journal of Foreign Exchange and International Finance
43-55
Derivatives in an Emerging Market:
A Study of Thailand
Jyoti P Gupta, I M Pandey and Tippawan Pinvanichkul
I. Introduction
The volatility of interest rate, currency,
stock and bond returns and commodity
prices have led firms and financial
institutions to implement hedging
techniques to manage their financial risks.
Financial derivatives are essential in
designing an effective hedging strategy.
They also represent an important source of
revenues for financial institutions and
speculators. This has led to an explosive
growth in the trading of derivative securities
and they represent trillions of dollars of
transactions. Futures and option are now
actively traded in many different exchanges.
Many other derivative contracts are traded
on the over-the-counter market. The
globalisation of financial markets has
enabled developing countries to get an
experience on the utilisation of these
techniques.
At present there is no financial derivative
exchange in Thailand. However, some
derivative securities are being traded
regularly in the OTC market. It is believed
that the Government will soon take
initiatives to establish organised futures and
options exchange as the derivative securities
are expected to positively contribute to the
development of financial system and capital
market of the country. On the other hand,
there are some controversies on the
introduction of derivatives market in
Thailand. It is questionable whether the
basic factors such as the current economic
status, maturity of the financial market,
* Authors are thankful to Mr. Darshana Vidyasagara
for providing research assistance in writing this
paper.
Vol. IX, No. 1, pp.
knowledge of the people, etc., are strong
enough to go for such a move.
This paper presents survey results of the
existing derivatives market and potential
development of a derivative exchange in
Thailand. Factors such as demand for the
financial futures and options exchange
among the entrepreneurs, potential
consequences after implementation of the
derivative exchange, commitment of current
financial market of the country towards
the creation of futures and options
exchange and the potential obstacles of
impediments to the creation of new
derivative exchange are also examined in
this study.
This research is focused only on
derivative market activities in Bangkok as
it is the centre of financial market of the
country. Information from end-users of
the derivative contracts was limited only
to experts such as institutional investors or
users. Information and data from
literature review and the various
economic and financial institutions were
also used in this study. In-depth study on
individual users of derivative contracts
and derivative market for commodities
were excluded from the scope of the
study.
In PartMI we discuss the need for
establishing derivative market in
Thailand. Part III focuses on the factors
facilitating and obstructing a futures and
options market. In Part IV we discuss
policy issues in developing a derivative
market in Thailand which is an emerging
market and Part V highlights the main
conclusions of the paper.
43
 Journal of Foreign Exdiange and International Finance
II. Need for Derivative Market in
Thailand
An emerging market simply reflects the
pace of the economic development of a
country. It is a key instrument to mobilise
the capital which is the driving force for the
country's economic development. The
following factors contribute to the need for
the development of the financial market in
Thailand.
Firstly, there is a pressure from the global
and regional economic corporations such as
General Agreement on Tariff and Trade
(GATT), Asian Trade Agreement (AFTA)
etc. These bring the closer integration of
country's financial market with the world
market.
Secondly, the rapid modernisation of
technology has made the country's financial
and trading conditions more compatible
with external conditions.
Thirdly, the recent relative high growth
rate of the country's economy which is
expected to be sustained in future
accentuates the need for investment. With a
high growth rate, Thailand is one of the
Asian emerging markets that provides
much higher spectacular return (Kuczynski,
1994). This interest in investment may affect
the market to be more costly and volatile.
Fourthly, making baht a regional
currency induces a higher priority for the
government to develop the financial
derivative market in Thailand. The country
will enjoy some benefits if the baht is made
a regional currency. As a result, there may
be impacts on the movements of domestic
interest rate and the effectiveness of
exchange rate policy of the country.
Once introduced, the volume of
derivative activities will significantly
increase due to fast economic development
and financial liberalisation. More
involvement in a derivative market can be
expected with the increased awareness
among public and private sectors towards
the necessity and benefits of, such market.
As the present OTC market is weak in terms
44
of speed of contract execution and liquidity,
it will no longer serve the purpose efficiently
with the tremendous demand for
derivatives.
Although it is not possible to measure the
volume of demand exactly, our survey
results show that there is a significant
demand for futures and options trading for
the following reasons:
Firstly, among the leading commercial
corporations, there is a high proportion of
activities in foreign currencies (e.g., foreign
currency debt, income and expenses
included in their financial statements).
