We got a teaser about the plans to bring derivates to Zimbabwean capital markets last year. You can read this article that explains the derivatives that exist in capital markets. Derivatives are contracts or agreements based on rights to underlying assets. The name derivatives should give you the idea that they derive their value from underlying assets. The Financial Securities Exchange (Finsec) has put in motion the rollout of the (re)introduction of derivatives to the Zimbabwean market.

Finsec has decided to start the road to the launch of the derivatives with a series of masterclasses all about derivatives. The classes will run for 8 weeks starting from Thursday 23 September with one class per week. To bring these masterclasses they have partnered with Harare Institute of Technology and the Investment Professionals Association of Zimbabwe. The masterclasses delivered over the live video are meant to give both an education on the theory of derivatives and the practicalities of the derivatives that will be introduced.

FUTURES

Futures or Futures contracts are commonly used for commodities but also apply in capital and equity markets. Examples of commodities traded in futures are crude oil, soya beans and pork bellies. Futures are contracts to perform meaning that the performance of the agreed future price is a must. In a futures contract, the buying party will usually pay a fee based on the amount of the contract. The contract will specify the asset and future price, so you can have a contract to buy shares of Innscor at a given price in 90 days.

OPTIONS

Are the most exciting of the derivative instruments because of just how versatile they can be. As illustrated in the benefit of speculation options are not obligations but rights to buy if you so choose to. Just to expand a little, options a split into call options (options to buy) and put options (options to sell), both at a specified price. So buyers and sellers can both use options to benefit. Options do also come at a fee paid by the option buyer to the option writer. They do also compensate for volatility. Interesting strategies can be entered into that combine call options and put options, one can enter into an option to buy something then write an option to sell the same thing and if things work out well benefit without having bought into the benchmark. A lot depends on the rules and regulations present in a particular exchange. Options are generally limited to a 12-month duration. There are long term options that have durations longer than 12 months known as Warrants.

Finsec seems quite excited about the prospect of derivatives and will focus on the introduction of futures and options. We have had derivatives in capital markets in the past in Zimbabwe but they were plagued with inefficiencies to the extent that we understand why Finsec would choose to start on a clean slate here. It will be interesting to learn more about the rollout and the practical implementation of derivatives in the market.