Journal of Financial Risk Management
2013. Vol.2, No.4, 61-66
Published Online December 2013 in SciRes (http://www.scirp.org/journal/jfrm) http://dx.doi.org/10.4236/jfrm.2013.24010
Open Access
Financial Engineering, Corporate Goverance and Nigeria
Economic Development
John Ifeanyichukwu Osuoha
Department of Accounting and Finance, Faculty of Business and Law, Leeds Metropolitan University,
Leeds, UK
Received July 23rd, 2013; revised Au gust 23rd, 2013; accepted September 1st, 2013
Copyright © 2013 John Ifeanyichukwu Osuoha. This is an open access article distributed under the Creative
Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium,
provided the original work is properly cited.
The study shows that the present Nigeria financial system is incomplete and lacking in hedging mecha-
nism. The Nigeria financial system has only organized Money Market and Capital Market. Although
these markets have proved useful in mobilizing resources for firms and governments for development and
growth of the economy but they are very vulnerable and not fully developed as expected because of the
absence of an organized derivatives market. Derivatives markets suppose to provide an impetus and en-
couragement for more investors (both local and foreign) to patronize the money and capital markets
knowing the risk of their investments can be managed. Also Nigeria abundant oil and gas resources are
lacking in hedging mechanism to manage the volatility of oil and gas prices in the international market
which directly affect the wealth and economic development of Nigeria. Therefore, Nigeria government
and corporate leaders should fast tract the establishment of derivatives exchange in Nigeria where futures
and options on Nigeria Mineral resources, agricultural produce and other basic instruments can be traded.
This will attract more foreign investments in the Nigeria financial markets thus boosting liquidity of the
market, increasing market depth and enhancing economic growth.
Keywords: Financial Engineering; Derivatives; Corporate Governance; Regulation;
Economic Development
Introduction
Financial engineering is the use of financial Instruments to
restructure an existing financial profile into one having more
desirable properties (Galits, 1995). Financial engineering com-
bines a rigorous study of computative mathematics with eco-
nomics and quantitative finance. Financial engineers are the
specialists who deal with the quantitative aspect of the deriva-
tives market. Financial engineering is a useful tool for eco-
nomic planning and in effect a tool for economic transforma-
tion. Financial engineering is usually employed in valuation of
securities, and management of risks, financial management,
Insurance, taxation, derivative accounting, commodity trading
and other financial decision applications. Financial engineering
can be applied by individual firms in an economy. It can also be
used by local, state and federal Governments in their economic
planning, foreign reserve management, and commodity export
risk management and a number of other applications. Financial
engineering combines or carves up existing financial assets to
create new financial products (Harvey, 2005).
Financial engineering is also intended to split risk and return
components of financial products/instruments and offering the
combination which is best suited to Investor’s risk-return pro-
file (Shah & Serinivasan, 2010). Financial engineering may
provide the expertise to handle the regulatory reforms during
the financial crises of 2007/2008 (Lo, 2009). According to Cole
et al. (2009), financial engineering provides potential in reduc-
ing consumption fluctuations and lower adoption of risk man-
agement technology during selected seasons.
Shah and Serimivasan (2010) views financial engineering as
an engineering discipline which deals with the creation of new
and improved financial products through innovative design or
repackaging of existing financial instruments. They consider
financial engineering as pervasive spanning across design of
innovative financial instruments, financing merger and acquisi-
tion deals, corporate restructuring, derivative trading strategies
to mention but a few. Financial engineering and its innovative
products have played an important role in expanding sources of
finance and meeting Investors and Issuers requirements. How-
ever, the field of financial engineering needs much more de-
velopment to ensure wider choice of investment products for
investors and wider choice of financing for firms and govern-
ments. Financial engineering and derivatives usage produce
efficiency in capital market, stock market and other basic mar-
ket. Arguably, the single largest innovation in global financial
markets over the past two decades has been the emergence and
growth of derivative market (Gupta, 2004). Financial Engineers
are responsible for combining, designing, researching, devel-
oping and implementing a range of innovative financial instru-
ments for commercial use. The work of financial engineers
covers a wide variety of sophisticated financial instruments
(Abumustafa & Al-Abduljader, 2011). In a study, “Modeling
Financial Innovation and Economic Growth: Why the financial
sector matters to the Real Economy”, Chou (2007), extending
the classic Solow (1956) model finds that financial innovation

J. I. OSUOHA
raises the efficiency of financial intermediation by increasing
the variety of financial products and services. The resulting
capital accumulation leads to economic growth. Financial en-
gineering and innovations may be motivated by a need to hedge
some economic risk. Financial innovations may involve in-
venting brand new classes of products, modifying existing
products; or combining the characteristics of several existing
products (Chou, 2007). Perez (2002) explains that financial
engineering/innovations have been associated with each tech-
nological revolution. Financial engineering products such as
derivatives can be simple and straightforward which are refe-
reed as plain vanilla and can also be complicated and exotic As
at shown in Figure 1.