These corporations are not only exposed to
I
the volatility of foreign exchange rate but
also to interest rate fluctuations. Almost all
of them (93 per cent) do hedge their position
by using derivatives instruments such as
forward contracts, interest rate swaps,
currency swaps, currency or interest rate
option, cap, collar and floor. The size or
volume of the contract varies from baht 10
million to baht 200 million per month. Some
of them have not entered into the derivative
activities due to management policy of the
company. There is high potential for them
to involve in derivative activities in the
future.
Secondly, as Thailand's capital market is
rapidly growing, discussions with portfolio
managers of security houses, mutual funds
and other financial firms indicated that most
of them are looking for the derivative
instruments like stock index options and
individual stock options to improve and
facilitate the portfolio management. Several
investors had used futures and options
traded on the other exchanges abroad to
hedge against the Stock Exchange of
Thailand (SET). However, this is not
possible now as they are prohibited to invest
in futures market.
Thirdly, discussions with some bankers
who are the major derivatives traders
(almost all foreign bank branches) show that
the derivative tradings are about US $ 10
million to US $ 200 million per day. These
banks enroll either as dealers or
 Derivatives in an Emerging Market: A Study of Thailand
counterparties. The bankers are of the
opinion that the growth rate of these services
will increase significantly in the future.
Lastly, the two major categories of
traders, viz., dealers and end-users, do not
only use local OTC market, they also trade
on the exchanges operated in other countries
with foreign dealers. The proportion of
these two markets which are used by the
Thai traders vary between 20 per cent of
local OTC and 80 per cent of foreign market
to 80 per cent of local OTC and 20 per cent
of foreign market.
According to the derivative floor in the
Thai OTC market, the position taken in 1994
(estimated from the position taken in the
first six months of this year) was 200 per cent
more than 1993 (Table 1). Swaps do not
include non-inter bank swaps and it is
therefore underestimated.
III. Conditions for the Creation of a
Futures and Options Exchange
The factors which are used to determine
the readiness for the creation of futures and
options exchange are (Pyle, 1993):
Trading volume in cash market of
certain types of underlying assets -
Amplitude of underlying price
volatility
Standardisation of the underlying
assets, such as quantity or volume,
quality, etc.
45
- Numbers of hedgers and speculators.
It appears that OTC derivatives in
Thailand are operated well with foreign
currency-linked products and interest rate-
linked products. Therefore the trend of the
market movement shows favourable
potential for derivatives market
development. It is the equity derivative
market that requires more careful
consideration in creating derivatives
exchange. In addition to this, numbers of
dealers and speculators are needed to be
studied in detail.
The speculative use is a feature of
derivatives market, specially in equity
derivatives whereas equity-index
derivatives are mostly used for hedging
purposes. In fact, speculation is needed to
sustain market liquidity, but too much
speculation would result in driving business
away from derivatives markets. The
question of how much derivatives tradings
are for hedging and how much for pure
speculation (taking rather than hedging
open positions) might be answered
indirectly by looking at the players. For
example, in Japan's stock index futures
market, 65 per cent of the trade is done by
the brokers and 35 per cent by institutional
investors. The latter are likely to do most of
their trading for hedging purposes. Trade in
stock index futures in Hong Kong is about
 Journal of Foreign Exchange and International Finance
50 per cent retail and 50 per cent
institutional.
In the Thai stock market, the major group
of hedgers are mutual funds, pension funds
and insurance companies. But these
investing groups are still small compared to
the individual investors who speculate in
the stock market. Figure 1 illustrates the
volume of transactions by groups of
investors in the SET in July 1994.
In addition to the above factors, the
following macro-economic factors can be
used to determine the readiness for the
creation of equity derivatives:
- Capitalisation of the underlying cash
market before launching derivatives
trading. It was suggested by the
interviewees, viz., the potential
operators and market makers that a
volume of around $ 20 billion appears to
be a critical mass in the case of Thailand.
- The turnover on the cash market,
defined as the annual average over the
three years prior to launch. A 20 per
cent of market capitalisation appears to
be the breaking point.
A positive growth of the ratio between
market capitalisation and GDP, which
indicates that more and more assets are
equitised. This may be seen as an
indication of greater risk awareness and
management capability.
Figures 2 to 4 show the SET market
capitalisation, market capitalisation to gross
domestic product ratio and market
turnover.
Based on the data as shown in Figures 2
to 4, one may conclude that Thailand has a
good potential to create the eqraity
derivatives markets. In addition, the
following three factors have direct impact
on the creation of derivatives market:
the level of transparency on the cash
market (measured by the delay in the
dissemination of the transactions)
information;
46
the availability of a short selling
mechanism; and
the joint availability of stock index
futures and stock index options.
