ABSTRACT

The trading with derivatives has developed over a long period of time though the greatest impact has been felt over the last three decades. Derivatives markets have changed overtime from trading with the simple contracts to very advanced and exotic instruments. Though Kenya has been lagging behind in the derivative markets development, a lot of ground work has been put in place for the trading with legislature in place and the CMA putting up a department to oversee the development. Lack of sufficient ways to access finance due to shallow markets and insure on fluctuations on various items makes it very important to understand why derivatives markets have not been developed. There are many economic benefits attributed to economies with derivatives markets and as well a lot of challenges having been identified in developing the markets. The research objectives and research questions were set out and the scope of study limited to Nairobi. Descriptive research design was used in the study. The population from which a census was drawn was from the Nairobi Securities Exchange brokers financial/investment advisors and key staff from the Capital Markets Authority of Kenya as a result of purposive non probability sampling technique. Both primary and secondary data were used. Data collected was validated, edited and coded then analyzed using Statistical Package for Social Sciences (SPSS) software. Descriptive statistics such as percentages and frequencies were used to summarize the data. Data presentation methods used are tables, charts and diagrams. From the research findings it was identified that government spending on financial infrastructure was inadequate for successful derivatives markets and that taxation hampers the progress of derivatives markets. Derivatives cannot diminish the ultimate control that the monetary policy has over the levels of inflation. On the other hand, high levels of foreign exchange reserves will greatly enhance derivatives trading and facilitates cross border capital flow. The regulatory measures put in place were adequate. It was noted that there will be the likelihood of scarce supply of derivatives instrument for hedging in the local market since the demand for derivatives is likely to be low. Derivatives trading will enhance market turnover of the underlying markets and will also improve the GDP of the country. The trading in the derivatives markets greatly influenced by local institutional and retail investors as well as by overseas institutional and retail investors. The success of the derivatives markets in Kenya will largely be influenced by political environment, knowledge of derivatives, participants‟ attitude, financial infrastructure and foreign competition. It was identified that the support received from the central government in the development of derivatives markets could be rated as fair while the awareness levels about derivatives instruments by investors rated as low. The main reason for trading on derivatives will be hedging. The derivatives markets will lead to increased transparency in the way of doing business through increased information disclosure. The study thus recommends that there is need for government to increase its intervention through increased spending on financial infrastructure, putting in place tax laws that will not discourage derivative trading. Also sensitization should be carried out to create awareness to the general public on role of derivatives trading.