts, which tell apart the way they traded in the market. Over-the-counter (OTC) derivative is a type of financial derivative that negotiated directly between two parties rather than through an exchange centre. The OTC derivative market is the largest market for derivatives, and is unregulated with respect to disclosure of information between the parties. (Essaddam, et al., 2008) Exchange-traded derivative (ETD) is a type of financial derivative that has its transaction traded via specialised derivatives exchanges or other exchanges, such as Bursa, CBOE, Eurex etc. Derivatives exchange act as an intermediary to all related transactions, ETD is usually traded in standardised derivative contracts. (ISDA, 2009) There are few major derivative contracts which consist of forward, future, option and swap contract. Forward Contract A forward contract is a contract negotiated at present that gives the contract holder both the right and full legal obligation to conduct a certain asset transaction at a specific future time, amount, price and other terms. (Schweser, 2002) The party to the forward contract that agrees to buy the financial or physical asset has a long forward position and is called the long. The party to the forward contract that agrees to sell or deliver the asset has a short forward position and is called the short. (David, 2003) For instance, Lam Soon Company signed a contract under which they agree to buy a tonne of crude palm oil (CPO) from their supplier 30 days from now at a price of RM2,500. Lam Soon Company is the long and the supplier is the short. Both parties have removed uncertainty about the price they will pay or receive for the CPO in the future date. If 30 days from now CPO are trading at RM2,580 per tonne, the short (supplier) must deliver the CPO to the long (Lam Soon) in exchange for a RM2,500 payment. If CPO are trading at RM2,420 on the future date, the long must purchase the CPO from the short for RM2,500, the contract price. Forward contract is usually negotiated directly between the two parties, therefore it is an OTC market forward contract. The forward contracts have the advantage of being flexible (the parties design the contract to meet their specific needs). However, Stalla (2000) had concluded that forward contracts have three major disadvantages: They are illiquid. Because the terms of a forward contract are usually designed to meet the specific needs of the contracting parties, it is difficult for either one of them to close out its side of the contract, either by selling it to a third party or by getting the counterparty to cancel the agreement without demanding an excessive buyout price. They have credit risk. Forward contracts usually require neither party to the agreement to post collateral, make any mark-to-market transfers of funds over the life of the contract, or make any margin deposits to give assurance that it will be able fulfil its obligations under the terms of the agreement (although such clauses could be inserted into a forward contract by mutual consent of the parties). Consequently, a typical forward agreement is based on trust, each party to the agreement must trust that its counterparty will perform in the agreed-upon manner. This exposes both contracting parties to the risk that the counterparty might default on its obligation. They are unregulated. No formal body has the responsibility of setting down rules and procedures designed to protect market participants. Generally, the only protection given to parties involved in the OTC forward market is that of contract law. Future Contract A futures contract is a forward contract that has been highly standardised and closely specified. As with a forward contract, a futures contract calls for the exchange of some goods at a future date for cash, with the payment for the goods to occur at the future delivery date. The purchaser of the contract is to receive delivery of the good and pay for it, while the seller of the contract promises to deliver the goods and receive payment. The payment price is determined at the initial time of the contract. (Adhar, 2006) Futures contracts are usually traded on futures exchanges (ETD), rather than in an OTC environment. Hence, futures contracts are unique forms of forward contracts that designed to reduce the disadvantages of forward contracts. The future contracts terms have been standardised so that can be traded in a public marketplace. Due to standardisation, futures contracts are lesser flexible than forward agreements, hut it also makes them more liquid. (Copeland, et al., 2004) According to Schweser (2006) points, in order to safeguard the clearinghouse, which act as the buyer to every seller and the seller to every buyer, the exchange requires traders to post margin and settle their accounts on a daily basis. Before trading, the trader must deposit funds, called margin with their broker (who, in return, will post margin with the clearinghouse). The purpose of margin is to ensure that traders will perform their contractual obligations. There are three types of margin. The first deposit is called the initial margin which had been explained above. Any losses for the day are removed from the traders account and any gains are added to the traders account. If the margin balance in the traders account falls below a certain level (called