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How derivatives will change value of stocks

By Otiato Guguyu | July 12th 2019 at 12:00:00 GMT +0300

An employee makes notes in front of an electronic stock information screen inside the Nairobi Securities Exchange Ltd (NSE) in Nairobi. [Courtesy]

Investors betting on stock prices will now have the chance to shape the price of securities by predicting what they expect it to rise to be on a future date.

This follows the launch of the derivatives market yesterday. The Nairobi Securities Exchange (NSE) has also set aside Sh130 million in a settlement guarantee fund if a player defaults.

NSE Derivatives Market Director Terrence Adembesa said additional measures that have been put in place to boost the trade include having the trading pre-funded, where you have to put in money first before you are allowed to play.

The settlement between positions will also be done on a daily basis, unlike before when the contract had to mature first.

“If you want to buy a stock, you have to pay the entire value of that stock but if you are buying a derivative e-contract, you only have to pay a fraction of  the initial margin, it is a good faith deposit for the duration of that contract,” Mr Terrence Adembesa the Derivatives Market Director said yesterday.

The speculative market allows depositing of 10 per cent of the value of a stock to be able to bet on the price movement. For shares trading below Sh100, you get 1000 shares for a single contract while for those trading above Sh100 you will get 100 shares. Besides the initial margin of 10 per cent of the value of the contract, and an additional margin set at 10 per cent of the initial margin plus a 0.17 per cent trading fee, the cash is refunded when the trade closes minus the fee.

There are 17 open contracts betting on price movements of bank stock with KCB Group which is buying National Bank of Kenya having 12 contracts while East African Breweries Ltd and Safaricom have one contract each.

The exchange-traded derivatives will increase market transparency and give a product the optimum value. This will allow anyone to participate in the hedge. The regulator has approved eight brokers, and investment bankers to set up derivative funds in preparation for the market. 

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