It has been brewing for some time and it is finally here. The Financial Securities Exchange (FINSEC) will launch derivatives markets on the 22nd of June 2022. There’s a lot to be excited about with this development as it is expected to add a lot of colour to the financial markets in Zimbabwe. Finsec’s derivative markets will launch with Options and Futures contracts only. There’s a lot to unpack here so let’s get into it.
Derivatives
Derivatives are instruments which, as the name suggests, derive their value from an underlying item. In English, derivatives are contracts or agreements that base their value on another item. For example, the right to buy something at a later date for a certain price of the right of first refusal when something goes up for sale are both derivatives of the item on sale. There’s a broader discussion on derivatives which you can read in this article on derivatives. For our purposes, you need only focus on the discussion on options and futures as these derivatives will be offered through Finsec from 22 June.
Options
Options are contracts that give the buyer of the contract the right but not the obligation to buy (call option) or sell (put option) an underlying asset within a given timeframe. They are used to taking advantage of expected price movements in more volatile items. Finsec will introduce European options which means the decision to execute or let the option lapse is only taken on the maturity date of the contract, there is no early exercising of the options. They expect to have options available on a wide range of things, including items on the Zimbabwe Mercantile Exchange soon but will start with Equity options. For options, the writer will have to prove they hold the underlying asset to the exchange.
Futures
Futures contracts are as the name suggests contracts for future purchases. Items like crude oil for example are traded based on a 90-day future, contracts and prices agreed today are for delivery 90 days later. Again we can see the appeal here of locking in a price for the future on an item of interest. Futures contracts will be available on Finsec derivative market. A highlight was the announcement of index futures which offers investors another great way to make money on the markets. This means you can agree on a future purchase price for units in a given index.
Ctrade in on the party
The derivatives market will cater to both traditional access through brokers and digital direct access through Ctrade which is good news in terms of inclusion in the derivatives market. We were given a demonstration by Finsec of how the Ctrade platform will cater for the digital trading of derivatives and it looks very competent. Once it is made the life we will test it out and give our feedback. If it launches successfully it will mark the first new development to launch simultaneously on traditional and digital platforms in quite some time.
The devil is in the details
There is a lot to explain when it comes to options and futures pricing and we feel it is wiser to delve into this with hands-on experience as theoretically there is a lot to tell and we believe showing will serve much better. Matters such as contract tenures, pricing, margin (payment) and settlement will be explored in follow-up articles once the exchange goes live.
The more options people have in capital markets the better the markets serve all participants so there is palpable excitement around this development for Zimbabwean capital markets.
Good article on some interesting investment option. Would like to read more on the derivatives as I am yet to understand the implications of say, obligation-free aspects, what if the promises to buy being unfulfilled become regular, won’t that disadvantage the options seller or destabilise the market. I am expecting some one to buy, then just because they don’t feel obligated to, they pass!!!
A layman’s lazy thoughts
Thank you for the comment. Not to worry, we’ve got your back on the derivatives front. The plan is to go in-depth but also practical with the options and futures so look out for articles a few weeks to a month after they go live.
An option is not a promise, so the option writer (seller) is aware and pricing is based on holding the right but not an obligation. Its all part of the game. Futures are agreements to pay in future but can be bought out. In both cases there are amounts you pay upfront called margins. It will make more sense when we are looking at it practically.