The structure of derivatives exchanges : lessons from developed and emerging markets

The authors examine the architecture, elements of market design, and the products traded in derivatives exchanges around the world. The core function of a derivatives exchange is to facilitate the transfer of risk among economic agents by providing mechanisms to enhance liquidity and facilitate price discovery. They test the proposition that organizational arrangements necessary to perform this function are not the same across markets. They also examine the sequencing of products introduced in derivatives exchanges. Using a survey instrument, they find that: a) Financial systems perform the same core functions across time and place but institutional arrangements differ. b) The ownership structure of derivatives exchanges assumes different forms across markets. c) The success of an exchange depends on the structure adopted and the products traded. d) Exchanges are regulated directly or indirectly through a government law. In addition, exchanges have their own regulatory structure. e) Typically (but not always) market-making systems are based on open outcry, with daily mark-to-market and gross margining -- but electronic systems are gaining popularity. f) Several (but not all) exchanges own clearing facilities and use netting settlement procedures. As for derivative products traded, they find that: i) Although most of the older exchanges started with (mainly agricultural) commodity derivatives, newer exchanges first introduce financial derivative products. ii) Derivatives based on a domestic stock index have greater potential for success followed by derivatives based on local interest rates and currencies. iii) The introduction of derivatives contracts appears to take more time in emerging markets compared with developed markets, with the exception of index products.Economic Theory&Research,Payment Systems&Infrastructure,International Terrorism&Counterterrorism,Non Bank Financial Institutions,Environmental Economics&Policies,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Economic Theory&Research,Non Bank Financial Institutions,Environmental Economics&Policies

The selling of put derivatives by firms for shareholder wealth and information signaling enhancement

Working paper; version dated November 5, 200

Why Do Financial Intermediaries Buy Put Options from Companies?

Companies have collected billions in premiums from privately sold put options written on their own stock, yet almost all of these puts expired worthless and their owners lost money as a result. Although these losses seem puzzling, we model how by offering to buy put options from better informed parties, investment banks receive private information about the issuing company. Empirically, we find a 12% increase in the stock prices and a 40% increase in the trading volumes around the put sales. An examination of 13D filings reveals that upper management insiders increased their long position on the stock around the put sale - consistent with them having private information. However, the magnitude of the volumes and the lack of change in the shares outstanding indicate that other informed-of-the-put-sale parties might also have acted. By examining 13F filings, we find no evidence that these parties were institutional investors

Why Do Financial Intermediaries Buy Put Options from Companies?

In the 1990s, companies collected billions in premiums from peculiarly structured put options written on their own stock while almost all of these puts expired worthless. Buyers of these options, primarily �nancial intermediaries, lost money as a result. Although these losses might seem puzzling, by offering to buy put options from better informed parties, intermediaries receive private information about the issuing company. We fi�nd that the magnitude of changes and structural breaks in the stocks' �price trends and volumes around the put sales indicate that the intermediaries were indeed acting on this information and potentially made hundreds of billions of dollars

Why Do Financial Intermediaries Buy Put Options from Companies?

In the 1990s, companies collected billions in premiums from peculiarly structured put options written on their own stock while almost all of these puts expired worthless. Buyers of these options, primarily �nancial intermediaries, lost money as a result. Although these losses might seem puzzling, by offering to buy put options from better informed parties, intermediaries receive private information about the issuing company. We fi�nd that the magnitude of changes and structural breaks in the stocks' �price trends and volumes around the put sales indicate that the intermediaries were indeed acting on this information and potentially made hundreds of billions of dollars

Why Do Financial Intermediaries Buy Put Options from Companies?

In the 1990s, companies collected billions in premiums from peculiarly structured put options written on their own stock while almost all of these puts expired worthless. Buyers of these options, primarily �nancial intermediaries, lost money as a result. Although these losses might seem puzzling, by offering to buy put options from better informed parties, intermediaries receive private information about the issuing company. We fi�nd that the magnitude of changes and structural breaks in the stocks' �price trends and volumes around the put sales indicate that the intermediaries were indeed acting on this information and potentially made hundreds of billions of dollars

Why Do Financial Intermediaries Buy Put Options from Companies?

Companies have collected billions in premiums from privately sold put options written on their own stock, yet almost all of these puts expired worthless and their owners lost money as a result. Although these losses seem puzzling, we model how by offering to buy put options from better informed parties, investment banks receive private information about the issuing company. Empirically, we find a 12% increase in the stock prices and a 40% increase in the trading volumes around the put sales. An examination of 13D filings reveals that upper management insiders increased their long position on the stock around the put sale - consistent with them having private information. However, the magnitude of the volumes and the lack of change in the shares outstanding indicate that other informed-of-the-put-sale parties might also have acted. By examining 13F filings, we find no evidence that these parties were institutional investors

Managerial Decisions, Internal Organization Structure, And Agency Considerations

This paper deals with issues related to productive inefficiencies that occur at a divisional level of a multinational firm.  More specifically, the paper introduces an additional consideration in the agency relationship, namely, the internal organization structure.  It is argued that the internal organization structure imposes restrictions on the behavior of divisional managers resulting in financial decisions characterized by short-term orientation and risk aversion.  These suboptimal financial decisions generate organizational costs, called managerial regulatory costs, which should be distinguished from agency-type costs