Question

Since futures, options and swaps are complicated instruments, regulators should hasten slowly in approving these products on the financial market in Ghana. Critically discuss five factors that would contribute to a strong Derivatives market in Ghana.

Answer 1

With the increase in volatility of commodity prices there has been a raft of new risk management techniques developed. These include derivatives designed to risk managed the price exposure to commodities and in crop producing countries, their exposure to adverse weather. A developing, commodity driven economy like Ghana could benefit from these developments and by participating in derivatives markets.

For example : Malawi purchased drought insurance in the form of weather derivatives to protect their farming sector.

Derivatives Usage in Ghana

The table below summarises the derivative usage reported in Ghana by listed companies in their annual financial statements. Eight companies list the use of derivatives out of a population of 27 companies whose financial statements could be found

Please find the attachment

  Of the companies that listed the use of derivatives the value at year end in 2009 was not always available. Alternatively there would be reference to derivative usage in the notes to the financial statements but no corresponding line item in the balance sheet or income statement.

Of the eight companies one of the companies had a relatively high density of use by type. The company, EcoBank, had an Employee Stock Option Program, used Forwards Exchange Contracts, and interest rate and currency Swaps.

All of the derivatives listed with the exception of the ESOPs, were stated as being used for hedging purposes. The derivative usage was predominantly focussed on hedging currency risks. What is surprising is the low reported usage of commodity derivatives. Ghana is a major commodity producing nation rich in agriculture and in mining resources.

A study conducted by Alberta Market Solutions Limited (2003) on the key success factors in building a new derivative market found out that the pre-requisites for successful financial derivatives market development and growth include good governance in terms of the rule of law, good public sector management and fight against of corruption. It also includes

* Macroeconomic stability

* Financial market safety nets and competitive environment

* Robust legal framework

* Technology

* Institutional reforms

* Regulatory institutions

* Need for risk diversification

* Innovations in financial markets