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Votukpa:


An observation though -
Talking about CAPM in Nigeria is kinda annoying, primarily because financial markets in Nigeria are far from perfect - not even to the extent that the model implicitly attempts to reflect developed markets. (an assumption which the CAPM is solidly grounded on). With the volume of insider trading going on in the NSE along with the preponderance of asymmetric information delivery, I am fully convinced that financial market equilibrium will remain elusive in these parts.

No market is perfect anywhere in the world .

Recently some stock brokers in the uk appeared in court for insider trading. it happens everywhere not only in nigeria

Information asymmetry like u mentioned is part of this reason.

This is one of the reasons why investing in stocks is risky business. Stocks are stochastic processes. u can never predict what is going to happen unlike something like a bond for instance

Votukpa:

Therefore, I think its even dumb to teach CAPM and several other financial models (plus traditional portfolio theory) in Nigerian business schools. Moreover adjusting the model to fit the Nigerian model would be useless. All we need it time. Time with institutional development. These models have been developed with underpinnings that strictly apply to developed markets.

The reason why regression analysis is necessary is that it gives you a sense of how the stock has performed historically which helps in aiding your decision process on wether to invest in the stock or not.

CAPM itself is full of assumptions which doesn't hold up in the real world but at least you have a baseline to make sound decisions on . There are many extensions to CAPM by the way that strips out most of these assumptions and this can be adopted to the nigerian environment.

You are right about getting the optimal portfolio though. Its going to be very hard to get a truly optimal portfolio is you can't short sell. something not possible in Nigeria.

Short selling is actually a mechanism that helps in making a market more efficient . . so if the optimization solution is telling you that you need to short sell a stock for instance then you will need to add another constraint against short selling in the problem and this will actually not give u a true optimal portfolio.

Votukpa:

But of course you all knew these already.
Me
P.S WE don't need Black-Scholes either. Greeks are useless. All of them. No core derivatives markets in Nigeria.

Yes all these problems are not new . . . what we need is a new generation of finance professionals to move this industry forward. The old guard need to retire and live the field for us the youths

Derivatives is wonderful for risk management. This can be the first step. . . We can start an OTC market and write options for pension funds or institutional investors for a start. Simple marketing strategy will be that we are selling them this options e.g a put option so that they can buy downside protection. Who wouldn't fall for that ??

Black-scholes and the greeks are core to derivatives pricing. Classic black-scholes is nearly useless though because of all the laboratory assumptions. but the wonderful thing about it is that it can be adopted fairly easily . . so instead of having constant volatility assumed by BS you can have stochastic volatility . . . transaction costs etc . .

Yes all these problems are not new . . . what we need is a new generation of finance professionals to move this industry forward. The old guard need to retire and live the field for us the youths

Derivatives is wonderful for risk management. This can be the first step. . . We can start an OTC market and write options for pension funds or institutional investors for a start. Simple marketing strategy will be that we are selling them this options e.g a put option so that they can buy downside protection. Who wouldn't fall for that ??

Black-scholes and the greeks are core to derivatives pricing. Classic black-scholes is nearly useless though because of all the laboratory assumptions. but the wonderful thing about it is that it can be adopted fairly easily . . so instead of having constant volatility assumed by BS you can have stochastic volatility . . . transaction costs etc . .

It is not only about what and what not nice things are embedded in derivative securities, the concern is much more about the Nigerian state.

Even with clearing houses and Margin requirement, how sure are we that we can mitigate against counter party risk without taking resort from legal process?

How sure are we that the signals and the trends given off by the market is real and not "manipulated" as done in time past?

With a capitalization of 4 trillion Naira (correct me if am wrong) , it means any investor with as much as 10 billion Naira can drive the Nigerian all shares index in any direction he or she wants without prices reverting to the fundamental values for a long time.

Amidst these levels of deceit and fraudulent activities incorporating exotic instruments such as derivatives and structured products might only spell more harm than good for parties involved.