The rest of this paper is divided into the following sections:
1) The relationship between financial engineering, economic
development and growth;
2) The role of Corporate governance in Financial engineering
and derivatives market development;
3) Responsibility of the Board, Board Structure and Deriva-
tives use;
4) Regulation of Financial engineering and derivatives market;
5) Recommendations;
6) Conclusion.
Relationship between Financial Engineering,
Economic Development and Growth
The study of finance and development can be traced back to
Schumpeter (1911). There have been extensive empirical evi-
dences supporting the assertion and belief that financial devel-
opments lead to economic growth, Levine and Zervos (1998).
Financial engineering products and derivatives are product of
financial development. Factors underlying financial develop-
ment have been identified by Andrianaivo and Yartey (2010).
In their study, using a panel of 53 countries for the period
1990-2006, they examined the impact of income level, macro-
economic stability, financial liberalization and institutional
quality on both banking sector and the stock market develop-
ment. They found empirically the determinants of financial
market development in Africa with an emphasis on the banking
system and stock market. According to Andrianaivo and Yartey
(2010) Income level, creditor rights protection, financial re-
pression and political risk are the main determinants of banking
sector development in Africa, stock market liquidity, domestic
savings, banking sector development and political risk are the
main determinants of stock market development. However,
financial market cannot be complete without derivatives market.
The banking/money market and the stock market all depend on
the derivatives market to manage the risk inherent in their op-
erations. One key role of derivatives is to complete the financial
market and to provide avenue for managing the risks associated
with the use of other markets such as banking, stock market,
commodity market, energy market, power market to mention
but a few. Economic development of Nigeria is dependent on
stock market development (SMD), Money Market Develop-
ment (MMD), Derivatives market Development (DMD) and
other Factors (OFS) as shown in Figure 2. Other factors will
usually include government policies and regulatory environ-
ment, social-political environment, Gross Domestic product,
Agriculture, Energy, Power, other infrastructures and other
economic development drivers.
Neglecting the Derivatives market Development will break
the chain of development and stall economic growth. The MMD,
DERIVATIVE
EXOTIC
PLAIN
VANILA
Figure 1.
Derivatives classification. Source: Author.
SMD ED
MMD
DMD
OFS
Figure 2.
Economic development drivers. ED: Eco-
nomic Development; MMD: Money Market
Development; SMD: Stock Market Devel-
opment; DMD: Derivatives Market Devel-
opment; OFS: Other Factors; Source: Au-
thor.
SMD and OFS can all be improved by structuring derivatives
on them to manage them. For example, equity call and put op-
tions can improve the performance of the stock market. Interest
rate futures can enhance the value and performance of the
money market. Forward and futures contract on maize, cocoa
and other agricultural produce can help stabilize the price of the
agricultural market and provide food at affordable prices. En-
ergy options can be used to manage the risk inherent in the Oil
and Gas market. Futures, options and other derivatives can still
be structured on power, transportation/freight, weather condi-
tion etc. Every propeller of economic development can be
managed and enhanced with the use of derivatives products.
