The CMA’s Move to establish a futures market will be a great boost to the endorsement of Nairobi as a regional Financial hub.Despite having the most developed financial market in the region Kenya still lags behind Uganda and Ethiopia which have more developed commodities exchanges. The Uganda Commodities Exchange was formed in 1998 . Futures Exchange offer farmers stable commodity prices and a ready market for their produce, hence boosting Commercial agriculture. Ethiopia commodity Exchange lists Coffee, Sesame, Maize and white pea beans among others.
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of contracts fall into the category of derivatives. Such instruments are priced according to the movement of the underlying asset (stock, physical commodity, index, etc.) So a futures contract whether for commodities, currencies or even based on the movement of a stock or index, is simply a financial derivative based on the underlying assets value.
Futures Market offer farmers stable commodity prices and a ready market for their produce as has been proved by Ethiopian and Ugandan Commodities Exchanges which have resulted in improved Output in these Countries specially Ethiopia.
Volume in the futures market usually increases when the stock market outlook is uncertain. Using futures is a common way of hedging your bets or indeed securing a given asset at today’s price for an agreed delivery date.
How it works
For example, a Wheat Farmer may require some investment in new machinery for next years harvest. He could enter into a futures contract by selling a few tonnes of Wheat yet to be harvested at an agreed price; he would receive the money and fix the price for the future date in which the wheat must be delivered. The other side of this trade might be a wheat flour manufacturer, say Unga Group. The manufacturer sees that wheat prices are rising rapidly and decides that this will negatively affect his profit margins, so he enters into the agreement for delivery of the wheat in 2 years time at today’s price, Unga Group has locked future delivery of wheat at today’s price!.
This enables the wheat flour company to hedge the risk of rising prices, but also enable the farmer to invest in the machinery to deliver the product. This is an example of a commodity Futures contract that will benefit Tea, Farmers, Coffee Farmers, Sugar Cane Farmers and other agricultural products like Rice that are produced in bulk are most likely to benefit from this market.
Currency futures, Forward Contracts and Options are among the most advanced Financial engineering products that are not common in African financial markets setting.