I agree

But if it is that bad then why are people still investing in the stock market ?

why was there a collective downward trend during the crash ?

why were the prices not manipulated to stay overvalued ?

with more foreign investors coming in i think things can only get better not worse ( am an optimist btw)

you mentioned counter party risk which i think is embedded in almost any form of vanilla stock or bond.

how am i sure that if i invested in a 20 yr Federal Government bond that Nigeria will still be existing in 20 yrs time ??

I think first step will be for this to be structured in the OTC market by reputable blue chip companies.

for instance there are already blue chip companies in nigeria utilizing currency forwards to hedge foreign exchange risk in the OTC market.

my suggestion is that for a start it should be used for risk management. . something like portfolio insurance . . 

The company structuring the option will be fully hedged  against the market to ensure  they maintain a market neutral view.

So in essence they don't care if the market goes up or down they are just interested in the premium and the probability that the option might be exercised or not.

Yes, its that bad!

Did you read somewhere in an earlier post where supposed company's without a location or address, or even account statements engage successfully in IPO deals?.  Now, where in the world is such carried out except Nigeria?

It literary means, i can approach the Corporate Affairs Commission today, register a company name and after a week, approach the NSE for an IPO deal.  Now that's unimaginable! 

Frankly speaking, i don't see foreign investors coming in {you can say am being pessimistic}, rather, i see more of our own home grown investors seeking the greener pasture elsewhere.  The Political system is still very much unstable, credit intermediation is gradually coming to a halt, companies are facing hard times expanding their business, consumer confidence index and all other leading economic indicators are not very promising, and to make matters worse, why would you think someone will leave the comfort of his own economy and come down to a country which of recent has been riddled with religious riots and stories of kidnapping.  Wouldn't you agree that a smart and rational foreign investor will rather move to the Arab Emirtes where even tax rates is close to zero?

As for the issue of counterparty risk, Options don't operate like bonds or equities.  Equities signifies an ownership stake and the only sets of risk you have are market risk and company risk, while government  bonds on the other hand are usually not known to fail, all Jonathan has to do is to direct that tax rate be increased.

However, with options {calls as an example} , the person buying carries a significant risk that the writer might default on payment if the option ends up deeply in the money.

Now in as much as i agree hundred per cent with you on the fact that options if well structured can limit a holders downside losses and it is particularly useful for insurance and pension funds, my pessimistic imaginary friend tells me that given a history of defaults from our Insurance houses in time past, people might not just be willing to trade in it, and this of course will affect liquidity in such markets if and when established.

Yeeeeee !!! so nigeria is this bad. na wa o

There is actually a very simple solution to guard against all this fraud and counter-party risk thing. electronic trading. . .

All transactions are settled online. no need for fiscal delivery

Once you are not meeting certain mark to market margin requirement the system automatically closes your position. . . and everybody is happy 

Or you could even set up automatic stop losses etc . . most electronic trading systems these days have all these anyway

i think Votukpa has said it all Candylips

all the finance models may not really work in Nigeria with the way we distort facts and figures in Nigeria

like i said in my earlier posts, we just need to make crawl a bit before we start jumping

The overall development of the country will surely reflect on our financial markets overtime

lets watch and see

LAGOS—THE Nigerian Stock market recovery was, last week, tagged the top among emerging markets raising hope that those who lost money through share purchases during the global financial crisis have a chance of recovering their losses at the Nigeria Stock Exchange this year if they have not sold their shares at give away prices.

A research conducted by Fund Managers in Europe and published by Bloomberg said that stocks in the smallest emerging markets were beating their larger peers by the most in almost five years and Templeton Asset Management Limited’s Mark Mobius said they would continue to rally as consumer demand picked up. The Nigerian Stock Market was named as one of such top performers.
Hugh Young, who counts shares in Sri Lanka, Pakistan and Nigeria among the $232 billion of assets he helped to manage as head of equities at Aberdeen Asset Management Plc in Singapore said: “Given their gains, I would not say that we are finding screaming value in some of these markets now.”

