You are here: About us / Newsletter / 2010 / No. 1/2010
Derivatives market – high level of activity in troubled times
In May, many derivatives traders gasped with disbelief as the volatility index shot through the roof. Greece’s debt crisis made many people think that we were on the edge of a new financial abyss, and the perceived level of risk encouraged people to look again at the slump of the 1930s to try and understand what might happen next. Concern over Greece spread to other countries in Europe, and as bad news followed bad news, the shockwaves spread throughout the world's stock markets.
International markets saw a major flight away from equities and into bonds. Investors saw bonds as a safer alternative, and in most cases, also as an investment with a better yield. The sharp drop in the level of activity in global equity markets also affected the equities-related derivatives market, which has suffered from shrinking volumes over an extended period.
In contrast to the situation elsewhere in the world, Oslo Børs has seen a sharp increase in derivatives turnover over recent months, and May proved to be the busiest month so far this year, with average daily activity of 74,056 contracts.
The volatility index (also known as the “fear index”) is one measure of the market's expectations of the scale of future price movements. The index jumped from a relatively normal level of 20% at the start of the spring to a sky-high level of around 40% (see the chart to the right). This led to greater interest in hedging against falling prices in the cash equities market, and turnover in derivatives increased.
The high level of derivatives activity also demonstrates that Oslo Børs member firms contributed to good liquidity and hence financial stability. The liquidity, transparency and availability of the derivatives markets throughout the financial crisis have demonstrated its important contribution as a financially stabilising market.
