After the launching of trade in euro options on the Tel Aviv Stock Exchange and after a few days of stormy trade last November, the market for euro options stabilized to a daily turnover of 700-2,000 options. For the sake of comparison, daily turnovers in dollar options during the past year reached 50,000-70,000 options.
Daily trade turnover figures are the only measure of the success of the new instrument, and the current turnovers show that if it is to be deemed successful, it will have to do much better. In the past two months, when the foreign currency market was in a tizzy and billions of shekels flowed to various investment channels, the light trade in euro derivatives could hint at failure.
The success of the dollar options on the TASE is also reflected in the active trade in these options on Sundays, when there is no foreign currency trade abroad. For many, the Sunday trading is an indication of the exchange rates that will open the trading on the following day. Euro options, on the other hand, are barely traded at all on Sundays.
In the first few months after their introduction, the euro options were an interesting instrument for mutual funds that specialized in euros. These funds were launched toward the end of 2001 and at the beginning of 2002, on the background of the transition of the European bloc to the exclusive use of the euro.
The funds, which encountered regulatory difficulties in purchasing euro-linked bonds on money markets in Europe, used euro options on the bourse. However, like every passing fad on the capital market, and despite the considerable strengthening of the euro in relation to the dollar (an appreciation of 17 percent since the beginning of 2002), the demand for these funds has dropped somewhat in recent months.
Bourse sources do not define the trade in euro options as a dizzying success. Even so, they do not dismiss the necessity of this instrument, the possibility that it will become more useful in the coming years and the chances that trade volume will increase.
Samuel Berger, of Mirvachim Capital Markets, says that the market cannot survive if the market makers are unable to protect themselves from changes in the exchange rates in the deals they make. He explains that the options market is based on three main players - market makers, the brokers and the consumers (the business sector or speculators). He says that the need is there and the players are there, but since the market makers are feeling their way in the darkness, trade is very light. He notes that the manner in which the representative shekel exchange rate of the euro is set, is not clear to the players, plus the hour at which it is set varies, so they are unable to protect themselves.
Berger blames this situation on the Bank of Israel, which sets the daily representative rate of the euro based on two factors - the representative rate of the dollar, which it sets each day, and the euro-dollar rate around the world. Berger claims that while the dollar's exchange rate is set according to clear parameters at a fixed time, the central bank does not notify the public of the criteria by which it sets the euro-dollar rate. "If this problem is solved," says Berger, "there will be a lot more deals in the euro options market."
Berger also says that the market makers always prefer a market that is as fluid as possible, with high maneuverability similar to that of the dollar options. Even so, there are still problems with the fact that the euro-shekel rate is set according to the euro-dollar and dollar-shekel rates. If there are any additional problems, the market makers steer clear of the market.
One of the reasons for the lack of success of derivatives on the TASE is the high correlation between them and other instruments. This is how, for example, the trade in derivatives of the banking index failed, due to the correlation between them and the Maof Index. There is no problem in finding a deal similar to shekel-euro options via acquiring shekel-dollar options in Tel Aviv and euro-dollar derivatives in Chicago. Thus the players gain the most from the shekel-euro derivatives, and also trade in markets in which negotiability is very high.
Amir Ayal, president of Infinity Group investment house, notes that the big derivatives players in the market suffice with Maof and dollar options, which provide them with enough profits. They do not take an interest in the euro options because there is no profit in these options' activity, so the players don't even enter the market.
Ayal claims that without these players, there is nothing to attract others. This means that negotiability is low and also that anyone who wants to protect himself has to wait, sometimes as long as a month, until someone will make a deal with him. Ayal adds that the business and financial mindset in Israel is still in dollars, so even those who are exposed to the euro prefer to relate to the dollar. Even so, Ayal feels that in the future the euro options market will become a significant financial instrument.
Dror Shalit, senior vice president of the bourse, says the trade in dollar options also took a few years till it attracted large volume. He says that the current trade volume in euro options is similar to that of dollar options after they had been around for over two years.
Shalit added that the bourse is introducing changes in the way expiration rates are set, which bothered a few active players. He believes, however, that after approval is received from the Securities Authority and from the Knesset Finance Committee, others will join the trade.
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