Abstract
Despite their importance in hedging against risk and reducing price uncertainty, derivative markets remain undeveloped or absent in many African countries. This paper describes market depth using key trends observed in the Kenyan derivatives market for the first 30 weeks of trading using mixed methods. Market depth was measured by the number of open interests of 142 trading days (30 weeks. The market was described using trend analysis, tests of means, and thematic analysis. The results revealed a market highly dominated by one company's single stock futures (Safaricom Plc), whose overall trade was 68% of the 6179 open contracts. Further, the market has strong weekly swings fluctuating from no trade to a high of 326 and a weekly average of 206 contracts. The market segment of single stock futures is significantly deeper than that of equity index futures. The qualitative study attributed the results to limited knowledge on derivatives amongst investors, unclear market policies, few derivatives products, and skepticism associated with developing financial markets. The Nairobi Securities Exchange (NSE) is advised to intensify investor education, introduce market makers, add new derivatives products, and transform the Nairobi Securities Exchange Clearing House into a full Central Counterparty (CCP) structure to accelerate market depth. This will create a pathway to market depth through efficiency and reduction of operational risks.
Highlights
A derivative is an agreement of worth whose value depends on a product's price in the cash market (Gupta 2017)
The single stock futures listed in the included stocks of five companies, namely, Safaricom Plc (SCOM), Equity Bank Group, Kenya Commercial Bank Group (KCBG), East African Breweries Limited (EABL), and British American Tobacco Kenya (BATK)
The results imply that Kenya's derivatives market is still in its nascent stage, which agrees with the Black (1986) results that derivatives contracts are successful after completing more than 1000 contracts in their third year
Summary
A derivative is an agreement of worth whose value depends on a product's price in the cash market (Gupta 2017). These markets have substantially gained value and importance to become a strong pillar of the global financial system that enhances increased access to finance and financial deepening (LiPuma & Lee, 2004). Developed countries have benefited immensely from derivative markets through various inventions and innovations in the industry. In recent years, the derivatives market in South Africa has increased rapidly to support capital inflows and to support pricing, to unbundle and transfer risk market participants. At the micro-level, the South African market enabled farmers to discover prices of maize and efficient management of price risk (Mezui, Rutten, Sekioua, Diaye, Kabanyane, Arvanitis, 2013)
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