the maintenance margin), the trader will get a margin call and have to deposit more money (called the variation margin) into the account to bring the account back up to the initial margin level. (Stalla, 2000) For instance, Lam Soon buys a 30 days future contract of CPO at RM2,500 per tonne. The initial margin was RM2,500. The next day the price of CPO plummetsRM50. Therefore Lam Soon has just lost RM50. At the end of the day, the daily settlement process marks Lam Soons margin account to market by taking RM50 out of the account leaving a balance of RM2,450. Now, assume the maintenance margin level is at 70%. If Lam Soons margin balance falls to or below RM1,750, Lam Soon gets a margin call and has to bring their account back up to the initial RM2,500 level. There are several advantages to using forward or futures contracts as a substitute for trading in the spot markets of commodities: (Sorid, n.d) Transaction costs are much lower and liquidity is better in the futures markets than in the spot markets. There is no need to store or insure physical assets if forward or futures contracts are used. Forward and futures contracts may be sold short, as well as bought long. This may not always be possible if one were trading the actual underlying assets themselves. There is a great deal of leverage in forward and futures contracts. A trader can control on a large position with only a small initial deposit. If the futures contract with a value of RM100,000 has an initial margin of RM10,000 then one percent change in the futures price which is RM1,000, would result in a 10 percent change relative to the traders initial costs. Since there is no margin is required with a forward contract, control can be obtained with no money down. There is flexibility, especially with forward contracts, that can be used to create specialized risk/return patterns. Price risk can be accepted or eliminated by using forward or futures contracts without compromising any holdings of an underlying asset. Thus, a jeweller can sell the price risk associated with holding an inventory of gold without actually disturbing the physical inventory itself. This makes it easy to adjust ones financial exposure to commodity markets, even if ones physical exposure must be maintained for business purposes. The primary disadvantage of using futures contracts for speculative trading would involve a great deal of leverage, so that large losses can occur. In effect, holding a futures position with only the margin requirement on deposit in a brokerage account is the same thing as having purchased the underlying asset on margin. Another closely related disadvantage is that futures (but not forward) contracts subject the trader to margin calls to meet daily settlement obligations. This requires participants to have a cash reserve that can be drawn upon to meet these demands for additional cash. (Sorid, n.d) Option Contract According to the Chicago Board Options Exchange (CBOE) 2008, an option is a contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. The owner of a call option has the right, but not the obligation to purchase the underlying good at a specific price for a specified time period. While the owner of a put option has the right, but not the obligation to sell the underlying good at a specific price for a specified time period. To qualify these rights, the options owner has to pay a premium to the seller of the option for buying the option. (CBOE, 2008) The seller of the option is called an option writer. Options have four possible positions: (CBOE, 2008) Call option buyer Call option writer or seller Put option buyer Put option writer or seller In these contracts, the rights are with the owner of the option. The buyer that pays the premium receives the right to buy or sell the underlying asset on specific time and price. The writer or seller of the option receives payment and obligates to sell or purchase the underlying asset as agreed in the contract of the option owner. (Akmeemana, n.d.) For instance, BAT share is selling at RM50 while its call option is at RM10. The call option can be exercised for RM45 with a life span of 5 months. The exercise price of RM45 is called the options strike price. The RM10 price of the option is called the option s premium. If the option is purchased for RM10, the buyer can purchase the stock from the option seller over the next 5 months for RM45. The seller, or writer of the option gets to keep the RM10 premium no matter what the stock does during this time period. If the option buyer exercises the option, the seller will receive the RM45 strike price and must deliver to the buyer a share of BAT stock. If the price of BAT stock falls to RM45 or below, the buyer are not obliged to exercise the option. Note that the option holders can only exercise their right to act if it is profitable to do so. The option writer, however, has an obligation to act at the request of the option holder. A put option is the same as a call option except the buyer of the put has the right to sell the put writer a share of BAT at any time during the next five months in return for RM45. The owner of the option is the one who decides whether to exercise the option or not. If the option has value, the buyer may either exercise the Option or sell the option to another buyer in the secondary options