What requirements does an underlying have to fulfill so that an exchange issues a derivative?

Answer 1

There are four requirements;

1. It has to be possible to value the underlying using a robust and agreed process at least once a day (so that positions can be calculated and margin taken). If your underlying is 100 PRU shares then valuation is easy, if your underlying is some new Asian property index then valuation might be more difficult.

2. It has to be possible to deliver the contract when it expires. Delivery can be in physical or financial form (ie: for some energy contracts you get a garage full of WTI delivered, and for some you get paid for the oil instead).

3. There has to be a market in the underlying with enough liquidity to support a derivatives contract. Obvious really, if there are no traders then there's no point in launching a contract.

4. The underlying has to be approved by your local regulatory authority. There are very few rules about what is acceptable for a derivatives contract, regulatory agencies are mostly interested in making sure there is a detailed process in place to make sure trading is fair and transparent. In theory it would be possible to launch a derivative on almost all traded commodities, however illegal activities would not get approved. Cocaine futures anyone?

Answer 2

Try these links perhaps it will help you

http://www.lofinance.blogspot.com