There is also another measure to
determine the potential for developing
derivatives market in a given financial
centre. This is known as "the derivatives
liquidity ratio (DLR)" and defined as the
ratio between the national value of traded
equity index derivatives and the cash
market turnover in a given year. This
indicator indicates that liquidity of the
derivatives market is a measure for its
success. Research has shown that a DLR
equal to 1 appears to be an important
dividing point. Markets have shown a
tendency to remain consistently either
above or below 1 (OECD, 1994). At the
moment it is impossible to apply this
criterion to Thailand but it may be useful in
the future.
In practice, a DLR higher than 1 does not
always mean that the local derivatives
market is successful. The long delay in
information dissemination can reduce the
level of transparency which will not always
indicate a negative factor. For example, the
long delay in information dissemination of
the London Stock Exchange has the
advantage of attracting large block trading
to London. (OECD, 1994).
Potential Obstacles
There may be positive as well as negative
factors for the development of financial
derivatives exchange in Thailand. The
existing obstacles may overshadow the
potential benefit. The potential obstacles are
defined into two categories : domestic
regulations and system and market
participants (viz., dealers, end-users and the
regulators).
Domestic Regulations and System Related
Aspects : The government regulatory
measures do not oppose the creation of this
market in Thailand. But the existing
47
Journal of Foreign Exchange and International Finance

48
 Derivatives in an Emerging Market: A Study ofTliailand
restrictions neither support nor promote the
exchange. They are:
- There are some limitations on the capital
outflows of commercial banks and
finance companies in Thailand. This
prevents them taking full advantage of
the international market.
The artificially regulated exchange rate
is another obstacle that may delay the
development of the exchange rate-
linked derivatives market. A considered. According to some reports,
prohibition of short-selling in the
Stock Exchange is a major obstacle to the
introduction of individual stock futures
and options. The availability of
short-selling mechanism is one of the
success factors for the creation of equity
derivatives market.
- Income tax laws are vague. There are
serious concerns about the stock option
tax law among government and private
sectors. The Revenue Department
recently studied the ways to tax stock
options. The Government may lose tax
revenue if the individual receivers enjoy
tax exemption when they sell the stocks
of exercised options on the Exchange
with no income tax.
- According to our survey, it was found
that banks rarely sell the currency
option as the total amount of premium
before deducting any expense is
subjected to tax (around 30 per cent).
As far as the regulatory obstacles are
concerned, the sound and strong
commitment of the government to relax or
remove these obstacles is another criterion
to determine the success of the market
operation. So far the government's attitude
towards the removal of these obstacles is
quite strong. This may be another positive
factors for the introduction of derivatives
exchange in Thailand.
Market Participants Related Aspects :
Among the other factors the traders'
understanding of derivatives, activity is the
most important. Even within the countries
where derivatives markets have been
49
developed for a long time, derivatives
instruments remain relatively unfamiliar to
the general public and not properly
understood even by some segments of the
financial community. The knowledge on
derivative products and their use is lacking
in Thailand and which may cause to- hinder
the market development.
The understanding of derivatives market
by regulatory agencies needs to be
derivative markets can pose some specific
threats to the cash market and financial
system in countries where regulatory
practices lag significantly behind
practitioners. For example, in Hong Kong
some types of financial institutions are
neither covered by bank regulators nor by
security regulators. Similarly, regulatory
agencies that lack full understanding of
derivative markets are likely to concentrate
on probable harmful effects and risks rather
than the new value which such product can
bring.
As the understanding of the market
mechanism is lacking in Thailand, the
complex operations of the new market may
not be easy to grasp by its users. This may
prevent the efficient utilisation of the
derivatives market.
Customer-base is another important
criterion in the market participants related
aspects, m Thailand, the foreign brokerage
firms are much more keen in dealing with
financial derivatives than the local firms.
Therefore the brokerage firms which are
entering into the emerging markets may
help to stimulate the market development.
However, the size of the potential customer
base will determine the foreign brokerage
firms' interest in entering into the emerging
derivatives market.
Consequences of the Derivatives Market
Generally, the purpose of the "exchange"
is to provide an institutional framework as
well as the place for the buyers and the
sellers to meet and transact business without
 Journal of Foreign Exchange and International Finance
any default of trust and with financial
integrity. However, an exchange brings to
the country both advantages and
disadvantages. Academic scholars have
given various reasons for the recent growth
in derivatives. The reason include (Pyle,
1993): Diverse functions as the enrichment
of securities of security firms; Regulatory
and tax avoidance; Economic efficiency
gains.
