Economy

FG Can Leverage Derivatives To Hedge Against Oil Price Volatility- FMDQ

The management of FMDQ Securities Exchange Limited says implementation of its derivatives market will take off soon, such that the Federal Government can leverage the products to hedge against crude oil price volatility.

An exchange traded derivative is a financial contract that is listed and traded on a regulated exchange. These instruments have over the years become increasingly popular given their advantages over over-the-counter (OTC) derivatives, such as standardization, liquidity, and elimination of default risk.

Addressing capital market correspondents during its Academy Derivatives Market Webinar series on Tuesday, Vice President, Market Architecture at the FMDQ, Jumoke Olaniyan, said derivatives are useful for hedging exposure, or speculating on a wide range of financial assets like commodities, equities, currencies, and even interest rates.

No wonder, she stressed, that the global market is now moving in the direction of derivatives, following which the gross market value of OTC derivatives which provides a measure of amounts at risk, rose from $11.6tr to $15.5tr in the first half of 2020, boosted by increases in interest rate derivatives.

Speaking on the theme: “Understanding Exchange Traded Derivatives Market,” Olaniyan said this is why the FMDQ began its own derivatives project about two and half years ago when its management saw the need to introduce derivatives into the capital market.

According to her, “the exchange derivatives space remains to be tapped by the government. We have a 91% focus on OTC derivatives, while it is 9% on exchange traded derivatives, and the globe is now shifting to this aspect due to the fact that it performed impeccably well during the global financial crisis.

“It is this form of exchange that is being implemented by the FMDQ in which we have been working on its implementation status which is now in Phase II.

“Once it is introduced and takes off, it would present an opportunity for our own government to leverage on traded derivatives and use it to hedge risks. In actual fact, the capital market needs derivatives to hedge against market volatilities,” Olaniyan said.

Also commenting, the Group Head, Derivatives Market Group, FMDQ, Oluwaseun Afolabi, noted that with the introduction of the derivatives market development project, there will be an increased participation by local and foreign investors and market liquidity.

“Derivatives are needed in the market as it will bring an increase in secondary market liquidity, efficient capital allocation and risk management, financial system stability, market transparency, market sophistication, human capital development and economic growth”, he said.

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