In Africa South Africa is in the lead with other African countries arguing

In africa south africa is in the lead with other

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In Africa, South Africa is in the lead with other African countries arguing whether it is beneficial to have the derivatives market, putting into measures the costs involved in providing the necessary infrastructure and the regulatory framework. The growth of exchange- traded derivative instruments begun in the late 1980s. The South African Futures Exchange (SAFEX) was informally launched in 1987 and over the years evolved as a leading emerging market. It started trading on financial futures including options on futures- gold futures, the creation of the Agricultural Markets Division in 1995 led to the introduction of a range of agricultural futures contracts for commodities such as maize, wheat and sunflower seeds. Later options on agricultural products were launched in 1998. In 2001, JSE Securities Exchange, in South Africa, absorbed SAFEX to become Africa’s most active andimportant commodity exchange (MFA, 2008). Development of derivatives in Kenya is associated with the existence of the Kenya agricultural commodity exchange (KACE) which deals with agricultural products. KACE was established in 1997, as a forum for trade in spot and forward contracts for a range of commodities. KACE is a private sector firm launched in Kenya in 1997 to facilitate competitive and efficient trade in agricultural commodities, provide reliable and timely marketing information and intelligence, provide a transparent and competitive market price discovery mechanism and harness and apply information and communication technologies (ICTs) for facilitating trade and information access and use in Kenya and subsequently scale out to the East African Community (). Among the countries that Kenya is looking up to as a model in the setting up of an agricultural commodity derivatives market is South Africa (CTA. 2002). 1.1.1 Financial derivatives 4
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According to Brigham and Houston (2008), a financial derivative is a security whose monetary value is derived from the price of some other underlying assets. Financial derivatives such as forwards, futures, options and swaps allow corporations to protect themselves from unpredictable changes in exchange rates, interest rates and commodity prices, thereby reducing the degree of financial risk to which they are exposed. While financial corporations are the most significant participants in derivatives markets, non- financial corporations are also important. According to Mishkin and Eakins, (2012), Derivatives are securities or financial instruments whose value is derived from the value of another underlying asset. They are a class of assets that can be bought, sold, and traded like other financial instruments such as shares. The underlying assets or instruments on which derivatives can be based include commodities, equities, residential mortgages, commercial real estate, loans, bonds, interest rates, exchange rates, stock market indices, consumer price indices, and weather conditions (Lydenberg, 2007). There are many categories of derivatives. However, the main types in use are options, forward contracts and futures and credit derivatives which are based on loans. Others are
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