Time Right For Investment In Derivatives Market

Time Right For Investment In Derivatives Market

With Covid-19 seemingly the topic of every dinner conversation and emblazoned below the masthead of every newspaper, Cambodian Derivatives Exchange (CDX) director Lawrence Kook believes that it may be an opportune time for investors to make their first trade.

While there is inherent risk involved in trading derivatives, the amount of leverage – which in Cambodia can be up to 100 times the investment – makes it a potentially lucrative part of an investor’s portfolio, according to Kook.

For instance, an investor needs only $1,000 to trade $100,000 worth of derivatives, with only the swap – the interest on the amount borrowed – being applied.

Derivatives are financial tools that allow for the leveraging of capital in underlying assets such as commodities or currencies.

Trading in derivatives includes exchanging various foreign currencies to purchase commodities, with this among the reasons it is believed to be a viable tool in hedging risk and maximising profit.

CDX, which began operating in 2016, offers 27 financial instruments through its numerous brokers.

Kook said that CDX can also access foreign markets through its licensed brokers.

The volume of derivatives trading in Cambodia rose from $84 million in 2018 to $120 million last year, according to official figures.

“Looking at the market and the number of players entering it, perhaps up to $180 million of trades will take place this year,” Kook told The Post via telephone from Hong Kong.

“The Ministry of Economy and Finance has seen the importance of helping Cambodia have its own derivatives market so that it can help banks, investors and farmers to hedge risks in the globalised economy.

“So far, we are very satisfied regarding how the derivatives market has been growing and evolving over the past five years,” Kook said.

Globally, over-the-counter derivatives trading rose from $544 trillion at the end of 2018 to some $640 trillion in June last year, according to the Switzerland-based Bank for International Settlements.

Kook said that foreign exchange and gold often combine to account for 60 to 70 per cent of all trades on the CDX, making them “the most popular financial instruments traded by brokers and the CDX”.

“I think [gold] is a very good commodity to mitigate risk through diversification for any individual if it is not already a part of their portfolio. My high school friends even call and ask me if it is a good time to buy coins – not necessarily as a market investment, but real gold coins for their sons or daughters – and I say ‘yes’,” he said.

A distinguishing feature of CDX, according to Kook, is that it uses a “spot market”, which allows investors to exit at any time, unlike futures contracts, which have a maturity and delivery date on products.

This means investors are able to execute trades or sell off their investment at any time.

CDX, despite having only been formed four years ago, is considered a critical part of the capital market because “it has allowed the [derivaties] financial tool to be regulated by bringing it out of the grey market”, Kook said.

Your investment should depend on your age, your marital status, whether you have children and the level of risk you are willing to take, he stressed.

While it is best to defer to a financial planner, Kook recommended the “30-30-40” rule for young investors or those entering the market for the first time.

This calls for 30 per cent in high-risk, high-return investments; 30 per cent in medium-risk, medium-return; and 40 per cent in low-risk, low-return.