The discussion on the economic gains are
given by several economists and financial
experts. The exchange-based markets
provide valuable services and
opportunities. Two well known economic
functions of the exchange-based market are
(Kilcollineffl/, 1993):
Price Discovery Function : Liquid markets
provide the economy with the valuable price
discovery function. Active trading provides
a constant reassessment of true market
valuation of products. This mechanism thus
provides the economy with an accurate and
up-to-date valuation of exchange traded
products.
Transfer of Risk : Corporations can use
these markets to offset the risk of holding
assets or liabilities. Such risk is often
transferred to firms and individuals whose
expertise and efforts are aimed at
speculation.
Other functions of exchange-based
market are operational standardisation and
liquidity and depth of the relative cash
market. Merton and Miller (1992) identified
three ways in which derivatives products
improve economic performance:
- By meeting investors and issuer
demands for new securities and other
financial products, expanding the
opportunities for risk-sharing,
risk-pooling, hedging and
inter-temporal or spatial transfers of
resources.
- By lowering transaction costs or
increasing the liquidity of the markets.
50
By helping to solve costly contractual
and informational problems.
The economic efficiency gains from the
use of derivatives are (Pyle, 1993):
- Lowering transaction costs
Reducing agency costs
- Helping to complete capital markets.
The household savings are channelised to
the companies in the form of real investment
through the capital markets. The return on
investments flows back to households for
further investment or consumption. Capital
markets help for households to select
investments in accordance with the required
risk - return profile and make funds
available to the companies to carry out their
operations. Derivatives help to strengthen
this saving-investment link.
Derivatives, by enlarging the scope of
investment and financing, could help in
saving costs, enhancing returns and
reducing risks. They may also strengthen
the financial institutions by reinforcing
existing operations of the clients and by
creating diversified credit portfolios (Group
of Thirty, 1993).
The futures and options market is
expected to contribute to Thailand in the
following ways:
- Enhancing the competitiveness of the
Thai economy. This market will
provide a wide range of risk
management tools; for example, the risk
from currency, interest rate and price
volatility could be hedged or shifted by
using derivatives instruments.
- Encouraging financial innovation for
the Thai financial industry. The Thai
financial industry currently has been
most attractive to those who are
brilliant, creative and well educated.
Together with the derivative activities,
new inventions in the form of new
business, new products, or even new
knowledge (e.g., mathematical model)
would be possible to emerge.
 Derivatires in an Emerging Market: A Study ofTlutiland
- Providing the risk management tools to
the corporations and individuals.
Allowing corporations to improve their
ability for assets and liability
management at a lower cost.
- Enhancing the existing scope,
magnitude of services and bring new
services to the business of banks and
other financial institutions.
- Acting as a income stabiliser. This may
help to improve the Thai's saving status
and will reduce the country's reliance
on foreign capital.
The useful social functions of this market
should also be considered. As stated by Cox
and Rubinstein (1985), the market enables to
allocate individual wealth, firm resources
and provide information.
The most probable disadvantages of
derivative activities are the impacts on the
cash market and the fear of high speculation.
Studies by OECD (1994) have shown the
following impact of derivative activities on
the related cash market:
Trading in stock index futures, stock
options and warrants have an
insignificant impact on the underlying
cash marker volatility.
- The introduction of derivatives trading
improves the informational efficiency of
the underlying stocks.
- The volatility of stocks and futures price
do not significantly differ on expiration
dates as compared to other dates.
- The greater the imperfection of the cash
market, the more significant is the lead
lag relationship observed between the
futures market and the cash market.
The efficiency of the cash market needs
to be improved to make the two markets
move in tandem. If the markets lose
efficiency, more speculation will occur.
IV. Policy Issues
The Thai government has to play a major
role in order to encourage, promote and
support the private sector. This may lead to
51
making the market more competitive and
efficient. One of the government's most
important actions towards this end is the
creation of financial reform policies. A
comprehensive financial reform plan should
encompass the following major areas
(Chodechai and Vachira, 1993) :
Deregulation and liberalisation; Improving
supervision of the financial system;
Development of financial instruments and
services; and Development of payment
system.
