Market watchers weigh options on futures contracts

The combined market capitalisation is a paltry $20 billion in the EAC against South Africa’s Johannesburg Stock Exchange with equities capitalisation of $650 billion.

Under the GBOT proposal for currency derivatives, companies could sign contracts to buy foreign currency for future delivery at a certain price thereby hedging against feeling the full blow of adverse foreign exchange movements.

In South Africa, currency derivatives reached $11,000 in 2007 compared to $4,474 for interest-derived transactions.

Higher volatility

Apart from insurance against volatile capital flows and financial risks attendant to volatility of asset prices, IMF said derivatives could yield a more efficient allocation of capital and cross-border capital flows.

It would also create more opportunities for diversification of portfolios, facilitate risk transfer, price discovery, and more public information.

However, the study by Janet Adelegan Olatundun cautions that derivatives can achieve just the opposite — financial crisis, capital outflows, and higher volatility if not well regulated.