market. (Tatum, 2010) For short-term investment horizons, options trading can produce lower transaction costs than the outright purchase and sale of the underlying assets themselves. Besides, options can he used to execute some tax strategies. (Skousen, 2006) Swap Contract A swap is an agreement between two or more parties to exchange sets of cash flows over a period in the future. The parties that agree to the swap are known as counterparties. The cash flows that the counterparties make are generally tied to the value of debt instruments or the value of foreign currencies. Therefore, the two basic kinds of swaps are interest rate swaps and currency swaps. (Schweser, 2006) Unlike the highly structured futures and options contracts, swaps are custom tailored to fit the specific needs of the counterparties. The counterparties may select the specific currency amounts that they wish to swap, whereas exchange traded instruments have set values. Similarly, the swap counterparties choose the exact maturity that they need, rather than maturity dates set by the exchange. This flexibility is very important in the swap market, because it allows the counterparties to deal with much longer horizons than can be addressed through exchange-traded instruments. Also, since swaps are not exchange traded, it gives the participants greater privacy, and they escape a great deal of regulation. (Hodgson, 2006) According to Hodgson (2996), the advantages of swap agreements over conventional traded derivatives can be summarised as below: Swaps are highly flexible and can be custom made to fit the requirements of the parties entering into them. The swap market is virtually unregulated, in contrast to the highly regulated futures market. This could change, however, since regulators usually abhor a regulation vacuum and probably will, eventually, seek to bring the market under their protection. The cost of transacting in the swap market is low. Swaps are private transactions between two parties. Often, swaps are off-balance sheet transactions that can be used, for example, to enable a firm to reposition its balance sheet quickly without alerting competitors. The disadvantages of swaps include: Because swaps are agreements, a party who wants to enter into a particular swap must find a counterparty that is willing to take the other side of the swap. Swaps can be illiquid; once entered into, a swap cannot easily be terminated without the consent of the counterparty. Because there are no margin deposits or a clearinghouse that help ensure, or will guarantee, that the agreements will be honoured, the integrity of swaps depends solely upon the financial and moral integrity of the parties that have entered into them. In other words, the swaps have more credit risk than futures contracts. The Demand of Derivatives Based on the statistics of the Bursa Malaysia Derivatives Berhad, the total exchange of derivatives during the year 2009 was up to 6,137,827 contracts. The crude palm oil futures (ETD) is the most liquid future in Malaysia, total of 4,008,882 contracts with average of 334,074 contracts traded monthly during year 2009. (Bursa Malaysia, 2010) Figure 2.1 shows the monthly price traded and the monthly volume of crude palm oil futures (FCPO) traded in Bursa Malaysia from year 1985 until March 2010. The green colour bar represents the price close on the month end was above the open price open on the beginning of the month, while red colour bar indicates the closing price is below the open price. Figure 2.1 indicates that there was less transaction traded during the eighth decade of the 20th century until 2002. The number of FCPO contract traded keep on increasing especially start from year 2002, and is quite popular in recent year, the volume of transaction exceeded 150,000 contracts each month. FCPO is extremely high volume in 2008 because the global oil price is at its peak at USD145 per barrel. FCPO traded at its pinnacle in November 2006 which recorded 360,650 contracts in a month. This showing that the FCPO is high in demand in Malaysia as compare to previous years. Figure 2.2 shows the history chart of FTSE Bursa Malaysia Kuala Lumpur Composite Index Futures (FKLI) traded in Bursa Malaysia from December 1995 until March 2010. There was a high trading volume during the 1997 Asian Financial Crisis due to the high fluctuate of the Kuala Lumpur Composite Index (KLCI). 148,318 future contracts were traded in September 1998. There were at least 40,000 future contracts traded in the following years of 1998. The volume traded increasing rapidly in 2007 as Malaysian economy recovers. KLCI went as high as 1400 points during the last 3 years. 