Derivatives in Nairobi: “Yoghurt is a derivative of milk”

Derivatives, if not monitored, may have a negative connotation for some investors, given their role in the last global financial crisis.

However, the NEXT products that the NSE launched are simple standardized contracts that are transparent, valued and settled daily, allowing investors to take their profits and close loss positions.

For the first time, investors can speculate on a share price dropping and take advantage of down market trends, not just the traditional buy low and sell high that has been the norm for shares.

Derivatives futures will help further integrate Kenya with international capital markets, becoming the second country in Africa, after South Africa to offer these products.

The launch of derivative products, dubbed NEXT, at the Nairobi Securities Exchange (NSE) in July 2019, opens up an interesting new series of products for investors.

One of the main goals of derivatives is to manage risk amid volatile market prices, and they are widely used across the world today. The combined value of derivatives is estimated to be $544 trillion, globally, which is six times larger than the total global GDP of $88 trillion. But derivatives, if not monitored, may have a negative connotation for some investors, given their role in the last global financial crisis, as we saw with off–the-book transactions bringing down banks and economies.

However, the NEXT products that the NSE launched are simple standardized contracts that are transparent, valued and settled daily, allowing investors to take their profits and close loss positions. The trades are done through licensed brokers, with investors getting daily statement updates. The derivatives products also come with a Settlement Guarantee Fund and an Investor Protection Fund.

COMPARE WELL

Investors can now buy single stock futures for shares of Safaricom, EABL, KCB, BAT and Equity. Or they can buy an Index Future that tracks the NSE25 Share Index. Shares of British America Tobacco trade at Sh515 each and those of East African Breweries are Sh203 today. These prices are out of reach for many retail investors, but for a smaller amount, they can trade on what the future prices of these shares will be next quartet. Trading fees are 0.17 percent for single stock futures and for index futures, they are 0.14 percent, and this compares well with the 2 percent for trading shares. To trade single stock futures worth Sh1 million could cost as little as Sh1,700.

For the first time, investors can speculate […]

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