Earlier, Dermirguc-kunt and Levine (1996) have found that
most stock market indicators are highly correlated with banking
sector development. Countries with well developed banking
sector also tend to have well developed stock markets. Levine
and Zervos (1998), show that stock market development affects
growth through capital accumulation and improvement in pro-
ductivity. On the relationship between st ock mark et grow th and
economic growth, El-Wassal (2005) found that economic
growth, financial liberalization and foreign portfolio invest-
ments were the leading factors in emerging market between
1980 and 2000. Cecchetti and Kharroubi (2012) have a differ-
ent view on the relationship between financial development and
growth. They reassessed the impact of finance and growth.
Their finding shows that the level of financial development is
good only up to a level or point, after this point, it becomes a
drag on growth. The samples used were data from both devel-
oped and developing economies. When focused on advanced
economies, they show that a fast-growing financial sector is
detrimental to aggregate productivity growth. Financial sector
size has an inverted U-shaped effect on productivity growth.
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J. I. OSUOHA
There comes a point where further enlargement of the financial
system can reduce real growth. Financial sector growth is found
to be a drag on productivity growth. The authors believe that
the reason for this is that financial sector competes with the rest
of the economy for scarce resources so that financial booms are
not, in general growth-enhancing.
However, while this may be true for already developed
ec
Role of Corporate Governance in Financial
Strong, effectissential to the
fu
several definitions, let’s con-
si
992) defined Corporate governance as
th
corpora-
tio
that the foreign currency hedg-
in
onomies with well developed financial market, it cannot be
said of Nigeria and other developing economies. Financial de-
velopment should be growth-enhancing for Nigeria. The growth
and consolidation of Nigeria banks and the stock market has
provided both short term and long term finance to support in-
dustries, firms, governments, infrastructures development and
business initiatives which in turn produce growth. The devel-
opment of derivatives market should have positive impact on
economic development of Nigeria. Derivatives market should
bring about increased liquidity, increased capital flow, in-
creased market depth, increased confidence in the basic markets,
predictable cash flows from oil, protection of foreign reserves,
enhanced price discovery to mention but a few.
Engineering and Derivatives
Market Development
ve corporate governance is e
nctioning of derivatives market (ISDA, 2002). What is cor-
porate governance? The definition of corporate governance
depends on one’s view of the world (Gillan, 2006). The model
of corporate governance has been differently defined and the
best way to look at the concept is to list a few of the different
definitions instead of mentioning one (Maw & Cring-Cooper
1994). These definitions vary across countries/region being
contingent on different legal, political, economic, cultural, reli-
gious and ethical underpinning.
Before examining some of the
der the origin of the word “governance”. According to Tricker
(1984), the origin of the word governance can be found in the
Latin word “gubernare” meaning “to rule” or “to steer” and the
greek word, “kybernetikos” which means steering. Nobert
Wiener used the Greek root as the basis for cybernetics. Cy-
bernetics is the science of control in man and machine. The idea
of the steer man is a particularly helpful insight into the reality
of governance. Also Rwegasira (2000) opined that governance
in a cybernetic concept, referring cy bernetics speci fically to the
feedback and control mechanism by which a system, and any
system for that matter, keeps itself oriented towards the goals
for which it was created. Let’s now examine some definitions
of corporate governance.
Demb and Neubauer (1
e process by which Corporations are made responsive to the
rights and wishes of shareholders. To Cadbury (1992), “Cor-
porate governance is the system by which companies are di-
rected and controlled”. According to Blair (1995) Corporate
governance is about “the whole set of Legal, cultural, and In-
stitutional arrangements that determine what publicly traded
corporations can do, who controls them, how that control is
exercised, and how the risks and returns from the activities they
undertake are allocated”. According to Shleifer and Vishny
(1997) “Corporate governance deals with the ways in which
suppliers of finance to corporations assure themselves of get-
ting a return on their investment”. Kensey and Wright (1997),
explain that corporate governance is the “entire network of
formal and informal relations involving the corporate sector
and society in general”. According to Garrett (2000) corporate
governance “concerns the appropriate board structures, proc-
esses and values to drive the enterprise forward to achieve the
organization’s purpose whiles keeping it under prudent con-
trol”. To Cadbury (2003) in its broadest sense, corporate gov-
ernance is concerned with holding the balance between eco-
nomic and social goals and between individual and communal
goals. The governance framework is there to encourage the
efficient use of resources and equally to require accountability
for the stewardship of those resources. The aim is to align as
nearly as possible the interest of individuals, of corporations,
and of society. To OECD (2004) “Corporate governance in-
volves a set of relationship between a company’s management,
its board, its shareholders and other stakeholders”.
