FG urged to protect oil price volatility with derivatives

Financial experts have urged the Federal Government to leverage opportunities in exchange-traded derivatives (ETD) to eliminate the risk associated with oil prices.
  
At an Academy Derivatives Market Webinar series themed, ‘Understanding ETD Market’ held in Lagos, on Tuesday, the Vice President, Market Architecture at the FMDQ, Jumoke Olaniyan, said the government could leverage derivatives to hedge against crude oil prices.
  
According to her, hedging oil price would enable the government to make payment at the initial price the product was locked in case of future volatility.
  
An ETD is a financial contract that is listed and traded on a regulated exchange and has become increasingly popular because of the advantages they have ahead of over-the-counter (OTC) derivatives, such as standardisation, liquidity and elimination of default risks.
 
Olaniyan disclosed that the execution of a derivative market development project on FMDQ Securities Exchange platform would take off shortly. 
  
According to her, the gross market value of OTC derivatives, which provides a measure of amounts at a risk, rose from $11.6 trillion to $15.5 trillion during the first half of 2020, triggering an increase in the interest rate of derivatives.
  
She said: “The exchange derivatives space remains to be tapped by the government. We have a 91 per cent focus on OTC derivatives while it is nine per cent on the part of the exchange-traded derivatives and the globe is now shifting to this aspect because it performed impeccably well during the global financial crisis.  
“It is this form of exchange that is being implemented by the FMDQ in which we have been working on its implementation status which is now in Phase II.
  
“Once it is introduced and takes off, it would present an opportunity for our government to leverage on traded derivatives and use it to hedge risks. The capital market needs derivatives to hedge against market volatilities”, Olaniyan said.
  
Olaniyan added that exchange-traded derivatives can be used to hedge exposure or speculate on a wide range of financial assets like commodities, equities, currencies, and even interest rates.
  
The Group Head, Derivatives Market Group, FMDQ, Oluwaseun Afolabi, noted that with the introduction of the derivatives market development project, there would be increased participation by local and foreign investors.