Derivatives and Listed companies

In addition to the traditional equity-style products, ASX also operates markets in the following derivative-style products:

Exchange-traded options (ETOs)

ETOs are either the right to buy an asset (call option) or the right to sell an asset (put option) for an agreed price on or before a specified future date.

Warrants

Warrants are structured financial products, generally issued by investment banks, and individually structured to meet varying investor needs.

Company options - company options are issued by many ASX-listed companies for a number of reasons, including to raise capital, or as part of a director or executive’s incentive arrangements.

Futures

Futures are legally binding contracts to buy or sell a particular asset (or cash equivalent) on a specified future date.

Trading in derivatives has increased significantly in recent years. ETO market volumes have increased over 20% per annum for the past four years, with an average of 90,000 ETO contracts now traded on ASX each day. Turnover value of warrants has increased over 50% for each of the past two years, with average turnover now more than $650 million a month.

The significant growth in the role played by derivatives in the Australian equities market has prompted discussion of the effect of derivatives on the underlying securities. Specifically, is it beneficial for a stock to have ETOs or warrants listed over its securities?

Studies in both Australia and the US have looked at the impact of derivatives on trading in the underlying securities. The conclusions reached by the academic studies support the generally held market view that listed companies on the whole benefit from the trading in derivatives offered over their securities.

Specifically, listed derivatives can:

In addition to these direct benefits, a company’s shareholders can also benefit from using a variety of derivative strategies that may enable them to enhance the performance of their existing investment in the company.

Listed companies should also be aware of the potential impact of corporate actions and the payment of dividends on the value of derivatives listed over their shares. For information, go to Derivatives, Corporate Actions and Dividends.

For a detailed discussion of the impact of derivatives on trading in the underlying securities of a company, download the paper Derivatives and Your Company (PDF 176KB).