Possibility to use derivatives in Mongolia

Abstract

Since the first organized exchange in derivatives market was established, derivatives have

been capturing huge attention as a tool to transfer and hedge risks. As long as current global

derivatives market has already become a gigantic one, emerging countries also made big

movements in their financial markets to develop derivatives trading during last decades.

Among the emerging markets, Mongolia is one of the countries where an organized

derivatives trading is not evolved. Currently only commercial banks use currency forward,

options and swaps as financial derivatives in Mongolia. This paper tried to extract possible

ways for Mongolian investors and speculators to use derivatives to hedge risk and make profit

by speculating in domestic financial market. First part of study, risk hedging, answers the

question why Mongolia needs derivatives and second part, market speculation, gives answer

to what if derivatives are used in Mongolia. Our main finding includes the result that

Mongolian stock and commodity markets have high fluctuation, which encourages usage of

derivatives and in market speculation, option trading strategy overcomes a regular portfolio

holding strategy by its feature of huge profitability and insurance for unwanted price

movement.