Capital market ready for the launch of derivatives


Friday, Dec 10, 2021 / 2:23 p.m. / by NGX / Header image credit: NGX

All the ducks now appear to be in a row for the launch of Exchange Traded Derivatives (ETDs) in the Nigerian capital market. This follows the official launch of NG Clearing as a Central Counterparty Clearing House (CCP) in Nigeria on Thursday, December 9, 2021.

Speaking at the event, the CEO of Nigerian Exchange Limited (NGX), Mr. Temi Popoola, CFA, said: “I am delighted to attend the official launch of NG Clearing and have to congratulate his board of administration and its direction for this historic step. As a multi-asset exchange, NGX recognizes the importance of a well-developed derivatives market, and we have worked hard to put in place the appropriate regulatory and technological framework to support the launch of a standardized derivatives market traded in stock exchange (ETD). efforts will be further supported by NG Clearing, the best CCP and clearinghouse. These are indeed exciting times for the Nigerian capital market and I am excited about the prospect of deepening Africa’s position in the financial market global with the imminent launch of ETDs “.

NGX’s activities in establishing a vibrant derivatives market have also focused heavily on capacity building. Being the first line of contact for investors in the capital market, NGX reiterated that it is imperative that participants entering the derivatives industry have adequate knowledge of these instruments. As such, The Exchange has hosted workshops, webinars and conferences, the most recent of which was the 2021 Market Data Workshop on “How Market Data Fuels Investment Strategies Using of derivative products ”.

Taking inspiration from NGX, it might be important to lay the right foundation for explaining what derivatives are and some of the key elements needed to successfully trade this asset class. Derivatives are the most common financial instruments used to reduce or hedge risk, and are also meant to hedge downside risks when there is significant exposure in a long portfolio to stocks. Among the various financial instruments in common use, index derivatives have received a great deal of attention from researchers around the world.

Index derivatives exist for all asset classes and over time their use has increased exponentially for a variety of purposes. The main advantage of index derivatives is the ability to leverage by investing a small amount to gain exposure to a much larger investment. While index futures have a symmetrical impact on portfolio returns, index options can have an asymmetric impact. Having said that, both are valuable and profitable tools for a number of reasons for a portfolio manager.

For example, if an investor has shorted a large number of securities, a single index call option can be excellent protection against a reverse market movement. However, if an investor has a lot of cash that they want to use to buy stocks after further research, a quick and easy way to deploy the funds is to go long in an index futures contract. This provides the exposure that the investor is ultimately looking to gain, saves time for research, costs much less, and manages the price impact of large transactions in a short period of time. Small purchases over time reduce the effect on prices and will not create an impact on the market.

Likewise, when a large number of securities need to be sold, buying an index futures contract gives time to ease the sale over time and ease the pressure on prices. As cash positions build over time, the index futures contract maintains the overall exposure to safety until new investment decisions are made. This approach makes sense for both active and passive investors, where large transactions can be offset by the use of index futures or options purchased at low cost by an investor to avoid having changes in business. exposure having a significant impact on prices.

NGX reports have shown that when ETDs are introduced to the market, index futures will be rolled out in the first year, while other products will follow as the market evolves based on readiness and development. market demand. It should be recalled that NGX recently received the approval of seven derivative contracts from the SEC, including Access Bank Plc Stock Futures, Dangote Cement Plc Stock Futures, Guaranty Trust Bank Plc Stock Futures, MTN Nigeria Communications Plc Stock Futures, Zenith Bank Plc Stock Futures, NGX 30 Index Futures and NGX Pension Index Futures.

Ultimately, the derivatives market should complement existing spot markets and provide investors and other market participants with the necessary tools for tactical asset allocation, risk management and cost management for asset management. efficient portfolio. So it will be interesting to see how the market reacts once ETDs are introduced in the short term.

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