Derivatives • Derivatives Exchanges • Commodities

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Derivatives are financial instruments that derive their value from their underlying assets or instruments such as bonds, equities, commodities, currencies, interest rates, or stock indices. They are often bought or sold in an effort to manage risks or fluctuations in the value of the underlying asset or instrument, but they also serve as investments in their own right. Futures, options and swaps are the most common forms of derivatives.

Most African countries have no derivative markets, with the exception of South Africa and the North African economies of Morocco, Egypt and Tunisia, where the volume of derivative transactions is small but growing. Where derivative markets exist, they are largely in their infancy and mostly focused on foreign-exchange derivative contracts.

In South Africa, derivative products include forwards and futures, forward rate agreements, interest-rate swaps, basis swaps, options, equity derivatives, and commodity futures with exchange-based and over-the-counter trade. South Africa’s agricultural commodities futures markets sees active trade in maize, wheat, sunflower seeds and soya beans, thereby providing risk-management tools for regional  producers as well as pricing benchmarks.

Zambia and Malawi also have agricultural commodity exchanges, with the Zambian exchange trading mainly in wheat and maize but also in soya, fertilizer, cement, maize barn, cottonseed and kidney beans.

A commodities spot and derivatives exchange is being established in Botswana as a hub for pan-African trading. It is expected that the Botswana commodities exchange will catalyse performance in African commodity and financial markets through enhancing price discovery, market transparency and risk management.

Other agricultural commodity exchanges in Africa, including operations in Kenya, Nigeria, Ghana, Ivory Coast and Uganda, have struggled to take off or to achieve appropriate scale.

The role of derivatives in the current financial crisis has been widely discussed and to some extent their limited use in Africa has turned out to be a boon. Nonetheless, the role of derivative instruments is well-recognized as a means for companies to adequately manage their market risks, in Africa as in the rest of the world.