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Czech Republic: Prague Exchange Plans Derivatives Trading

Prague, 15 October 1997 (RFE/RL) -- The chairman of the Prague Stock Exchange says plans are underway to launch derivatives trading next year, and that other changes also are being considering in an attempt to attract new issuers and investors to the bourse.

Chairman Tomas Jezek told a press conference that preparations for derivatives trading should be ready by the middle of next year. The development would mark another key step for the Czech Republic in the transition to a market economy.

Millions of traders in the world's more mature capital markets buy and sell derivatives every day. A derivative is a kind of options contract that has a somewhat abstract value based on another security -- such as stocks, bonds or currencies. Derivatives can also be based on a financial benchmarks such as a key interest rate or a stock market index.

In the west, derivatives are now a common way to redistribute the risks of doing business. Farmers in the United States use derivatives when they sell crops on the futures markets before they've even finished planting. By locking in on a price, they protect themselves if grain prices fall later in the growing season.

In the same way, grain dealers, bakeries and other corporate customers often buy grain futures to hedge against the risk of rising crop prices.

But derivatives also have been associated with some recent financial disasters. Notably, they played a role in the bankruptcy of Orange County, Calif., and the demise of the British bank Barings. Still, they are widely regarded as something that is beneficial to a market economy.

In addition to derivatives trading, Jezek says the Prague Stock Exchange wants to establish a special panel to prevent secret, hostile takeovers on the bourse. The practice has become common on the Czech market. Jezek says the threat of hostile takeovers has raised the concerns of some potential issuers.

The proposed changes at the Prague bourse come amidst a relative trickle in new investments. Average daily trading levels during the past three months has been about two million dollars in Prague, compared to about $40 million on the Warsaw exchange in neighboring Poland.

Jezek said the Prague exchange also is preparing to start trading in foreign securities next year. He said several issuers from Russia and western Europe already have approached the exchange about a listing.

Foreign issuers would need to be publicly traded in their home country and fulfill the Prague bourse's listing requirements.

In addition, Jezek said there are plans to add another five to seven stocks to the exchange's continuous trading system. Currently 11 of the bourse's most-traded stocks are part of the continuous trading system.