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

This preview shows page 2 - 5 out of 27 pages.

2
Image of page 2
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
Image of page 3
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).
Image of page 4
Image of page 5

You've reached the end of your free preview.

Want to read all 27 pages?

  • Fall '17

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors