The NGX...

since mid-December last year from 0.5 percent to 0.75 percent as it fears that the scourge may peak at 8 percent.

In the United States, the inflation rate has hit 7.9 percent, the highest in 40 years. Consequently, America’s Federal Reserve is contending with options to tame the rising inflation. The Bank knows that it is obligatory for every central bank to inspire confidence in the economy by keeping inflation low. Godwin Emefiele is sweating under his sparetary kling suit as Nigeria’s Central Bank struggles to fight inflation among other macroeconomic vagaries that torment the economy. The apex bank has consistently retained the monetary policy rate, cash reserve ratio and liquidity ratio to sustain price stability and growth in an atmosphere of stagflation.

Rising energy prices following the ongoing war in Ukraine is a signal to the global community that imported inflation is waxing stronger. Shareholders are vulnerable to making flawed assumptions of inflation and monand fiscal policy. This may jeopardise their investment decision. At this juncture, commencement of NGX ETD could not have come at a better time. Shareholders need comprehensive and sustained enlightenment on how derivatives work. They should be exposed to the risks and reward trade off of these hedging instruments. At this point in time investors require a knowledge of Inflation Derivatives. This type of derivative provides opportunities for investors to minimise potential risks of rising inflation. By investing in inflation derivatives, an investor can speculate future trends of inflation as a risk aversion measure.

According to Investopedia, the most common form of inflation derivative is an inflation swap. This allows an investor to secure an inflation-protected return relative to an index, such as the Consumer Price Index (CPI). There is a Zero-Coupon Inflation Swaps which gives an investor an option of trading the instrument over-the-counter before maturity. While inflation can erode a portfolio’s real value, inflation derivatives are a hedge against the risk. Inflation derivatives can be deployed for a wide range of products and they are more cost effective. Individuals can participate in the price movement of an underlying asset through inflation derivatives.

However, opinions of shareholders differ on the launch of NGX ETDs. They all agreed that derivatives trading is necessary. But while many hailed the launch as one of the best initiatives in the market in recent time, some believe that a lot more should be done to encourage retail investors to take advantage of the derivatives market to manage share diminution.

“The brokerage firm community is not ripe for ETD. They are currently struggling with native equity market, let alone the derivative market. More training is required for them. Derivative market is prone to heavy risk and our brokerage firms, who are supposed to advise us, lack the financial muscles for managing such risk. They should create more products through ETFs first, which have lesser challenges than ETD,” said a concerned shareholder.