The Nigerian capital market has grown by 33.26 per cent from the commencement of trading in 2010 till date, as investors enjoyed N1.66 trillion improvement on their investments at the Nigerian Stock Exchange.
In particular, analyses in the period under review, showed that the key performance indices, the All-share index and market capitalization, both rose within the period by 32 per cent and 33 per cent respectively, a record achievement by international bench mark.

The capitalization shot up to N6.649 trillion from N4.989 trillion recorded as at the open of trading in the year, while the index garnered 6,662.55 basis points to 27,489.72 points from 20,827.17 points.
Also significant improvement was recorded in all the major sectoral indices and blue chip index – the NSE 30 index. The NSE Food/Beverage index appreciated by 52.8 per cent to 804.78 points from 526.71 points at which it opened in the period under review.

The NSE Banking index rose by 35.81 per cent to 460.82 points from 339.32 points, NSE Oil/Gas index garnered 11.5 per cent to 321.15 points from 288.06 points at which it opened, while the NSE 30 index appreciated by 33.45 per cent to 1,104.93 points from 827.99 points at which it opened trading for the year.


http://www.vanguardngr.com/2010/04/12/nigeria-tops-global-stock-market-recovery/

Look at our beautiful exchange with beautiful single laptop screens

am not sure the n s exchange is fullying electronic.

it looks more like a cybercafe to me!

Although all settlements are done electronically via CSCS

so its semi electonic. 

^^ why did modify your post? I was just about responding to that!

That's a great leverage you've got, the country needs intellects like you!

what ?

k

k

@ Candylips & TKB247

Hey fellas, been on the fringe for a while and just read the comments, over time your posts have been interesting and impressive. Anyhow if it would be worth your while perhaps I can seek your opinions on a Business Model I recently put together. Full gist is that plans are in top gear to launch a Corporate finance boutique before year end . If you guys are down , kindly drop me a line on
lolasweetgirl@yahoo.com.

Shud be able to holla back from there.

Rgds,

:d

Good thread guys, didn't know there was one for ibanking types till now
On the development of the Naija finance scene i think it's a strong question of ambition and demand. The fact is if the market requires ("demands" a solution to a problem and if the problem is large enough then someone will create the product or fill the need. Derivatives and other exotic type assets like securitized products will come on  stream here as soon as the market's big and sexy enough for em.

On the flip side however, the market doesn't always know what it wants or needs, so someone OR some people with ambition and a truckload of cajones have gotta step up to the plate, create a product with merit and virtually force feed it to the market (case in point: Mike Miliken creating the junk bond market and Salomon Bros practically creating the securitized mortgage bond market), so all u guys thinking it's time for a derivative market, go for it!

Jon-oh-jon:

@ Candylips & TKB247

Hey fellas, been on the fringe for a while and just read the comments, over time your posts have been interesting and impressive. Anyhow if it would be worth your while perhaps I can seek your opinions on a Business Model I recently put together. Full gist is that plans are in top gear to launch a Corporate finance boutique before year end . If you guys are down , kindly drop me a line on
lolasweetgirl@yahoo.com.

Shud be able to holla back from there.

Rgds,

On Corp Fin boutiques there r tonnes out there, although most of em don't know what they're doing sha, but u gotta come in with some major edge especially as work's a lil dry now, just my 2cents

interesting!

but do you think the enabling environment is there for derivative market in Nigeria

off to a meeting

hope ull still be online when im back

i'll be here chief, today's dedicated to finishing a model and a report

Market should be ripe for Simple equities or credit derivatives. I think if they are marketed solely for risk management in the first instance there should be a ready Market for it. Credit derivatives especially

candylips:

Market should be ripe for Simple equities or credit derivatives. I think if they are marketed solely for risk management in the first instance there should be a ready Market for it. Credit derivatives especially

