Why derivative market is important for Bangladesh?

Derivative market plays a significant role in managing financial risks and enhancing market efficiency. It offers various benefits that make it important for Bangladesh, including:

1. Hedging and Risk Management:

- Bangladeshi businesses and farmers engaged in export-import or agricultural activities can use derivatives to hedge against price fluctuations in international markets.

- Farmers can use futures contracts to lock in a fixed price for their produce, mitigating risks associated with volatile agricultural commodity prices.

- Derivative instruments such as options and futures allow businesses and individuals to reduce exposure to unfavourable price movements in commodities, currencies, and financial assets.

2. Market Efficiency and Price Discovery:

- Derivatives facilitate efficient price discovery by bringing together buyers and sellers in a centralized market.

- Derivative markets provide real-time information and data on underlying assets, enabling market participants to make informed decisions.

- Transparent pricing and standardization of contracts enhance the efficiency and fairness of financial markets.

3. Access to International Markets:

- Bangladeshi investors can gain exposure to international financial markets through derivative products, broadening investment opportunities and risk diversification.

- Derivative markets allow local investors to participate in global market trends, access various asset classes, and potentially hedge against local market risks.

4. Increased Liquidity:

- Derivatives can enhance liquidity in underlying markets by providing an additional trading venue.

- The ability to trade derivatives contracts supports smoother price adjustments, reducing the impact of temporary supply or demand imbalances.

- Increased liquidity attracts more investors, improving overall market efficiency and resilience.

5. Speculation and Capital Formation:

- Derivatives provide an avenue for speculative activities, allowing investors to capitalize on price movements without directly owning the underlying assets.

- Speculation contributes to market liquidity and supports price discovery.

- Speculative trading also attracts additional capital into the financial markets, boosting economic activity and capital formation.

6. Risk Transfer:

- Derivatives allow for the transfer of financial risks from one party to another.

- This risk transfer mechanism enhances the resilience of financial institutions and other market participants, helping maintain financial stability.

7. Financial Innovation and Product Diversification:

- Derivative markets encourage innovation by introducing new financial products and trading strategies.

- These products cater to different risk profiles and investment objectives, expanding the range of financial services available to Bangladeshi market participants.

8. Regulatory Oversight:

- Derivative markets provide a regulated environment for trading and hedging activities, ensuring transparency and safeguarding investors' interests.

- Regulatory frameworks aim to minimize systemic risks, promote fair trading practices, and protect market integrity.

9. Economic Growth:

- Derivative markets can contribute to broader economic growth by facilitating efficient allocation of capital, enhancing risk management capabilities, and providing investment opportunities.

10. International Benchmarking:

- Derivative markets enable local businesses and investors to participate in global benchmarks, facilitating international trade, investment, and collaboration.

In summary, derivative market offers numerous advantages for Bangladesh, supporting economic growth, increasing market efficiency, managing financial risks, and providing access to international markets.