Derivatives Overview
Derivatives are financial instruments the value of which depends upon (or is derived from) other assets, known as underlying assets. For example, the value of derivatives on the TA-35 index is based, inter alia, on the value of this index during trading on the TASE.
There are two main types of derivatives: futures contracts and options. These derivatives enable purchasers or sellers to hedge the risk of their investment against increases or decreases in a certain asset, but also as an alternative for investment in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives on the TASE
The TASE derivatives market was established in 1993 and is currently one of the most active markets on the TASE. The first product was options on the TA-25 index (the index tracking the top 25 companies on the TASE), currently named
TA-35 index. TA-35 index options are a success, not only locally but on an international scale as well.
Since 1999, trading on the derivatives market is fully-automated on
TACT (Tel Aviv Continuous Trading). Technological advancements have greatly contributed to trading volumes in the derivatives market.
Options and Futures Contracts
"Call" and "Put" options are traded on the TASE.
- The option buyer receives the right (without obligation) to buy or sell the underlying asset (for example: the TA-35 index) at a pre-agreed price (the "exercise price") and on a date known in advance (the "expiration date"). The buyer pays a "premium" in return for this right.
- The Put option seller ("writer") undertakes, in exchange for a premium, to pay the option buyer the difference between the exercise price and the value of the underlying asset on the expiration date of the option.
- The Call option writer, in return for a premium, pays the option buyer the difference between the value of the underlying asset on the expiration date of the option and the exercise price. Payment is made on the exercise date. If the difference is negative, the option is "out of the money" and expires free of charge.
The buyer of the option can at most lose the premium he paid. Option writers are potentially exposed to a much larger, sometimes unlimited, loss. The Derivatives Clearing House is obligated to complete the transaction vis-a-vis option buyers, and accordingly requires investors who write options to deposit collateral and holds it in order to ensure the stability of the Clearing House and the TASE members.
Future Contract
A future contract is an agreement between two parties for a predefined period. The seller of the contract undertakes to pay the purchaser the difference if the value of the underlying asset at expiration is higher than the price agreed upon in the contract. On the other hand, the buyer undertakes to pay the seller the difference if the underlying asset at expiration is lower than the price agreed upon in the contract. Both buyers and sellers of a future contract, are potentially exposed to unlimited loss and are therefore also obliged to deposit collateral.
Options and Futures Contracts on the TASE
The derivatives market, which was launched in August 1993, is also known as the Maof market (futures and financial instruments). Futures and options trading was fully automated in October 1999 and the TASE trading rooms were closed.
Immediately after automation, trading in the TA-25 index (now TA-35) surged more than three-fold.
Equity Index Derivatives
On the TASE, options and futures are traded on the TA-35 index. These derivatives provide investors with tools to hedge against fluctuations in the TA-35 index.
The options on the TA-35 index are the flagship product in the TASE derivatives market and are considered successful not only in local terms but also in international terms.
In 2013, the TASE made another move to expand products available on the TA-25 index (now TA-35) and launched two weekly derivatives on the TA-25 index (currently: TA-35). Weekly derivatives are identical in their characteristics to the monthly derivatives, except for their duration - two weeks.
In addition, as of March 29, 2018, long-dated TA-35 index future contracts began trading on the TASE for a period of 15 months. This will be in addition to the weekly futures and monthly futures that will continue to be opened, as is the current practice.
In addition, options and contracts are traded on the TA Banks-5 index and on the TA-125 index.
FX Derivatives
Options on the Dollar exchange rate (launched in October 1994) as well as options on the Euro exchange rate (launched in November 2001), are traded on the TASE. These protect against fluctuations in exchange rates.
In 2016, the TASE launched two weekly derivatives on the dollar exchange rate. With the exception of life span, the terms of weekly derivatives are similar to those of monthly derivatives.
Equity Options
Equity options were launched in March 2009. The underlying assets were chosen among the shares with the highest market capitalization on the exchange as well as with the highest volumes. Currently, select TA-35 Index companies have listed options.
The main specifications of the equity options are similar to the TA-35 index options: European style options, cash settlement and the same exercise date.
