This research report was prepared by the Research Department of Old Mutual Securities Limited. Old Mutual Securities Limited is a securities trading company licensed by the Capital Markets Authority (Kenya) for the purpose of facilitating trade on the Nairobi Securities Exchange.

Here are our views on the news making headlines today for Kenya:
It now seems trading in derivatives - instruments that mitigate investment risks – could become a reality by the second half of the year in Nairobi and Kampala. ALTX Uganda, the country’s first derivatives exchange, is set for launch in May, promising investors shorter settlement times and access to global markets. The Nairobi Securities Exchange plans to have a derivative board in place by the end of June, giving impetus to the deepening of the capital markets being driven by regulators and the East Africa Stock Exchanges Association.

Our View: One of the key goals the NSE had set was to enhance the securities market and develop commodities and derivative markets for a deeper and a more liquid market. There is increased demand from institutions and funds that want to invest in Kenya but there is insufficient supply of appropriate products and responsive structures to satisfy this demand. The most pressing issue in the primary market for equities is inadequate supply. The derivatives markets are used to hedge against the price risk (risk of price of asset owned going in an unfavorable direction). It enables transfer of risk from those who are not willing to take it (hedgers) to those who are intentionally willing to assume it (speculators).Derivative have many advantages aside from hedging to include enable price discovery, completion of market efficiency however it needs increased regulation as a Large number of participants take positions in derivatives and take speculative positions. It is necessary to stop these activities and prevent people from getting bankrupt and to stop the chain of defaults...

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