The Role of Financial Derivatives in Hedging Market Risks in Nigeria: A Case Study of Nigerian Stock Market Investors
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Background of the Study
Financial derivatives, such as futures, options, and swaps, are critical tools for managing market risks. In Nigeria, the introduction of derivatives trading on the Nigerian Stock Exchange (NSE) has provided investors with mechanisms to hedge against price volatility, interest rate fluctuations, and currency risks (Chukwuemeka & Ijeoma, 2024).
Despite the potential benefits, the adoption of financial derivatives in Nigeria remains limited due to low awareness, regulatory challenges, and market illiquidity (Olowookere, 2023). This study examines the role of financial derivatives in hedging market risks among Nigerian stock market investors.
Statement of the Problem
Nigerian investors face significant exposure to market risks due to economic volatility and external shocks. While financial derivatives offer solutions for mitigating these risks, barriers such as inadequate infrastructure, low investor education, and regulatory gaps hinder their widespread adoption (Adetola, 2023).
This study explores the role of financial derivatives in risk management, focusing on their usage and effectiveness among NSE investors.
Objectives of the Study
- To examine the role of financial derivatives in hedging market risks in Nigeria.
- To analyze the challenges faced by investors in adopting derivatives.
- To propose strategies for increasing the adoption and effectiveness of financial derivatives in Nigeria.
Research Questions
- What is the role of financial derivatives in hedging market risks in Nigeria?
- What challenges hinder the adoption of financial derivatives by Nigerian investors?
- What strategies can enhance the adoption and effectiveness of financial derivatives in Nigeria?
Research Hypotheses
- Financial derivatives play a significant role in hedging market risks in Nigeria.
- Challenges such as low awareness hinder the adoption of financial derivatives.
- Improved education and infrastructure can increase the adoption of financial derivatives.
Scope and Limitations of the Study
The study focuses on financial derivatives trading on the NSE between 2023 and 2025. Limitations include limited availability of historical data and evolving regulatory policies.
Definitions of Terms
- Financial Derivatives: Contracts whose value is derived from underlying assets such as stocks, bonds, or commodities.
- Hedging: Strategies employed to minimize financial risks.
Market Risks: Potential losses due to fluctuations in market variables like prices and interest rates
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