Good corporate governance shows why and how a
n should be managed. Corporate governance is all about a
system that demands integrity, openness, straightforwardness,
fairness, timely reporting from management of the firm. It also
includes compliance with relevant laws guiding the operations
of the firm. It also requires adequate disclosures, reporting,
truthfulness in structuring derivatives and other financial prod-
ucts. Financial engineering and derivatives are like electricity
which can be beneficial and destructive if not properly used.
Derivatives can also be related to a two edged sword that must
be handled very carefully. The nature of financial engineering
and derivatives—their complexity, “two-edged sword” charac-
teristics, demand the need to ensure a sound system of internal
controls and governance in firms and Institutions that issue or
use financially engineered products. This will help ensure
greater internal oversight over the activities of derivatives han-
dlers in such institutions. The misuse/misapplication of finan-
cial engineering and its products can be very devastating and
therefore, there is need for a good system of corporate govern-
ance to guide the use of financial engineering products. Hull
(2006) highlighted cases of derivatives mishaps resulting from
the wrong application of derivatives instruments. Some of the
misapplication resulted from lack of internal controls and sound
corporate governance. Instituting sound internal controls and
corporate governance practices in the firms that use derivatives
and other financially engineered products will help to moderate
the risk of mis-use. According to Al-shboul and Alison (2009),
corporate governance can provide mechanism to effectively
monitor the use of derivatives.
Allayannis et al. (2004) find
g premium is statistically significant and economically large
only for firms that have strong internal and external corporate
governance. Corporate governance can provide mechanism to
effectively monitor the use of derivatives (Al-Shboul & Alison,
2009). Corporate governance is necessary for participants in the
financial market to trust the people, place, product, processes,
price and promotion offered by the market and its players.
Since the derivatives market in itself is considered risky, its
modus oparandi must be characterized by transparency and
good governance. While some people have blamed the Global
Financial Crises (GFC) on derivatives, the real issue with GFC
seems to be corporate governance and regulatory problems. The
report of the Financial Crises Inquiry Commission (FCIC) re-
leased on January 27th 2011, identified the causes of the GFC to
include: widespread failure in financial regulation; dramatic
breakdowns in corporate governance including too many finan-
Open Access 63

J. I. OSUOHA
cial firms acting recklessly and taking on too much risk; explo-
sive mix of excessive borrowing and risk by households and
Wall Street that put the financial system on a collision course
with crises; key policy makers ill prepared for the crises, lack-
ing a full understanding of the financial system they oversaw;
and system breaches in accountability and ethics at all levels
(FCIC, 2011). All these issues in one way or the other relate to
corporate governance and regulatory failures.
According to Katz (2011), for market to work, they need
m
’t greater investor confidence in
th
Responsibility of the Baord, Board Structure
According to MPlaintiffs are de-
m
greater board oversight, supervision and
m
Market development (DMD) will depend on gen-
er
Regulation of Financial Engineering and
The Global Finanstrated that both
arket institutions that includes regulations that prevent con-
flict of interest and fraud and that align the compensation
package to top executives with the interest of the firm whose
fate is entrusted to their hands. Katz (2011) queried: “But why
assume that sound regulations hurt investments? Isn’t the op-
posite more like ly? Wouldn’t Investors be more likely to entrust
their savage to financial markets where a triple. A rating actu-
ally means something and where a derivative issued by Wall
Street can be trusted?”
