The growing importance of LIFFE

at each other. Or else one thinks of the huge losses made by young bank

employees during the stock market crash of 1987.

Less than two decades ago, financial futures trading did not exist.

However, a period of rapid change in financial markets created a need

for markets in fixed income, treasury and equity-index derivative

products.

The collapse of the Bretton Woods Agreement in 1971, regulatory

restructuring worldwide, instantaneous communication and accelerated

international capital flows have produced unprecedented volatility in

inflation, interest rates, stock markets and currency relationships.

Inevitably, individual financial centres have become linked components

in an ever-changing, increasingly-integrated, global financial market.

With changing markets have come new opportunities and their associated

risks. As a consequence, increased demands and greater expectations have

been placed on institutions and individuals who have responsibility for

managing large sums of money under increasingly challenging conditions.

A future is a legally binding contract to deliver or take delivery, on

a specified date, a given quality and quantity of a commodity at an

agreed price. An option is an instrument that gives its holder the

right, but not the obligation, to buy or

sell a set number of something

at a fixed price, within a

pre-determined period of time. Traded options are available

on a wide range of products, literally from pork bellies to platinum.

While perceptions in the retail market may still be negative,

institutional investors, such as Scottish Widows, Robert Fleming and

Foreign & Colonial, are increasingly using futures and options as part

of their asset allocation investment strategy, following the removal of

tax barriers two years ago. By using futures, separate judgments can be

taken on the overall market, stocks and currencies.

The UK market for equity options remains underdeveloped when compared

to the United States and European options markets such as the

Netherlands. The London International Financial Futures and Options

Exchange (LIFFE) believes this is due to the structure of the market and

relative lack of involvement by UK investors.

The merger between London's two major financial and equity derivatives

markets, LIFFE and the London Traded Options Market (LTOM) in March last

year, has led to a number of structural changes to the market which

should have a positive effect in developing the market as a whole.

Indeed the volume of trading carried out on LIFFE is steadily increasing

with more than $100 billion worth of business done each day, making it

the third-largest exchange in the world.

Its position as a major international financial market reflects not

only the global diversity of products traded but the global composition

of its membership. UK members are in the majority at 34% of the total

with a further quarter

of membership in Continental Europe. The USA accounts for 19% of

membership with Japan just behind at 18%. Members include commercial

banks, investment banks, stockbrokers, securities houses and independent

traders.

LIFFE, which is regulated under the provisions of the 1986 Financial

Services Act, lists options on interest-rate futures and equities.

Equity products are the most suitable for private investors given that

they include 67 options on individual stocks, 66 of them related to

leading UK companies, such as Glaxo, ICI and Scottish Power, and one

dollar-denominated stock, Vaal Reefs. In addition, there are two

FTSE-100 index options and one FTSE-100 futures contract.

Traded options may be used in a number of different ways, including as

a form of insurance against a fall in the price of a share, as a way of

generating income from an existing shareholding, to reduce the cost of

stock purchase and for straightforward speculation.

There are two types of equity option -- calls and puts. Call options

give the holder the right to buy shares, put options the right to sell

shares. A single standard contract is equivalent to 1000 underlying

shares. An investor in equity options can deal only in whole contracts.

An equity option has a limited life-span which is determined by its

expiry date. Expiry dates are fixed at three-monthly intervals.

The performance of equity products is closely related to the health

and trading of the underlying cash market. A buoyant share market is

usually also good news for LIFFE as is volatility. Amid the market chaos

on infamous ''Black Wednesday'', when sterling was forced out of the ERM

last September, LIFFE traded a record daily volume of 886,110 futures

and options contracts.

The market has developed rapidly with growth in trading volume

averaging 50% per annum. Average daily volumes have risen from under

40,000 in 1986 to almost 160,000 in 1991 and are still growing.

LIFFE is keen to overcome the negative perception of investment in

futures and options in the wider community and indeed there is a role

for these instruments in the portfolio of small investors as a means of

achieving greater returns. As with all investment there is a risk.

However, the buying of traded options involves a limited-known risk with

the maximum loss limited to the price paid when entering into the

contract. Much of the business currently being done relates to

speculation but this requires prudence.

Investment should be done through an authorised broker with specialist

knowledge of how the market works and the necessary administrative and

systems back-up. LIFFE has compiled a list of around 40 brokers

nationwide intending to provide equity and index option broking services

to private clients. Allied Provincial, Bell Lawrie White and

Charterhouse Tilney in Edinburgh, and Cawood Smithey are among those

currently in talks with LIFFE.

For more general information on the workings of futures and options,

contact the LIFFE Publications Department at Cannon Bridge, London EC4R

3XX. Telephone 071 623 0444 or Fax 071 379 2733.