Derivatives: A Few Things You Generally May Need To Know

Derivatives: A Few Things You Generally May Need To Know

  Derivatives have traditionally been defined as contracts whose values derive from and are dependent on the value of the underlying assets which include currencies, securities or commodities such as tea, coffee and maize. Basically, there are only three major classifications of derivatives, and those are options, forwards and futures. Although I don;t want to divulge into much detail, in summary: options pretty much work like insurance products, you pay a price for the option to buy or sell a particular asset at a particular price in future, you may decide to exercise your right to buy or forfeit depending on what you think will favor you the most. Put options give you the option to sell, and call options give you the option to buy. Forwards basically is a contract to buy at a particular price in a specific future date but doesn’t give you the option to forfeit. They are similar to futures and the major distinction is brought about by the ability to use leverage in futures as well the ability for it to be trading among very many people in the markets. Leverage simply put is just additional borrowing that allows you to use more money...
Continue reading...

Opinion: What World Bank Could do to Eradicate Poverty in Kenya

Opinion: What World Bank Could do to Eradicate Poverty in Kenya

The issue of eradicating poverty isn’t just about ensuring access to cheap credit. If anything, in some of the instances, access to credit has worsened the situation by burdening the poor with so much debt that they are unable to accumulate saving that are necessary for future investing. Creditors need to go a step further like BRAC in educating the poor people on proper utilization of credit that is extended to them so that they can be able to run sustainable sources of income. If you examine majority of the micro-lenders including unregistered ones and NGOs that issue low interest loans to the poor, little effort is done in ensuring that the borrower can run said project profitably or whether it even exists. The end result is obvious, some of them mis-allocate spending or exhaust funds before even projects can break even, or worse engage in products that are caught up in endless hog cycles recent example being the Quail bird bubble. Some of the poor are also unable to borrow because they are required to provide extensive business proposals. How can someone with very little knowledge about formal business operations write a proposal without assistance or access to free...
Continue reading...

Local & International Markets Round Up

In financial investing, it’s advisable for one not to be too complacent in their views on the market and must continually review to see if they conform with the underlying fundamentals as will be perceived by the market. Nevertheless, I still hold my previous views on the market though there have been additional developments in the last few weeks. I still contend that we are more likely to see continued dollar strength through the year despite concerns over material impact of strong dollar on the US economy (Similar thing happened in the 1980s). The strength is likely to be particularly seen against the Japanese yen(currently locked in a range trade) and Euro (Generally suffered sharp depreciation past few months). Oil Oil has continued trading under pressure and at the time of writing had broken through former trading range. I still expect it to continue trading under pressure given that underlying trend is still oil bearish. Strategy remains selling into technical levels. There is a risk that it could fall into the $30s. US U.S. economy has continued doing well compared to its peers. GDP growth has in some instances continued to exceed previous expectations. Year on year growth since mid-2011...
Continue reading...

Detailed understanding of oil prices by Deputy Governor of the Bank of Canada

Get the PDF with charts here . I have cut out bits that narrowed down on the Canadian economy World oil markets have been turbulent over the past several months. In the next few minutes, I will describe the fundamental economic forces that are at play. I will also highlight the uncertainties surrounding both those forces and the other factors affecting oil prices… The commodities super-cycle Over the past decade and a half, world oil prices, and commodity prices in general, experienced a sustained upward movement, often called the “super-cycle” (Chart 3). By far the most important reason for this long-term trend is the rising demand for these products stemming from rapid economic growth in China and other emerging-market economies. It would be hard to exaggerate the importance of the integration of China, India and other emerging economies into the world economy. The economy of China alone doubled in size between 2007 and 2013, an expansion built on the production of goods requiring energy to manufacture. With rising living standards, Chinese households have been able to afford cars and other products that consume energy. China’s oil consumption followed suit, doubling over the past decade to about 10 million barrels a day...
Continue reading...

Possible explanation on why Safaricom Merchant Transaction Charges Differ

Possible explanation on why Safaricom Merchant Transaction Charges Differ

I cannot speak on behalf of the company but I think there are reasonable explanations as to why merchants negotiate different terms with the mobile operator and as to why they cannot operate a free service. To begin with, to my understanding, although Safaricom provides financial services, by itself it cannot operate like a bank. This means it cannot be able to lend against customer deposits. According to the current regulations, Central Bank of Kenya requires that all mobile money operators instead collaborate with a commercial bank and to hold in an escrow account in their partner bank sufficient funds to cover all of the electronic money which they have sold to their customers. Therefore mobile money operators cannot themselves intermediate the funds they have mobilized from their customers; they must instead transfer these funds to a commercial bank which is as well subject to all the normal prudential regulations applicable to deposit taking institutions. This was done so as to protect consumers so that even if tomorrow a mobile money operator were to collapse, the electronic money held by its customers could be reimbursed from the escrow account in the partner commercial bank and you would still get your money back...
Continue reading...

What Bank of Japan is Doing to Promote Financial Education

Extract from Dept Governor Iwata’s speech Changes in financial behavior and challenges presented by the aging population and declining birthrate The need for improved financial literacy is gradually taking hold in Japan. In the council’s survey, we ask about the “purpose of holding financial assets.” The reply chosen most often had long been “preparation for illness and unexpected emergency.” But in 2013, this changed for the first time in its 60-year history to “funds for life during my retirement period.” This is symbolic for Japan, which has a well-developed public pension system. The financial behavior of Japanese people has changed accordingly. Households’ financial assets 1 have increased by around 20 percent over the last decade; that is, the period before and after the global financial crisis. Notably, the amount held by people aged 60 years and older has reached 25 million yen per household. This is almost the same level as the “target amount of funds you regard as necessary” in the survey. Financial assets are being accumulated to ensure a stable living standard over an individual’s retirement period. However, there are worrisome signs that financial literacy associated with lifetime planning has been undermined. As I mentioned earlier, households’ financial...
Continue reading...

Local and International Markets Round-up

Local and International Markets Round-up

Oil Oil has been falling since December and posted lows of $44.20 before rebounding higher and at the time of writing it was trading at $46.67.  Overall sentiment is still bearish with a number of investment banks revising their forecasts to around $40. The down move in oil prices have mainly been caused by unconventional oil supply against the backdrop of slower growth of global demand. According to BOC, a barrel of shale oil costs between $40 and $80 to extract, depending on the project but then noted that this is mainly a reflection of the upfront cost of investment and exploration, rather than the continuing cost of keeping oil flowing from existing installations which are much lower. Therefore those factors coupled with hedges and improvement in production efficiency may dampen chances of oil recovery in the medium-term. From a technical perspective, I think we may see more range trading in the short-term. I still prefer selling into rallies until underlying fundamentals change and would rather wait for a rally higher before selling into it. We may see prices dip below $40. One major factor to monitor going forward is developments in Iran. Sanctions might be lifted into March which...
Continue reading...