This archive report was first published on 13 November 2019.
On November 13, 2019, the Nairobi Securities Exchange (NSE) NEXT derivatives exchange launched single-stock and index futures, a risk-management tool for institutional investors.
However, the market has been slow to take off, with only 63 outstanding derivatives contracts in the debut quarter ending September.
The Safaricom single-stock future dominated trade, accounting for 71 percent of contracts traded during the quarter, with a total of 349 contracts traded.
The gross notional exposure (GNE) – the total value a security theoretically controls – traded amounted to Sh12.75 million, according to the latest Capital Markets Authority (CMA) soundness report.
Single-stock futures allow institutional investors to hedge positions on particular securities, giving sophisticated traders a better way to target the market.
Each contract comprises 1,000 shares of the underlying security, and investors must put up at least 10 percent of the value.
For example, if Equity Group is trading at Sh50 a share, one needs to put up 20 percent or Sh10,100 to control 1,000 shares of Equity.
Investors can settle the contract before the last trading day of the delivery month, or they can wait until delivery on the third Thursday of the contract month.
Experts say that part of the initial slow start may be due to the fact that they're new securities and people need to become more familiar with them.
Two strategies can juice up this new market: the 'matched pairs' strategy, which seeks to match pairs of highly correlated stocks, and the custom strategy, which allows investors to customise their exposure to a market index.
Overall, the new market shows a lot of promise and presents a new way to transfer risk. Investors should warm to the idea.
