By Mahnaz Abdi

Iranian capital market to experience new financial instruments

March 6, 2019

Applying new financial instruments in Iranian capital market has been a significant approach that Iran’s Securities and Exchange Organization (SEO) has adopted over the recent years to expand this market through availability of variable methods of financing.

These instruments are applied in different stock markets of Iran, including Tehran Stock Exchange (TSE), Iran's over-the-counter (OTC) market known also as Iran Fara Bourse (IFB), Iran Mercantile Exchange (IME), and Iran Energy Exchange (IEE), after being investigated and approved by the Jurisprudence Committee of SEO, which oversees compliance of capital market instruments with sharia rules.

As TSE Head Ali Sahraei believes, innovation in launching new financial instruments in the capital market is one of the strategic stock exchange policies to promote the share of capital market in providing financial resources for the productive economic activities.

One of the newly applied financial instruments in Iran’s capital market is futures contract, which was launched in mid-December 2018.

Futures contracts (more colloquially, futures) are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and price.

Addressing the ceremony to launch this instrument, Sahraei said that futures contract is one of the risk management tools (also called hedging tools), and expressed hope that it would act as a highly-applied derivative for hedging in the capital market.

Addressing the same ceremony, SEO Head Shapour Mohammadi said that futures are some very important instruments for the market balance, while they are also some strong hedging tools.

They provide investment opportunities for those who are seeking the amount of profit more than they can earn in the normal market deals, the official noted.

He further highlighted the significance of taking the advantage of new financial instruments to grab the opportunities for market arbitrage (purchasing and selling the same security at the same time in different markets to take advantage of a price difference between the two separate markets).

The new financial instruments will empower the capital market and fill many gaps, Mahmoud-Reza Khajehnasiri, a board member of SEO, says.

Option was another new financial instrument which was launched on Sunday (March 3) by Iran Mercantile Exchange (IME).

Option is a contract which gives the buyer (the owner or holder of the option) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option. 

IME launched this contract for saffron trades in an approach to diversify financing methods for agricultural products.

IME Managing Director Hamed Soltaninejad refers to launching this instrument as one of the major measures so far taken by IME regarding financial market and derivatives.

Launching new financial instruments in the capital market lures more industries into the stock market, and the good news in this field is that some new instruments are going to be launched at Iranian capital market soon, as announced by Sahraei on Wednesday.

The official said that these instruments are already in the stage of being approved by the Jurisprudence Committee of SEO; their related instructions are being prepared and technical and commercial feasibility studies are being conducted about them.

TSE head mentioned warrant as one of these new instruments.

Warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date.

Sahraei referred to short-selling as the other new financial instrument to be launched soon in the country’s capital market.

Shorting, or short-selling, is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference. But shorting is much riskier than buying stocks, or what's known as taking a long position.

Many stock market experts believe that launching these new instruments are considered as some turning points in the country’s capital market.

They also say that as the capital market is the best place to lead the liquidity to productive economic sectors, applying these instruments in this market is vital for thriving production in the country.

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