We talking CDS here or expanding to include options, forward, futures and other swaps too?? If OTC isn't there the potential for the whole thing blowing up here too? Lastly, who'll regulate?? Cos me i dunno about these regulators we have now ooo, can they handle it when people start doing collars and straddles and going wild with either hedging techniques or speculation??

candylips:


I think first step will be for this to be structured in the OTC market by reputable blue chip companies.

for instance there are already blue chip companies in nigeria utilizing currency forwards to hedge foreign exchange risk in the OTC market.

my suggestion is that for a start it should be used for risk management. . something like portfolio insurance . . 

The company structuring the option will be fully hedged  against the market to ensure  they maintain a market neutral view.

So in essence they don't care if the market goes up or down they are just interested in the premium and the probability that the option might be exercised or not.

Candylips who r the forward/future sellers?? The banks?
Cos i was working on a deal with some indigenous O&G company recently and was amazed that there was absolutely no hedging policy despite large FX exposures, scary stuff

hi all,,,

my two cents, a derivative market in naija will flop so bad!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

seunallday:

hi all,,,

my two cents, a derivative market in naija will flop so bad!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

why do u think it will??

CDS is a no no for now they are too complex to price especially if there is no ready seconddary Market.
Simple loan or asset securitisation might suffice especially for banks with a large loan portfolio

I think some banks are already doing forwards for FX already but equities is still virgin ground. The way I see it workin is banks or insurance companies takin on d role of Market makers. Regulation should still be controlled by SEC but am not sure if they have d expertise yet

Actually the OTC Market is largely unregulated(well dat is why it's OTC)
You are right there is a potential of the whole thing blowing up but this will be mostly in cases where people begin to speculate same thing happened to equities anyway until the crash of last yr.
The options strategy u mentioned I.e straddles are probably more applicable to a Market with a triving secondary derivatives Market. It's a little bit harder to in the OTC market

@Lawuyi
Chief, an emerging market like Nigeria may benefit from the strengthening of exchange-traded and over-the-counter markets.

without what im gonna listed below, i doubt if we'll be able to pull it through
> Provision of an enabling environment - including an adequate legal and regulatory framework
>Structure on ground to protect counterparty risk in these markets
> and also structure to improve transparency and disclosure.

If all these are in place, we should be able to introduce derivaties at an early stage in our development, as we would not have to wait until cash markets are liquid enough to support an exchange-traded derivaties market

tkb417:

@Lawuyi
Chief, an emerging market like Nigeria may benefit from the strengthening of exchange-traded and over-the-counter markets.

without what im gonna listed below, i doubt if we'll be able to pull it through
> Provision of an enabling environment - including an adequate legal and regulatory framework
>Structure on ground to protect counterparty risk in these markets
> and also structure to improve transparency and disclosure.

If all these are in place, we should be able to introduce derivaties at an early stage in our development, as we would not have to wait until cash markets are liquid enough to support an exchange-traded derivaties market

Totally agree with you man, especially on the first two points. Property/Contract rights must be enforceable and there must be an effective regulatory environment to pull it off, now all we just need to do is go tell d tossers that control our markets and we can get our lil OTC market up n going

Tbk counterparty risk can be eliminated by marking to Market this is a well adopted convetion in the OTC derivatives Market
I agree on ur point about transparency and disclosure though but I see the initial participants in this Market to be highly credible companies just dealing amongst themselves as an initial step before other things fall into place

lawuyi:

Totally agree with you man, especially on the first two points. Property/Contract rights must be enforceable and there must be an effective regulatory environment to pull it off, now all we just need to do is go tell d tossers that control our markets and we can get our lil OTC market up n going

same regulators that allowed coys with no visible corporate addresses to trade on the floor of NSE? or same regulators that allowed coys with no audited accts for 2 yrs to trade? i really have ma reservations for the people in SEC and NSE

Not sure they understand this thing