BOND & DERIVATIVE MARKETS Chipasha Mulenga (Dr) (LLM Residential) 2020 1. Bond Market This is a financial market in which the participants are provided with the issuance and trading of debt securities. Types of Bond Markets 1. Corporate Bond: provided by corporations to raise finances 2. Government Bonds: issued by government who entice buyers by providing the face value on the agreed maturity date with periodic interest payments e.g. Euro Bond. 3. Municipal Bonds: issued by local governments and their agencies to fund their projects. 4. Mortgage Bonds: on real estate properties, these are locked in by the pledge of particular assets. They pay monthly, quarterly or semi-annual interest. Derivatives A derivative is a financial security with a value that is reliant upon, or derived from, an underlying or group of assets. It is a contract between two or more parties, and its price is determined by fluctuations in the underlying asset – Investopedia Forms? 1. Futures: agreement between two parties for the purchase and delivery of an asset at an agreed upon price at a future date. 2. Forwards: the buyer and seller customize the terms, size and settlement process for the derivative. Forwards are traded OTC. 3. Swap: swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula e.g. an interest rate is switched from a variable one to a fixed, or vice versa. 4. Options: agreement between two parties to buy or sell an asset at a predetermined future date for a specific price i.e. unlike futures, in an option, buyer is not obligated to "exercise" the option. Derivatives Market Derivatives market is a market where contracts are traded which derive their value from a different underlying asset. Participants: 1. Hedgers: an act that reduces the price risk of a certain position in the cash market. Futures contract are the primary tools of effective hedging and they enable the market participants to change their risk exposure from unexpected adverse price fluctuations. 2. Speculators: bet on future movements in the price of an asset 2. Bond & Derivatives Exchange BaDEx was licensed by Zambia’s Securities Exchange Commission on 1 January 2012. and BaDEx is a public-liability company owned by “banks, pension funds and private companies including the major securities dealers in Zambia”– Madison Asset, Integral Initiatives, Intermarket Securities, Laurence Paul Investment Services, Pangaea Renaissance & African Alliance Securities. Products traded: corporate bonds, municipal bonds, currency futures and options, and derivatives.
