By Quantative Financial Analytics
Volumes in the Naira Settled Currency Futures contracts surged and open interest hit a record high at the end of trading on October 25 as investors try to stock up before a possible price increase.
The next futures in line to mature is the NGUS OCT 26 2016 with one day remaining.
It will be recalled that the CBN is in the habit of resetting the prices of currency futures at each maturity.
In anticipation of a possible price increase, investors traded 34.58 contracts which translate into $34.58 million in notional terms. Following the increased activity, open interest surged to a record N3,697.58.
The buying interest saw the recently most active NGUS AUG 16 2017 contract recording a daily activity of $15 million.
The NGUS AUG 16 2017 has the attention of investors because it has been in a low-price range for some time.
It is currently the lowest priced futures, at N240.5/$ and therefore offers the highest arbitrage opportunity should rates increase. It also has the highest potential for a price increase by the CBN which underscores the sudden interest by investors.
The predictability of CBN action in relation to the operation of currency futures may not augur well for the market and increases the ability of market speculators to take advantage of such actions.
The rate at which the market spikes during the maturity dates is an interesting case study for analysts.
It remains to be known whether the anticipation for a price hike by the CBN on existing currency futures will come through on October 26, 2016 although this same trend played out September 27, a day before the September Futures expired/matured.
