ABSTRACT
The development of a derivative securities market in Ghana was studied with the focus on the requisite conditions which form a foundation upon which a successful derivatives market would thrive. The study addressed the availability of participants, the presence or absence of a legal regulatory framework and the possibility of developing a derivatives market. The importance of this study is to provide a platform for which business could unbundle and redistribute risk through hedging, allow for price discovery and increase the inflow of global resources into Ghana.
The researcher used SPSS 16.0 software for windows in analyzing the quantitative data on the level of awareness of derivative instruments, the possibility of developing a derivative market in Ghana, organizations currently involved in any form of derivative trading and number of derivative contracts traded. The qualitative data collated through interview was analyzed using content analysis. Themes and keywords from the interview were isolated and described. The study found that Ghana is ready for the development of a derivatives market but lacks the needed legal and regulatory framework for derivatives trading.
It is recommended that policy makers should pass the law allowing the development of a derivatives market. With effective investor education, Ghana could start gradually probably with the establishment of a commodity exchange since the economy is commodity based.
Table of Contents
DECLARATION………………………………………………………………………………. i
ACKNOWLEDGEMENT…………………………………………………………………….. ii
ABSTRACT…………………………………………………………………………………… iii
LIST OF TABLES…………………………………………………………………………… vi
CHAPTER 1………………………………………………………………………………….. 1
INTRODUCTION……………………………………………………………………………. 1
CHAPTER 2………………………………………………………………………………….. 7
LITERATURE REVIEW…………………………………………………………………….. 7
CHAPTER THREE…………………………………………………………………………. 26
RESEARCH METHODOLOGY…………………………………………………………… 26
INTRODUCTION……………………………………………………………………….. 26
CHAPTER 4………………………………………………………………………………… 31
ANALYSIS OF RESEARCH DATA AND RESULTS…………………………………… 31
Chapter 5………………………………………………………………………………….. 44
SUMMARY ANALYSIS, DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS 44
5.3 Recommendations……………………………………………………………….. 49
Bibliography……………………………………………………………………………….. 50
Appendix A………………………………………………………………………………… 53
Appendix B………………………………………………………………………………… 55
LIST OF TABLES
TABLE PAGE
Table 4.1…… CDI FREQUENCY TABLE…………………………………………………………. 38
Table 4.2…… NC FREQUENCY TABLE……………………………………………… 38
Table 4.3…… LAD FREQUENCY TABLE…………………………………………….. 38
Table 4.4…… PDD FREQUENCY TABLE……………………………………………………….. 39
Table 4.5…… WDD FREQUENCY TABLE…………………………………………… 39
Table 4.6…… OCDT FREQUENCY TABLE………………………………………………………. 39
CHAPTER 1 INTRODUCTION
Risk is as an inevitable and integral component of doing business. However, when the level of risk is too high, it can adversely affect the financial position of the firm. It is this need to manage risk that led to the genesis of the derivative market. The purpose of this research is to explore the possibility of developing a derivative securities market in the emerging economy of Ghana.
This chapter captures the background to the project, the research problem, and objectives of the study, research questions, data collection method and the outline of the dissertation.
1.1 Background to the Project
The world of finance in the last twenty five years has seen the inevitable emergence of derivative securities. The derivatives markets globally is very huge, this now amounts to tens of trillions of dollars in monetary terms. Despite the continuous growth of the derivative market globally and its commensurate liquidity, developing economies such as that of Ghana have not fully participated in the current trend. Although Ghana can boast of a fully fledged capital market the derivatives securities market segment is non- existent.
1.1.1 Overview of Derivative Securities Market and the Ghana Stock Exchange
A derivative can be defined as a financial instrument whose value depends on (or derives from) the values of other, more basic, underlying assets (Hull, 2006). This implies that the price of a derivative security is not arbitrary, but it is inextricably linked to the price of the underlying asset. A classification of derivatives is between commodity and financial derivatives. Futures or options on gold or cocoa are commodity derivatives while futures or options on the Ghanaian Cedi, stock market indices are financial derivatives. Derivatives can also be classified as the basic and complex derivatives. Basic derivatives are forwards/futures contract and options contracts. Other derivatives such as hybrids, swaps, swaptions, synthetic derivatives, exotic products are all classes of the complex derivatives (ibid, 4).
The Ghanaian Stock Exchange (GSE) which was incorporated in 1989 and started activities in 1990 has grown into an organized exchange with over 30 listed companies. The Ghanaian capital market can boast of a market capitalization of over Seventeen billion Ghana Cedis (approximately 13billion US Dollars) as at 22 March, 2010. Despite the volatility which is a characteristic of the global stock exchanges, the GSE has performed well. There has been an increase in the GSE index from 4,833.33 points in 2006 to 5814.71 points in 2010. This increase can be attributed to the fact that the fundamentals of the listed companies are very strong and they are doing well in their respective industries.
The economies of nations are dependent on the financial and real assets markets because of their ability to provide liquidity. With the increase of foreign companies coming into the country, there is the possibility of more companies being listed on the GSE. It is based on this conditions that developing a derivative securities market in Ghana would be important because a developed underlying securities market is one of the prerequisites for developing a derivative market. The focus of the Ghanaian Derivatives securities market will be more on its risk-management capabilities.