These policies if effectively implemented
will open the Thai financial market to the
world market (free market). For example,
the abolition of interest rate ceiling allows
the local interest rate to move more in line
with the world interest rates. But this
exposes the entrepreneurs to the interest rate
risk. However, financial deregulation will
increase the competition among banks and
financial firms. As a result, these
organisations will have to improve their
existing service lines and need to create new
businesses.
As discussed earlier, our survey has
shown that there is high potential to
introduce organised derivatives exchange in
Thailand in the near future. The
Government and private sector have shown
a strong commitment to remove or ease the
barriers (e.g. lack of professional ethics,
good understanding of derivatives
activities, market mechanisms, some
regulations which will not allow derivatives
activity to be misused, etc.) which may
obstruct the operation of the derivatives
exchange. However, according to the
Securities' Exchange Commission and Bank
of Thailand, steps are being taken to
introduce this exchange by forming
regulations and processes and may be
possible within two years time.
Potential Products for Initial Trading
The products which may have more
potential to be listed on the Thai exchange
are equity-linked futures and options
 Journal of Foreign Exchange and International Finance
contracts, currency-linked futures and
options contracts and interest rate-linked
futures and options contracts.
Equity-Linked Futures and Options
Contracts : Local equity market is growing
rapidly and the SET index volatility is also
moving significantly. Many investors,
particularly institutional investors, are
looking for more versatile risk management
tools. Many of them are involved in trading
of futures and option contracts abroad.
In the Thai stock market, the number of
hedgers is much smaller than the number of
speculators and the equity derivatives
products are handled by financial
institutions. According to the survey
results, it was found that almost all
derivatives traders have shown keen
interest on the equity-linked futures and
options to be listed in the exchange.
Equity-linked contracts include stock
indexes futures and options, individual
stock futures and options and stocks baskets
futures and options.
As the existing exchange is dominated by
stocks, the current SET index includes all the
stocks being listed on the SET. This is not
appropriate to be used as the underlying
indices of futures and options contracts.
Therefore, it is necessary to develop a new
index to use as underlying indices.
Currency-linked Futures and Options
Contracts : The most popular
currency-linked derivatives activities in the
Thai market are cross currency swaps and
currency options. At present, there is a high
demand for these products. This is mainly
due to increasing economic growth of
Thailand which has led to a significant
increase in the international tradings of local
52
entrepreneurs. The larger is the
international trading volume and
transactions the more susceptible is the
currency risk. The largest currency exchange
deals are baht/US $, baht/yen and
baht/DM respectively (Table 2).
Interest Rate-linked Futures and Options
Contracts : There are few factors that affect
i
any form of investments more than the
"interest rates." The most closely watched
interest rates are the benchmark rates that
are coming from the government treasury
securities since they reflect changes in the
economy, inflationary expectation and the
value of the baht. The other interest rates,
i.e. bank's prime lending rate and home
mortgage rates, reflect the trends in the
treasury market. Due to many reasons the
treasury market in Thailand has not been
developed yet. One of the major reasons is
that the issuing of the government bonds
were stopped a few years ago as the
government operated at surplus. Although
the Bank of Thailand recently promoted the
treasury market as a tool to facilitate
liquidity of money market, the liquidity of
this market is still low. This low liquidity is
due to the small volume of demand which
comes solely from the banks and financial
firms who buy the treasury bills at a
minimum level. A benchmark interest rate
in Thailand cannot be developed unless the
liquidity is improved.
Structure of the Exchange
The structure of any derivatives exchange
may differ from country to country, but
some main characteristics would be the
 Derivatives in an Emerging Market: A Study ofTliailanii
same and are generally used by almost all
exchanges. They are discussed below.
Market Independence: In an exchange, only
futures or options or both futures and
options or in some cases, both derivatives
contracts and stocks are traded :
- From the cost perspective, the aggregate
market would reduce the resources
required to develop and operate the
market.
From the human resources perspective,
at present human resources in the
financial industry, specifically in
derivatives, are in short supply. A
single exchange may be adequate for the
derivative tradings in Thailand.
- Liquidity is the most important criterion
to operate a derivative exchange
efficiently. However, aggregate market
may dilute the demand and number of
trading transactions in each exchange.
As a result, number of transactions and
traders will not be adequate to achieve
market liquidity.
Trading System: The "open outcry trading
system" has been proven to be exceedingly
successful in promoting the market's
economic functions such as price discovery
and liquidity, transparency, etc., in the
developed markets. Open outcry relies on a
regulatory system where merchants agree to
certain trading rules and their trades are
guaranteed by the clearing organisation.
