Taiwan `ripe' for advent of options trade

Business Asia, April 5, 1999 by Lawrence Chung

Taiwan's relative financial stability and big stock market make the island ripe for trading of options, a Chicago Board Options Exchange senior executive claims.

What remains to be done is to educate investors and brokers about the importance of options and their usefulness for risk management, CBOE executive vice-president Mr Richard DuFour said.

"Taiwan is ready for options trade in the near future because of its highly developed stock market and its start of futures trade on the stock index," Mr DuFour said.

Taiwan lifted restrictions on futures in 1998, finally allowing a futures market, but has yet to embrace options. Taiwan Securities and Futures Commission officials said allowing options trade was a part of the government's market liberalisation program, but it should be done on a step-by-step basis.

Mr DuFour said Taiwan had worked well to weather Asia's financial crisis, which he believed would be short-lived.

Despite the turmoil battering neighbouring nations, Taiwan managed to post 4.83 per cent gross domestic product growth in 1998, far below the 6.77 per cent rise of 1997 but admirable compared to the recession pounding much of Asia.

Recent statistics show global trading volume of options contracts reached US$3 trillion in 1998, not counting a much larger volume traded in over-the-counter options. Mr DuFour said he believed Taiwan sooner or later would open up to options and the instruments would succeed.

He said risk-management benefits of options would be particularly useful for Taiwan, since 90 per cent of Taiwan stock is held by mom-and-pop retail investors, not institutions, making the market particularly emotional and volatile.

He added his board was interested in promoting options exchanges in Asia, noting that a large chunk of its business was derived outside the United States.

"Twenty-five per cent of our trade come from overseas ... This is why we want to push for more active options exchanges in other countries," Mr DuFour said.