Nigerian Bank Nigeria Nigerian Stock Exchange – How To Sustain Investors Interest Through Derivatives

Source: Guardian, March, 2011

TRADING in derivatives on regulated Stock Exchanges worldwide rose to record level in nearly a decade in 2010, the World Federation of Exchanges (WFE), has said.

Also, the Managing Director, Nigerian Capital Market Institute- a subsidiary of the Securities and Exchange Commission (SEC), Dr Oluwatobi Oyefeso, has declared that derivatives can constitute a large part of investment portfolio.

He explained that it is important to note that the market conditions are hardly ideal for anyone, adding that there is need to give the investing public more choices of investment instruments or contracts.

Oyefeso said: “Capital protection and high participation in capital market activities can be encouraged with simple options”, adding that “not all investors will be interested in investing in a company’s shares, but may go for derivative stock options of such company. This explains the need to give the investing public more choices of investment instruments or contracts”.

According to WFE, more than 22.4 billion derivative contracts were traded on exchanges worldwide in 2010 (11.2 billion futures and 10.9 billion options) against 17.8 billion in 2009. The growth rate, it explained, is one of the highest observed since 2003.

“The increase in volume transacted on exchanges confirmed the trend noted in a study commissioned by the WFE and conducted by TABB Group, said WFE.

Chairman of WFE, Ronald Arculli, in a statement, said: “The strong volume in exchange-traded derivatives in 2010 indicated that reforms in regulation of over-the-counter derivatives markets are causing participants to shift some of their risk transfer activities to exchange-traded derivatives.”

Arculli, who is also the Chairman of Hong Kong Exchange, noted that according to Bank for International Settlements (BIS) statistics, notional amounts outstanding of Over –The-Counter Derivatives decreased by 13 per cent between June 2009 and June 2010.

Oyefeso said Derivatives, without doubt, give the opportunity to individuals and corporate entities to hedge (insure) against both the systemic and non-systemic risk.

Explaining further, Oyefeso said that “capital market investors may anticipate the possible market bearishness and the effect on their investments. Derivatives allow them to minimise the risk associating with such negative movements or/and bearishness in the financial markets.

“In view of the nascent nature of the Nigerian capital markets and the non-existent of derivatives in the market, it is rational that the markets should start with the simple derivatives options before graduating into more sophisticated variants of options.

“On the whole, the need for the adequate understanding of the mechanics of derivative options cannot be over-emphasised”.

Nigerian Bank Nigeria Nigerian Stock Exchange