THE CASE FOR A DERIVATIVE MARKET IN ZIMBABWE (PART II)
By: Edwin Potsiwa
This week`s article is a follow up on the previous article that proposed the need for a derivative market in Zimbabwe. Last week I highlighted the role of regulatory institutions in the facilitation and sustenance of a vibrant derivative market in Zimbabwe. Key issues indicated included the need for stringent regulation, the setting up of relevant statutory or regulatory instruments, fostering of general macro economic stability. This week’s article discusses the role of financial and business schools as well as that of industry in the development of the derivative market
Financial and Business Schools perspective
Our Universities should include a full module on derivatives in all business degrees. Leading Universities such as NUST and UZ inter alia, are already a step ahead in this direction. In fact there is now a considerable pool of graduates from which industry can tape from. There is need for continuous improvement in terms of the syllabus content and subject deepening. Such an envisaged module should cover in greater detail aspects of financial engineering and aspects of derivative regulation and also keep students abreast with global trends. It is equally important for the module to have an interface of theoretical models and the practical Zimbabwe situation, such as modifications of theoretical models and running these in test environments and compare to actual market price trends. It is not good enough for academia to concentrate on the old school models without helping students to cross the bridge and begin to practically use these instruments in the market.
There is need for concerted effort from bankers and financiers to give a serious look at the importance of derivatives as hedging instruments for themselves and more importantly for their clients. The year 2003 saw some of the upcoming and innovative banks opening derivative desks, which were sadly closed. Industry need to lobby regulators to put in place legislation to enable them to practice. Financial innovation needs practitioners who are always on the ball and bracing with change. Industry can also assist financial schools through financial support needed to buy computer infrastructure and software to facilitate in-depth study of derivatives at our local universities. Industry may also facilitate continuous career development of aspiring derivative practitioners through further training and workshops. I also propose for the establishment of a derivative society in Zimbabwe if all parties are agreed, that Zimbabwe needs a derivative market.
An active derivative desk is an equally important income stream if properly managed. The forward currency market has been active and been generating fee income for banks. The bank plays the intermediately function by being long with one counterparty and establish a simultaneous short position with another party. Customers typically faces opposing currency risk, for example an importer fears the risk of the exchange rate depreciating thus increasing the local currency price while the exporter`s risk profile is an exact opposite. Hence there is the need for the bank to establish an active forward market, for instance to facilitate the market to hedge their risks. Other products such as Forward rate Agreements can equally be pursued.
The Zimbabwe stock exchange can also facilitate in the establishment of a Futures market on currency, stocks and even commodities. A futures market for equities is a missing ingredient for fund (equity) managers who may need to hedge their portfolios or even to engage in aggressive active dynamic portfolio management strategies. The introduction of a derivative market can assist in the stabilisation of capital markets as well as stabilising company earnings through hedging. General equity price efficiency is also facilitated in a market where there are puts, calls, short selling and futures, and the like.
Until next week, think derivatives
This article is published for general investment advice and it must be noted that the price of
equities and the income derived from them can rise as well as fall. Neither First Mutual Limited nor the author shall be held liable for any losses as a result of the investment advice
contained in this article. It is important that specific investment advice is sought as each
investor’s investment will be dependent on their circumstances.
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