He queried further “wouldn
e honesty of the market provide firm with more capital at a
lower risk adjusted cost? Just as effective commodity regula-
tions have helped grain and meat futures provide us more food
at lower cost, so would effective financial regulations boost
economic output”. He emphasized the need of sound regulation
and corporate governance in order to boost investor confidence
in the financial markets. The culture of corporate governance is
yet to be fully enshrined across firms in Nigeria. While the SEC
has issued a corporate governance code, there is no proper
mechanism for monitoring compliance and for sanctioning
offenders or even rewarding firms with good corporate gov-
ernance practices. However the market itself rewards corporate
governance as Nigerian investors are willing to pay as much as
50% premium on shares of companies with good governance
(Osuoha, 2011). The implication is that corporate governance
can be value additive for Nigeria financial market. Corporate
governance can help to deepen the market by attracting more
investors at a good value to the firm and the economy.
and Derivatives Use
alina and Herman (2007),
anding corporate governance reform to resolve derivative
litigations. To them the reform should include changes in board
composition, right to nominate a board member, the election of
non-executive chairman and restriction on board membership.
Fama and Jensen (1983) argue that outside directors have
greater incentives to make decisions that benefit shareholders
than do inside directors. Weibach (1988), Bryrd and Hickman
(1992) Borokhovich et al. (1999) report a more favorable reac-
tion by the equity markets to decision made by boards with
greater proportion of outside directors. Management, though
skilled in running a firm in a particular industry, lacks the
broader knowledge supplied by the outside directors. In a study
“Board Composition and Corporate use of Interest Rate De-
rivatives”, Borokhoviah et al. (2004) established a positive
relation between the relative influence of outside directors and
the quantity of derivatives used, indicating that outside direc-
tors take an active role in derivatives usage and that firms em-
ploy hedging in the shareholders best interest. The study also
shows a significant and positive relation between the quantity
of interest rate derivatives used by firms and the proportion of
outside directors on the firm’s board. The size of the board has
also been found not to be significantly related to the quantity of
corporate derivatives use (Borokhovich et al., 2004). There is
no evidence to suggest that managers benefit from corporate
interest rate derivatives use at shareholders expense. But Griffth
(2011) argues that independent directors have not demonstrated
any special skill to monitor or manage risk. According to
Griffth (2011), most board members of AIG were independent
apart from 2 of the 12 - 16 board members of the parent com-
pany. Enron had 11 independent directors out of the 14 board
members. Also Citigroup had majority of its board members as
independent and yet they accumulated toxic assets. These in-
dependent board members could not discover nor manage the
excessive risk taking of their firms. Group of thirty report (1999)
focused on the board of directors as a primary source for the
oversight of derivatives use. This followed the losses incurred
through the use of derivatives by Procter and Gamble, Gibson
Greetings and other firms and the far greater oversight of de-
rivatives (Brorokhoviah et al., 2004). Breeden (2004) also re-
echoes this call for greater oversight over derivative policies
adopted by firms. But a firm’s risk-management policies, espe-
cially those pertaining to the use of derivatives should be
strongly influenced by the policies of the Board of Directors
(Borokhoviah et al., 2004). Duffie (2009) after reviewing the
institutional features of derivatives market outlining what went
wrong during the financial crises, recommends that to reduce
systematic risk or improve the efficiency of the derivatives
markets, there is need for centralized clearing, improved price
transparency, improved position transparency, migration of
Over the Counter (OTC) derivatives trading to organized ex-
changes, fixing speculative position limits, and improved cor-
porate governance.
There should be
onitoring of officers that are responsible for derivatives trad-
ing decisions. The board must avoid a “sit down look” or “o
yes” disposition when handling issues affecting the company
especially issues of derivatives and financial engineering. Both
inside and outside directors should be involved as they all have
roles to play. Directors of firms that employ the use of deriva-
tives should undergo training on financial engineering and de-
rivatives to equip them properly to supervise the management
and officers responsible for derivatives trade. Adoption or in-
troduction of new financially engineered products should first
receive the approval of the board that must first ensure that
adequate system of internal control and governance has been
put in place.
Derivatives
al financial market development (FMD). A well developed
financial market will give rise to increased financial engineer-
ing activities and the increased use of derivatives products.
Market Participants Activities (MPA) will also enhance or hurt
the development of derivatives market. Good Corporate gov-
ernance practices (CGP) will also improve the derivatives mar-
ket as more people will have confidence in the financial market
place and will be willing to commit their hard earned resources
into it. The regulatory framework (RFM) is also important as it
will determine the environment under which the entire market
will be operating. See Figure 3.
