Derivative Securities and Its Impact on the Nigerian Stock Market

International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue IX, September 2020 | ISSN 2321–2705

Derivative Securities and Its Impact on the Nigerian Stock Market

Efanga, Udeme Okon¹, Hanson, Uwem Effiong², Ekanem, Boniface Christopher^3
1Department of Banking and Finance, Faculty of Management Sciences, University of Calabar, Nigeria
²Department of Banking and Finance, College of Management Science, Michael Okpara University of Agriculture, Umudike, Nigeria
³Department of Insurance and Risk Management, University of Uyo, Uyo, Nigeria

Abstract: This study was carried out to ascertain the impact of derivative securities on the Nigerian stock market between 2014 and 2019. Data employed for this study was elicited from Central Bank of Nigeria Statistical Bulletin of 2018 and Security and Exchange Commission statistical Bulletin of 2019. This study employed All Share Index and Market Capitalization as measure of productivity of the Nigerian stock market, while Foreign Exchange Derivative was employed as the regressor and Exchange Rate was employed as a controlled variable. This study employed Auto-Regressive Distributed Lag ARDL Model to analyze data. Inferential results pointed out that Foreign Exchange Derivative had positive impact on productivity of the Nigerian stock market within the period under review. The study recommended that monetary authorities in Nigeria should lay emphasis on the deepening of the Nigerian derivative market through the introduction and trading of derivative instruments such as swaps, options, futures and forwards amongst others as applicable in the financial systems of advanced countries. If this is done, the productivity of the Nigerian stock market would be greatly enhanced.

Keywords: Foreign Exchange Derivative, Nigerian Stock Market, All Share Index, Market Capitalization, Exchange Rate and ARDL Model.

I. INTRODUCTION

Background to the Study

Financial derivatives are financial securities used in hedging against risk and loss in the value of an underlying asset. Efanga, Umoh, Essien and Umoh, 2019 opined that derivatives are forms of risk management tools. Osuoha 2013 defined derivative as financial assets that gain their values from the value of other assets. The assets from which derivatives gain their values from are known as underlying assets. These underlying assets may be any financial securities, commodities, interest rate and exchange rate, amongst others. Some of the major types of derivatives include options, forwards, futures and swap. Others include caps, swaption, floors, collars and rights. In another study, Efanga et al. 2019 defined derivatives as financial assets that derive their worth from the performance of underlying assets. These underlying assets can be an asset index, exchange rate or interest rate.

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