Currency Futures Trading Volume Drops as Rates Converge

June 21, 2017

By Quantitative Financial Analytics

Since the Central bank of Nigeria (CBN) came up with the investor foreign exchange rate window and other actions leading to convergence of rates to around N370 per Dollar, the volume of trade in the Nigerian currency futures market has been recording dramatic decline.

The slowdown in volume has been so apparent that the NGUS MAY 30, 2018, which replaced the NGUS MAY 24, 2017 that matured on May 24, has not attracted a single trade ever, an unusual and unprecedented occurrence.

According to analysis of open interest report conducted by Quantitative Financial Analytics, the average daily volume for currency futures in April was 34.955 contracts or $34.95 million.

The corresponding average for March was 14.5 contracts or $14.486 million. That daily average tapered to just 8.41 contracts in May.

On day count basis, the market had witnessed daily activities on at least 15 of each month’s 22 trading days in the past but so far in June, only 3 of the 14 trading days witnessed any activities.

Though average daily volume has fallen since April, if things continue the way they are, June’s trading activity may be the least in the history of the currency futures market in Nigeria.

At the moment, the NAFEX rate is about N368/$, most of the futures open contracts have contract prices of about N374/$ while the parallel market settles at about N370/$, all pointing to a convergence of some sort.

According to a recent report by Fitch, there has been an improvement in FX liquidity in Nigeria following massive interventions by the CBN and the introduction of the NAFEX window.

Good as this improvement is, it does appear that it has or is killing the incentive to use the currency futures market and one wonders if some of the CBN policies are becoming cannibalistic.

The currency futures market should not be allowed to die because such markets play vital roles in both price discovery and risk management, among others.

Source: Quantitative Financial Analytics

Dipo Olowookere

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan.

Mr Olowookere can be reached via [email protected]

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