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An investigation into the use of derivative instruments by financial institutions in Namibia.

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Date

2008

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Abstract

Over the past two decades, derivatives have demonstrated their important role in the financial market. At the same time, they have been criticized for some severe financial losses (Eales, 2004). These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. It appears that along with the benefits of powerful new tool for managing risks and the ability to create preferred return patterns, the use of various derivatives instruments has become what often appears to be a substantial risk (McHenry, 1995). This research aims to investigate whether financial institutions in Namibia use derivatives instruments and to ascertain the risk management practices that institutions have put in place in order to avert huge derivative losses. This survey covered all the portfolio managers that register with the Namibia Financial Institution Supervisory Body. The sample was chosen for the reason that portfolio managers are usually at the center of derivative trading dealing on behalf of their clients as market markers or trading on their own account. Overall, this research reveals that 64.7% of financial institution in Namibia use derivatives instruments. Although institutions use derivatives for different reasons, hedging was rated high among derivative users with 58.3% followed by asset allocation with 45.5%. Accessing to market is rated third. It is also found that future contract and swaps are the most traded derivatives instrument, followed by forward contracts. This research discovers that significant proportions (61.5%) of derivatives users find that derivatives are helpful and they will increase usage in the next financial year.

Description

Thesis (MBA)-University of KwaZulu-Natal, Westville, 2008.

Keywords

Financial institutions--Namibia., Risk management., Theses--Business administration.

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