Derivatives Markets
ncial Crises (GFC) has demo
Open Access 64

J. I. OSUOHA
DMD
RFM
MPA FMD
CGP
Figure 3. market development drivers.
lobal and domestic regulatory structures should be revisited.
lian study by Saunders (2010) advocates that De-
fa
a-
tiv
is no government body charged with the responsibility
of
Recommendations
The following re this paper. rket
in
money and
ca
Derivatives
DMD: Derivatives Market Development;
FMD: Financial Market Development;
CGP: Corpo rate Gove rnance Practic e; RFM:
Regulatory Framework; MPA: Market
Participants Activities; Source: Author.
g
The GFC shows that regulation is needed to ensure that eco-
nomic advancement are well being facilitated (Legg & Harris,
2009). Derivatives and financial innovations generally can offer
significant private and social value. The emergence of new
financial innovation and financial engineering process involv-
ing derivatives can cause even the most sophisticated financial
institution to make mistakes. It can also affect the core corpo-
rate governance mechanism. For example, equity decoupling,
described as the separation of the voting rights associated with
equity from the usual economic interest, can affect the core
internal and external mechanism of corporate governance such
as the shareholders vote and the market for corporate control
(Hu, 2011).
An Austra
ult Swap (an OTC derivative) issuers is subject to prudential
regulation in order to improve systemic stability in the financial
system. He compares Credit Default Swap to Insurance that
must be subject to prudential regulation, just like Insurance
Companies. The argument is that since CDS perform the eco-
nomic function of assuming Credit risk and so should be regu-
lated in the same way as other entities that assume credit risk.
Nelson (2010) advocates that if the initiatives taken to increase
the competitiveness of OTC derivatives market in Europe are
not effective in the near future, a code of conduct could be en-
visaged. Prudential regulation will reduce systemic instability
(Saunders, 2010). Title VII of the Dodd-Frank Wall Street Re-
form and Consumer Protection Act set forth a wholly new
regulatory structure for OTC derivatives. The regulation of
OTC derivatives under the Act has three primary goals, namely
the minimization of systemic risk from derivatives transaction;
the establishment of transparency in derivatives market and the
creation of credit protection for derivatives counter parties.
Regulation is essential for an effective operation of a deriv
es market. Most OTC products are unregulated while ex-
change traded derivatives are subject to regulation. Financial
regulation in most African states still remains challenging. This
has the potentials to threaten the future growth prospects of
African financial markets (Salami, 2011). International stan-
dards do not take into account the peculiarities of financial
systems in Africa and making application of international stan-
dards in Africa difficult and challenging (Salami, 2011). Most
African legal systems are weak in enforcement of contract of
property and insolvency laws. This does not provide the right
environment for the smooth operation of African capital mar-
kets and regulations (Salami, 2011). The challenging aspects of
banking regulations in Africa have been identified by Kew and
Patterson (2009); Salami (2011) to include lack of independ-
ence of regulators, poor corporate governance, poor enactment
of banking regulations and poor accounting standards. These
are similar to the same challenges facing the regulation of De-
rivatives market since the Derivatives market is part of the fi-
nancial system. Most African countries do not have derivatives
market, with the exception of South Africa and the North Afri-
can economies of Morocco, Egypt and Tunisia where the vol-
ume of derivatives transaction is small but growing (MFW4A,
2012). Mauritius, part of eastern Africa has a growing deriva-
tives market. Nigeria has no active derivatives market but OTC
derivatives transactions take place, especially among financial
institutions. The Abuja Commodity Exchange established in
2006 only trade spot although have long term plans to start
trading futures on the commodities they offer (Osuoha, 2010).
To make the derivatives market work as expected and to en-
courage the emergence and growth of the derivatives market
there is need for a regulatory framework. Financial regulation
can be in direct or indirect forms. Direct financial regulation
occurs through the role and powers of government regulators.
Indirect regulation can occur through the use of non-govern-
ment bodies who act as gatekeepers such as credit rating agen-
cies, Auditors, lawyers to mention but a few (Legg & Harris,
2009).
