The NSE launching Exchange Traded Derivatives is a big deal
As part of measures to enhance liquidity and participation on the Nigerian Stock Exchange (NSE), it has decided to introduce Exchange Traded Derivatives (ETDs) . First Vice President of the NSE, Abimbola Ogunbanjo, disclosed this at a training seminar held in Lagos recently.
Exchange traded derivatives are simply derivatives traded on the floor of a stock exchange. A derivative is simply a contract between two parties. The derivative’s value is dependent upon the underlying asset. Derivatives are used to diversify a portfolio, manage risk and take advantage of market movements.
Unlike regular derivatives, the exchange serves as a middle man in ETD transactions. This reduces the chances of a default, as the contracts will be formal and binding. The introduction of this asset has numerous positive benefits for the exchange and the economy as a whole. Multinational corporations that hitherto shied away from derivative transactions will now participate. Many of these companies made billions of Naira in FX losses due to failure to hedge foreign exchange obligations.
Introduction of ETDs will enhance liquidity on the stock exchange. Companies and individuals that had shied away from these transactions will trade them actively. The NSE, and stockbrokers will have enhanced income from ETF trading activities. International investors that had shied away from the market due to its shallow nature, will be active participants in the ETD market. ETD transactions tend to make use of leverage and occur in large volumes, so banks also benefit from ETD transactions. The underlying assets on which the derivative trades are based on will also have enhanced liquidity.