Photograph — Market Digest Nigeria

In a bid to facilitate in-depth capacity building program on the derivatives market, the Nigerian Stock Exchange (NSE) this week announced a collaboration with American investment banking giant, JP Morgan Chase.

On Wednesday, a team from JP Morgan visited the NSE and were honoured with a Closing Gong ceremony. The group was led by Leenart Sjoerd, the company’s Global Head of Corporate Bank & Head, CEEMEA Region.

The partnership with JP Morgan is expected to promote the development of derivatives, in line with the NSE’s commitment to developing a thriving derivatives market in Nigeria. This will be achieved via knowledge transfer, which will help bridge the knowledge gap on derivatives investments and trading strategies, the bourse said in a statement.

Generally belonging to the realm of advanced investing, derivatives are financial instruments whose value is reliant upon or derived from, an underlying asset or group of assets. The derivative itself is a contract between two or more parties, and it derives its price from fluctuations in the underlying financial asset (like a security) or set of assets (like an index).

Commonly used derivatives include futures contracts, forward contracts, options, swaps, and warrants. They are often used for commodities, such as oil, gasoline, or gold. Another asset class is currencies, often the United States (U.S.) dollar. There are derivatives based on stocks or bonds. Still, others use interest rates, such as the yield on the Treasury bills.

Originally, derivatives were used to ensure balanced exchange rates for goods traded internationally due to differing values of national currencies. But today, Investopedia notes that derivatives are based on a wide variety of transactions and have many more uses. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a region.

In 2015, the Nigerian Exchange began its derivatives project following a market-wide feasibility study concluded the previous year which pointed to prospects for product creation in the equity, debt, currency, energy and commodity markets.

Presently, derivatives are used in some African markets.  A 2018 study by Wilbert Chidaushe at Botho University in Botswana reveals that registered banks in Botswana and Zimbabwe rely so much on forwarding agreements to protect against financial risk.

Also, Credit Default Swaps (CDS), currency options and simple foreign exchange swaps were relatively used in Botswana by most commercial banks to hedge against risk. While in South Africa, a wide variety of simple and complex futures and options products are effectively applied on commodities and currencies to protect against financial losses.

According to the NSE, the introduction of derivatives will deepen the Nigerian market, enhance liquidity and help mitigate price, duration and other financial risks that may arise from sophisticated financial transactional activities.

JP Morgan Chase & Co. is a leading global financial services firm with operations worldwide. The company is one of the largest banking institutions and one of the oldest financial institutions in the United States, with a history dating back over 200 years.

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