Here are our views on the news making headlines today for Kenya:
Derivatives trading at Nairobi bourse set to start by June. Trading of financial instruments that hedge against risk on the Nairobi Securities Exchange (NSE) is set to start by end of June, ushering in a new phase in the market that will allow investors to bet on the direction of the price movement of shares and bonds.
Our View: One of the key goals the NSE had set was to enhance the securities market and develop a 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 is 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.