For the first time since April 2017, Naira Settled FX currency futures open interest surpassed the 4,000 contracts mark on May 28th, 2018, after a substantial volume of transactions took place on that date in anticipation of the usual price changes that accompany expiration. The latest futures to expire was NGUS MAY 30, 2018 which matured on May 30th.
Until recently, trading volume had reduced drastically in the FX futures market between April and October 2017, only to pick up slowly thereafter. However, since April 25th, 2018, the market has been witnessing increased activity and momentum which hit its peak on May 28th.
It will be recalled that the market hit its highest open interest ever on April 18th, 2017 with 4,187 contracts, since then, open interest has been hovering between 3,200 and 3,500 contracts. But on May 28th, currency futures open interest spiked to 4,169 contracts of one million dollars each, the third highest ever.
Understanding Open Interest
Open Interest is a measure of the total number of contracts that are still outstanding or in the hands of market participants at the end of each day. In most cases, open interest is used with reference to options futures or commodity trades. Open interest is not the same as volume.
Volume is a measure of the number of transactions that take place in a market on a particular day, but open interest measures the flow of money into the futures market. Open interest could act as a pointer or signal to where the futures market is headed.
Increase in open interest, often, points to a bull market especially if accompanied by substantial trading volume while a falling open interest is usually taken to indicate a bear market.
The Nigerian Currency Futures, a non-deliverable instrument, was introduced by the Central Bank of Nigeria in June 2016 as one of the policy instruments to stabilize the Naira. To a large extent, there is an agreement among experts that it has done just that.
The Naira has been relatively stable for some months now, thanks to various CBN interventions and the Naira settled currency futures market. The increase in open interest as noted in this article is an indication that the currency futures market is alive and well.
Currency Futures and Price Discovery
One of the functions of the futures market, everywhere, is that they help in price discovery. Price discovery is the process of establishing the value of an asset (in this case, the Naira/Dollar Exchange Rate) based on interactions between buyers and sellers.
It is not very clear if the currency futures market in Nigeria plays that role as the prices are determined by the CBN or FMDQ OTC Securities Exchange, but it is expected that the pricing decisions by the CBN or FMDQ are based on available information.
It has been the custom of the CBN/FMDQ to revise the prices of outstanding currency futures at each expiration or maturity date. And they do it very religiously and predictably. As expected, that was done on May 30, 2018th when NGUS MAY 30, 2018 matured/expired by increasing the prices of all the currency futures by N1.03 or 0.3%.
For example, the NGUS JUN 27 2018 that traded at N360.79/$ before May 30th, now trades at N361.82/$ while the NGUS APR 24 2019 which was trading at N362.29/$ is now worth N363.32/$. The implication of the upward revaluation of the futures prices is that the Naira is expected to weaken against the Dollar by about 0.3% over the next month.