There
regulating the derivatives market in Nigeria. This may be
due to the fact that no organized derivatives market exists in
Nigeria at present. However, most traders in OTC derivatives in
Nigeria are banks and financial institutions who are already
being regulated by the CBN and the SEC. The focus of these
regulators is on the primary activities of these firms and not on
derivatives. Banks in Nigeria usually engage in foreign ex-
change forward contracts, swaps which are OTCs. The CBN
guidelines for these OTC trades are grossly inadequate as they
do not address all aspects of derivatives transactions. A much
more robust regulatory framework is needed. However, it may
not be feasible to regulate all OTC derivatives trade especially
for players who do not fall within already regulated firms. An
attempt to over regulate OTC trades may lead to regulatory
arbitrage which can be detrimental to the growth and develop-
ment of the Nigerian economy. Such regulatory attempt can
become counterproductive and self-defeating.
commendations are made in
1) There is need to introduce an organized derivatives ma
Nigeria where financially engineered products can be traded.
Futures and options and other derivatives can be structured on
Nigeria Oil and gas minerals, to make them easily tradable and
easily acc essible to foreign investors. This wil l boast capita l flow,
increase fluidity with attendant economic benefits.
2) The Nigerian financial market with growing
pital markets will be in comple te with out financ ial engin eering
products like d er ivativ e s, whic h are u seful i n man aging th e r isks
associated with the financial system. Absence of financial en-
gineering and derivatives market leaves the Nigeria financial
system vulnerable , r isk y and un attrac tive to for eig n parti cip ants,
because of lack of hedging mechanism to manage their risk of
investing in Nigeria financial market. The stock market, Agri-
cultural/Commodities market, Energy market and other basic
Open Access 65

J. I. OSUOHA
Open Access 66
es ex-
ch
and options market when established can begin by
tr
is also need for a robust regulatory framework to
gu
Conclusion
Most financial engiia are traded
O
markets will all experience tremendous increase in patronage
with development of the derivatives market in Nigeria. There-
fore, the Nigeria policy makers should consider putting in place
policies aimed at encouraging the growth of the derivatives
market to enhance financial engineering and innovation.
3) Before embarking on establishment of a derivativ
ange in Nigeria, there is need to institute system of corporate
governance across listed firms and financial institutions in-
volved in financial engineering. Although the Nigerian SEC has
issued a code of corporate governance for public companies in
Nigeria, they should ensure compliance. The CBN also has code
of corporate governance for Banks in Nigeria. There should be
enforceable sanctions for non-compliance to good corporate
governance. The regulators should step up in their monitoring of
compliance.
4) Futures
ading on selected quoted equities, Nigeria Oil resources,
FOREX and some selected agricultural produce such as maize,
cocoa etc. Over time, product offering by the derivatives market
can be expanded to include more derivatives product types and
other classes of assets (See Derivatives Type Tree (DTT) in
Figure 4).
5) There
ide the operation of the derivatives exchange in Nigeria. The
guideline should provide market structure and mechanism for
trading, margining system, trade registration and reporting,
clearing and oth er n eces sar y m ar ket infras tru ctur e. Other re lat ed
regulations and investments laws should be strengthened and
modernized to create a good environment for efficient workings
of the derivatives market.
neering products in Niger
TC with the attendant problems of illiquidity, default risk and
lack of standardization. Nigeria government and corporate
leaders should fast tract the establishment of derivatives ex-
change in Nigeria where futures and options on Nigeria Mineral
resources, agricultural produce and other basic instruments can
be traded. This will aid price discovery, market completeness,
leverage benefits, risk management and market efficiency. This
will also attract more foreign investments in the Nigeria finan-
cial market thus boosting liquidly of the market, creating jobs,
Derivative
Commodity
FINANCAI
ET
OPTIONS
FUTURE
OTC
Options
SWAP
Forward
Fut ures
ET
Figure 4.
Derivatives Type Tree (DTT). OTC: Over The Counter; ET: Exchange
Traded; Source: Author.
market depth and enhancing economic growth.
Allayannis, G., & Ofek, E. (2001). Exchange rate exposure, hedgingand
the use of foreign urnal of International
Money and Finance,
increasing
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