As many exchanges are now moving into
the international tradings, the electronic
trading system is out performing the open
outcry system. With the modern
telecommunication and computer
technology, electronic trading system
allows the markets to increase their trading
time to 24 hours per day and expand their
tradings to the international market.
Computer technology offers the
opportunity to store large volumes of
trading information as well as to improve
the ability to detect fraud. However, the
potential abuse in electronic trading cannot
be ruled out. This trading system is now
53
quickly amenable to the regulations. (Blank
efa/1991).
In the case of options trading, most
options exchanges in the world have market
makers to facilitate trading. This ensures
liquidity since buying and selling orders can
always be executed at some price without
any delays.
Regulatory Framework
There is a controversy whether Thailand
should have a single derivatives market
with both financial and commodity
derivative products or not.
The "bipolar" regulatory structure which
is used by many western countries has two
different agencies who are responsible for
regulation of commodity markets and
financial markets separately. Kilcollin and
Frankel (1993) highlighted that this
structure may provide the same tension and
uncertainty as commodity futures and
options. It is evident that the growth of the
western markets have been hampered by
uncertainty. The other rationales to support
a single derivatives market are :
According to the past experience, many
countries have suffered from the
regulatory measures such as
overlapping of rules and the
bureaucratic system in multi-derivative
markets (for example, Japan and the
USA)
Regulations are needed to be modified
when the current regulations are not
able to promote the efficiency of the
exchange. The dual regulatory agencies
system will create the extra cost as well
as the redundancy works.
Implementation
At present, it seems that the local financial
industry is developing at a faster rate than
the other industries (particularly the
manufacturing industry). As a result, the
gap of the growth between financial and
 Jaunui of Foreign Exchange and international Finance
other industries is becoming wider.
However, the development of derivatives
exchange is one of tine government efforts to
modernise and liberalise the country's
financial market. The effective handling of
financial market will in turn support the
country's manufacturing and trading
domain. Therefore it is clear that there
should be a balanced development between
financial and other industries to support the
country's economy in a meaningful way.
On the other hand, there is also a gap
between country's savings and investments.
It appears that the Government does not
encourage saving as it charges a tax of 15 per
cent on saving. Since the existing
saving/investment gap is large, the
Government has to rely on foreign capital
inflows to cover the huge public and private
investment needs. It was revealed that these
capital inflows are of short-term nature and
carry the pressure on the economy as there
is a risk of quick reversals. This may
increase the risk of volatility and hinder the
operation of derivatives market. Even
though derivatives are used to hedge the
risk, there is no way to eliminate them
completely.
V. Conclusions
The following recommendations are
made based on a study of the existing
derivatives markets in the developed
countries and our survey regarding the
potential for the development of a
derivatives exchange in Thailand.. They
may also be found relevant in the context of
other emerging markets in Asia:
- Regulators must play an effective role in
many areas (e.g., establish the standard
of the traders, promote transparency of
these markets, introduce measures such
as circuit breakers, higher margin
requirements, approval of new product
innovation, etc.). So far, no one knows
exactly the size of the derivative market
and number of existing derivative
54
products since there are always new
products being introduced to the market.
It may be impossible for the government
to make complete regulations to control
the derivative market. It is also
necessary to introduce regulations
to control the unscrupulous traders.
This is essential to build the
confidence of operators and derive the
desired objectives of the derivatives
market.
In addition to the regulations, the
professional ethics of the market players
and other parries should also be
developed. The factors such as the
understanding of different kinds of
derivatives, their operations, operation
of the market mechanism and the
recognition -of risks in utilising
derivatives will determine the efficiency
of the regularity.
Sound internal control system needs to
be introduced.. The internal control
system of derivative traders (especially
dealers) should be improved in order to
control or limit losses that may occur to
the firms. One good example of losses
resulted from the weak internal control
is the case of Barings pk. Among the
other currency-linked contracts the
baht/DM and baht/yen currency
contracts should be listed first in the
market.
A single exchange is more suitable to the
local conditions as the separate markets
cannot be justified on the ground of
efficiency at the initial stage of operations.
The futures and options exchange in
Thailand may operate with open outcry
trading system and the market maker
system can be utilised to ensrire the
market liquidity.
A single regulatory agency should be
preferred.
The organised exchange should be
introduced when the gaps between
growth of finance and other industries
and saving and investment have
reduced to a significant level.
Derivatives in an Emerging Market: A Study of Tltailand

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