2 The CME and the CBOE responded to the needs of portfolio managers by

2 the cme and the cboe responded to the needs of

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The CME and the CBOE responded to the needs of portfolio managers by introducing futures contracts on equity indices in the early 1980s. The increasing globalization of commerce is exposing firms to various financial risks, unrelated to their lines of business. Some of these risks are firm or situation specific with no ready-made exchange traded instruments to offset such risks. The management of these risks has created a new line of financial derivatives, the over-the-counter (OTC) derivatives. These derivatives are privately negotiated arrangements between parties that permit either one or all parties to obtain their desired financial flows. The OTC derivatives have grown faster than the exchange-traded contracts in the recent years (Remolona, 1993). Dodd (2002) stated that, a complete view of capital markets is made up of four securities markets that include: real estate investment trusts (REITS), banking industry, insurance and pension funds and the derivatives markets. Derivative markets are investment markets that are geared towards the buying and selling of derivatives mainly for risk management and price discovery. Derivatives markets are divided into two; over the counter (OTC) and the exchange markets. Exchange-traded and OTC derivative contracts offer several benefits, the exchange traded contracts have rigid structures compared to the OTC. The exchange-traded derivatives market operates through a central exchange and with standardized contracts. OTC derivatives are private contracts between two parties, typically either between the proprietary trading desks of two banks, or between a bank and one of its customers and these contracts are heterogeneous (González-Hermosillo, 1994). Derivative market helps in the management of financial risk exposure to hedge a variety of risks. Essentially, such markets could contribute to a more efficient allocation of capital and cross-border capital flow, create more opportunities for diversification of portfolios, facilitate risk transfer, price discovery, and more public information (Tsetsekos and Varangis, 1997). Derivative products can also be used to reduce the firms’ financial cost. It is also possible to reduce financing costs by using interest-rate swaps and options to transform callable, put table, floating, and nonconventional debt to other forms of debt In addition, businesses could use derivatives to take advantage of low interest rates to lock in the financing costs of a future debt issue (Goodman, 1993). 3
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The first derivative trade in Africa is linked to Alexandria’s futures market in Egypt which is regarded one of the oldest in the world. The first documented cotton transaction took place in 1865 in Alexandria Café where the cotton merchants met and made deals on supply and demand basis. In 1899, Alexandria Cotton Exchange was created and in 1909, cotton forward contracts were legalized. Initiatives about the re-introduction of the exchange are revived from time to time (MFA, 2008).
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