302,321 future contracts were trade in August 2007, which is the highest volume recorded in history. Based on Figure 2.2 trading volume trend, it can be concluded that speculators were heavily involve in trading FKLI in 1997, where the Asian Financial Crisis tragedy occurred and in its peak in 2007 . KLCI fluctuation was elevated during these two event (circled in the chart). For the global market, the market for options developed rapidly in early 80s. The number of option contract sold each day exceeded the daily volume of shares traded on the New York Stock Exchange. According to the Bank for International Settlements, the total OTC derivative outstanding notional amounted to USD605 trillion as of June 2009. Factors That Influence Derivatives Trading Mike Singh (2010) said that trading derivatives will have lesser risk than other trades because investor are not buying into the company or buying the underlying product. Instead, the risk is placed on performance. Due to its low risk factor, investment and commercial banks, end users such as floor traders, corporations, and mutual and hedge funds, are major types of firms that utilize derivatives. A much lower initial investment start up in derivatives trading, derivatives give an edge to those who decline or do not want to invest as much as is required to purchase stock. Derivatives can be a good way to balance ones total portfolio by spreading the risk throughout a variety of investments, rather than putting all eggs into a basket. Besides that, trading derivatives can be a good short term investment. Compared to some stocks and bond, derivatives is an financial instrument that can pay off in a shorter time frame such as days, weeks, or a few months. Stock and bonds are long-term investments and may over the course of many years. As the shorter turnaround time, derivatives can be a good way break into the market and mix short and long-term investments. (Siems, 1997) Numerous resources are available for learning about derivatives trading and many options are available. Hence derivatives are variety and flexibility, this point of view was supported by Mike Singh, 2010. Derivatives can derive profit from changes in equity markets, currency exchange rate, interest rates around the world. It also include the commodities changes in global supply and demand such as precious and industrial metals, agricultural products, and energy products such as petroleum and natural gas. This show that derivatives trading are available on a global scale. Getting involved in the global economy opens international options that may not be available through the traditional stock market. From the points given above, he concluded that there are three reasons for derivatives trading. First, trading derivatives are lesser risk than other trades. Second, trading derivatives are a good short term investment. Third, trading derivatives are variety and flexibility. Hence, derivatives trading may be a good trading option if someone are looking outside of trading traditional stocks and bonds. The International Swaps and Derivatives Association, Inc. (ISDA) announced the results of a survey done on the derivatives usage by the worlds 500 largest companies. According to the survey, 94% of these companies use derivative instruments to hedge and manage their financial risks in business. The foreign exchange derivatives are the most widely used instruments with total 88% of the sample, followed by interest rate derivatives which is 83% and commodity derivatives. There are two benefits which are most widely recognised attributed to derivative instruments, risk management and price discovery. Risk management could be the most vital purpose of the derivatives market. Derivatives also used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect, bearing extra risk by speculations. (Kuhlman, 2009) Price discovery is the prediction of information about future cash market prices through the futures market. There is a relationship between an assets current (spot) price, its futures contract price, and the price that people expect to prevail on the delivery date. By using the information contained in futures prices today, market observers can form estimates of what the price of a given commodity will be at a certain time in the future. Futures markets serve a social purpose by helping people make better estimates of future prices, so that they can make consumption and investment decisions more wisely. (Sorid, n.d) The derivatives market are broadly classified into three uses: Hedging Speculation Arbitrage Hedging Hedging is a way to enter into transactions that expose the entity to risk and uncertainty that fully or partially offsets one or more of the entitys other risks and uncertainties. (Elliot Elliot, 2005) One reason why companies attempt to hedge these price changes is because they are risks that are peripheral to the central business in which they operate. Hedging also refers to managing risk to an extent that makes it bearable. (Kameel, 2008) Equity Hedging Traders can use derivatives to hedge or mitigate risk in the stock market. Entering into a derivative contract can cover part or all of the losses if the value of their underlying position moves in the opposite direction. For equity forward contracts, where the underlying asset is a single stock, a portfolio of stocks, or a stock index, work in much the same manner as other forward contracts. An investor who wishes to sell 100 shares of BAT stock 90 days from now and wishes to avoid the uncertainty about the stock price on that date, could do so by caking a short position in a forward contract covering 100 BAT shares. A dealer might quote a price of RM48 per share, agreeing to pay RM4,800 for the 100 shares 90 days from now. The contract may be deliverable or settled in cash as described above. The stock seller has locked in the selling price of the shares and will get no more if the price (in 90 days) is actually higher, and will get no less it the price actually