This archive report was first published on 8 July 2019.
Historic Launch of Nairobi Security Exchange Next Derivatives Market ¶
On July 8, 2019, the Nairobi Security Exchange Next Derivatives Market is set for a historical launch, making the Nairobi bourse only the second in sub-Saharan Africa to trade in futures contracts.
A futures contract is an agreement made through an organised exchange to buy or to sell a fixed amount of a commodity or a financial asset on a future date at an agreed price.
Ordinary investors in the stock market, and especially businesses with divergent financial risks, should be excited about the prospects of this new product.
Exchange-traded products offer several benefits, including the possibility of financial loss being limited in comparison to OTC transactions, which are dogged by counterparty risk.
Traders have to deposit initial margin with the clearinghouse via their broker before they can take out a position, and all open positions are marked-to-market on a daily basis.
Exchange-traded products provide a matchless consistent level of credit support to traders, with the central clearance system ensuring that opposing positions taken by both sellers and buyers of the futures contracts are cash-backed.
Participants should be well advised to be aware of the initial and maintenance (variation) margin requirements of the trade.
From a transactional cost perspective, exchange-traded contracts are inexpensive and less time consuming to put in place than OTC contracts.
The most common use of exchange-traded products is hedging of risk, whereby investors use futures to protect or hedge against adverse movements in commodity prices, equity indices, interest rates and bond prices, among others.
