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The Turkish option market

Kreuk, N.A.W. (2006) The Turkish option market.

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Abstract:The ISE-100 is the most important composite index to measure the performance of the Istanbul Stock Exchange -ISE-, the only stock market in Turkey. Since 2000 its situation obviously improved, compared to the enormous fluctuations mainly due to political instability since its start in 1986. In 2003, after an influential change in Turkish regulation, Başak Emeklilik received authorization to establish a pension fund and began offering private retirement plans. In February 2005 the first derivatives were traded at the recently founded TurkDEX. Initially futures on the ISE-100 were traded among a few other future contracts. Trading of option contracts will be introduced soon. In this light the main question for this report was raised. The question whether the Turkish option market could be a valuable investment vehicle for the pension funds of Başak Emeklilik. This main question led to an explanatory research as trading of option contracts in Turkey still has to be established. The exploration shows that the option market could be a valuable investment vehicle for pension funds. The main advantage of options could be a decrease in volatility of the pension funds, which will already be the focus in the near future. There are several conditions however. After the introduction of option trade it will take some years before the market will be deep enough. When the Turkish political situation destabilises that period can be a lot longer, since the markets are very sensitive for political turmoil. Since both options and private pension plans are very new products, regulation might change in the near future. Besides, whether options are suitable for the specific relation between assets and liabilities typical for pension funds can only be investigated after their introduction when there is real data. An exploratory research modeling virtual options on the ISE-100 for the period from January 2004 until June 2006 and evaluating the performance of portfolios combining those virtual options with the stock fund of Başak Emeklilik, showed an average improvement of the daily fluctuation of the fund of 29,3%. A maximum of 20% of the value of these portfolios is invested in options, because of regulation. The model contained several variables, of which two - the risk-free interest rate and the volatility of the underlying value of the options- were not directly observable and therefore had to be estimated. A sensitivity analysis shows that the conclusion that the volatility of the fund improves is robust for -slight- changes in the values of these estimates.
Item Type:Essay (Bachelor)
Clients:
Ba¿ak Emeklilik
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:54 computer science
Programme:Industrial Engineering and Management BSc (56994)
Link to this item:https://purl.utwente.nl/essays/57827
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