Forward market - forward market - consists in concluding transactions where the purchase price is determined in advance and the delivery and payment of the contracted goods takes place at a fixed date and place in the future.
The history of the forward market in Poland
The first forward transactions in Poland were initiated in 1992 by Polski Bank Rozwoju SA, and included forward currency contracts, interest rate options, and options for the broad market index of the WIG Warsaw Stock Exchange. However, the above instruments were quickly withdrawn due to quite high prices, as well as pressure from the then stock exchange regulator - the Securities Commission.
The stagnation persisted for several years and in 1995 the Securities Commission was not interested in the introduction of derivative rights on the regulated market, and by analogy - a similar position was represented by the Warsaw Stock Exchange.
It was only in 1996 that the regulator's and the stock market's look began to change, and as a result the issue of derivatives was included in the draft law on public trading in securities. However, the regulator significantly limited the scope of generic and material derivative rights and the order of the Chairman of the Securities Commission focused only on two types: futures and options. Additionally, the scope of the underlying instruments for securities subject to the procedure of admission to public trading was limited. At the same time, the group of institutions authorized to create instruments was limited to the WSE and the company organizing the public, regulated over-the-counter market.
The Commission's position also limited the scope of entities that could act as a clearing house, and in practice - on the public market - only the National Depository for Securities could fulfill this function. As a result, the first transactions on futures contracts on the regulated market (WSE) were conducted on January 16, 1998, when a new market segment was launched. Interestingly, the first underlying instrument was not a security, and the WIG20 stock market index.
The immediate accelerator of the initiation of the regulated derivative rights market in Poland has become the fact that foreign enterprises have filled the gap outside the country. Trading in derivatives (futures and options contracts) based on shares of Polish companies was initiated in Vienna at the Austrian Stock and Futures Exchange (OTOB), as well as in the offer of some foreign banks (e.g. Creditanstalt, ING) warrants for Polish shares appeared. A little earlier, in June 1995, commodity options appeared on the trading floor of Giełda Poznańska SA for the first time in the post-war history of the country. The first issue - carried out by the Agricultural Market Agency - was based on the price of pork half-carcasses. Then, in May 1997, options for consumption wheat were issued, and the exhibitor was a private producer. At the same time - in February 1996 - currency options [bank issuer of instruments] appeared on the initiative of ING Bank SA against the most important currencies in economic defense: CHF, DEM, FRF, GBP and USD.
In August of the same year Polish Investment Bank SA offered to sell options issued by itself and by other clients [purchase and sale options for USD and DEM]. Over time, other banks joined the group of derivatives' issuers, however, due to the underdeveloped capital market, such activities were of limited character.
Classification of derivatives
- The criterion of standardization and the manner of trading:
- The settlement criterion:
Real transactions settled by delivery of the underlying instrument,
Unreal transactions cleared without delivery of the underlying instrument.
- Criterion of the underlying instrument:
Derivatives based on ownership instruments.
- Criterion for the nature of commitments:
Forward transactions are a group of financial contracts that overlap with one of the categories of derivatives.
This category includes:
- Standardized forward contracts traded on organized trading systems (futures),
- Forward contracts not listed in trading systems and not subject to standardization (forwards),
- Contracts for exchange differences (contracts for difference - CFD) listed in organized trading systems,
- Forward contracts for forward rate agreements (FRA)
On the forward market, only standard commodities such as cereals, non-ferrous metals and fuels are traded. It's about good, in which different portions, or commodities, are very similar to each other. These markets have developed particularly well for currencies and securities. Individual units of goods are then identical and easy to clearly define.
Purpose and use of derivatives
There is a huge variety of derivative instruments (futures) on the financial and commodity markets. They are a convenient tool to protect against the risk of changes in interest rates and exchange rates, as well as against the issuer's insolvency. If entities use these instruments as protection of their transactions in the real sphere, they affect the risk reduction in the economy and are conducive to reducing transaction costs. However, in the last twenty years they have been the subject of mass speculative transactions on world markets, on a huge scale which caused an increase in risk.
- Frankel, J., & Poonawala, J. (2010). The forward market in emerging currencies: Less biased than in major currencies. Journal of International Money and Finance, 29(3), 585-598.
- Elliott, G., & Ito, T. (1999). Heterogeneous expectations and tests of efficiency in the yen/dollar forward exchange rate market. Journal of Monetary Economics, 43(2), 435-456.
- Kiesel, R., Schindlmayr, G., & Börger, R. H. (2009). A two-factor model for the electricity forward market. Quantitative Finance, 9(3), 279-287.