Factors influencing development of financial derivatives markets: a survey of listed companies in Kenya

Ngugi Nahashon Njoroge¹, Njagi Gabriel Matumo^2* and Kimani E Maina³

¹JomoKenyatta University of Agriculture and Technology, P. o Box 58791 – 00200, Nairobi, Kenya.

^*2JomoKenyatta University of Agriculture and Technology, P. o Box 15-60400, Kenya.

³JomoKenyatta University of Agriculture and Technology,  P. o Box 20, Kalimoni-Juja, Kenya.

*Corresponding Author’s E-mail: gabrielmatumo@gmail.com

Accepted 09 May 2013

Abstract

The Kenyan economy is becoming more and more open with international trading constantly increasing and as a result Kenyan firms become more exposed to foreign exchange rate fluctuations. The relative price changes affect the firms’ competitive market position, leading to changes in cash flows and ultimately, in firms value. While it was observed that firms use a variety of instruments to manage financial risks, it was  not clear whether the full potential of these instruments is being realized since not all firms use derivatives and not all firms use all types and more important, whether they are used appropriately. The study found out that the use of financial derivatives instruments by quoted companies in Kenya is mainly influenced by legal and regulatory framework, market environment, operational efficiency and the role of financial market intermediaries. Hence the study concluded that there is need of building upon existing financial derivatives instruments so as to enhance efficiency and effectiveness in their use in Kenya as modern tools for financial risk management.

Keywords: Derivatives market, counterparty-risks, Systematic risks, Unsystematic risks, emerging markets, hedging