lower. (Sharma, 2009) For equity future example, an individual stock trader can minimise the stock trading risk by hedging using futures market (Exchange-traded derivatives). A stock trader is extremely aware of economy downturn. If the trader expected an economy downturn is coming which will cause the share price to drop, the trader can protect against down fall of stocks equity by opening a short position of the FTSE Bursa Malaysia KLCI Futures (FKLI) to hedge against his stock portfolio. So if the economy downturn does happen, the trader will gain profit from the FKLI. However, there will be a loss if the trader close the position of the stock during the economy downturn, but the gain from the FKLI will cover some or over the losses from the stock market. Thus, this can reduce the risk by FKLI futures hedging. (Copeland, et al., 2004) For stock option contracts, one call priced at RM6 with a strike price of RM30 gives the holder the right to purchase 100 shares of the stock at RM30 per share until the exercise date. The contract has a money value of RM600 (RM6 x 100 shares). For put options. the concepts are the same, except that the option gives the holder the right to sell 100 shares of the stated stock at RM30 per share through the exercise date. Commodity Hedging Commodity is a physical substance which there is demand, such as basic resources and agricultural. The most popular commodities in Malaysia include CPO, gold, tin, rubber and latex. (Amadeo, 2003) For instance, an airline company which the fuel is the biggest cost item for an airline taken care of, might want to get protection against the fuel price crisis. The airline company might enter into a future contract to hedge the fuel price. They will sign up a future contract with the fuel supplier (OTC derivative), promising that they will buy a certain amount of fuel at a certain price for the next certain months. The contract will definite the price that the airline company to pay for buying the fuel in future. In case the fuel price go higher than the contract price, then the fuel will have a cheaper price. If the fuel price gone down without the airline company expectation, which mean the contract price is higher than the market price, in that incident, the airline company might not want to exercise the contract price. In return, the airline company need to pay certain of fund to the fuel supplier as the contract fee. (Larry, 2005) Malaysian Airline System Berhad (MAS) announced a RM1.34 billion fuel hedge gain in the second quarter ended 30 June 2009. (Francis, 2009) Idris Jala (2009), the Managing Director and Chief Executive Officer of Malaysia Airlines said that he had decided not to unwind the fuel hedges so that the company can remain protected against the volatile fuel prices. MAS had hedged 47% of its fuel requirement at USD103/ bbl WTI for the year ended 2009 from 31 March 2009. Further highlighting the volatility of fuel prices, the fuel price increased 47% since April 2009, those airlines that did not hedge will be affected by the fuel price increasing, said Idris Jala, 2009. While MAS fuel bill increasing in tandem with the fuel price, MAS total fuel bill will be lower as the gains from the fuel hedges will partly offset the higher fuel cost. Foreign exchange (Forex) Hedging In international trading, dealings with forex play a significant role. There will be a significant impact on business decisions and outcomes if got any fluctuations in the forex rate. Many international trade and business dealings are shelved or become unworthy due to significant exchange rate risk embedded in them. Therefore, companies will use forex hedging with forwards, future, option. (Joseph Nathan, 1999) Forex hedging with forwards Forex forward rate is an agreement between two parties (OTC derivatives) to fix the exchange rate for a future transaction. In Malaysia, there are some banks do provide Forward Rate Agreements (FRA) service such as Bank Islam Malaysia, Maybank, EON Bank Group, CIMB Bank Group, HSBC Bank Malaysia, etc. A company simply transfer the risk to the bank when they entering into a FRA with a bank. Of course the bank internally will do some kind of arrangement to manage the risk. (Currencies Direct, 2010) For instance, a Malaysian construction company, Ban Lee Hin Engineering Construction Sdn Bhd just won a contract to build a bridge road in Philippines. The contract is signed for 10,000,000 Peso and would be paid for after the completion of the work. This amount is consistent with Ban Lee Hin minimum revenue of RM750,000 at the exchange rate of RM7.50 per 100 Peso. However, since the exchange rate could fluctuate and end with a possible depreciation of Peso, Ban Lee Hin enters into a forward agreement with Philtrust Bank in Philippines to fix the exchange rate at RM7.50 per 100 Peso. The forward contract is a legal agreement, and therefore constitutes an obligation on both parties. The Philtrust Bank may have to find a counter party for such transaction, either a party who wants to hedge against the appreciation of 10,000,000 Peso expiring at the same time, or a party that wishes to speculate on an increasing the value of Peso. If the Philtrust Bank itself plays the counter party, t hen the risk would be borne by the bank itself. By entering into a forward contract, Ban Lee Hin is guaranteed of an e