The Need for Financial Stability in Zimbabwe : Use of Derivatives Securities

Financial stability contributes to the stability and growth of a nation. There has been a sharp growth in use or trading of derivatives in both mature and emerging markets. The Zimbabwean financial sector is still not trading in derivatives security, yet Zimbabwe Stock Exchange is among the oldest and largest in Africa. The trading of derivatives is done in two types of markets: organized exchanges and over the counter. Investors generally use derivatives for three purposes: risk management, price discovery, and reduction of transaction costs. Apart from generating cash in the adverse states of the world, derivative instruments also can smooth cash flows through its interaction with the operating decisions. The study rallies behind the development of derivatives market in Zimbabwe in the face of liquidity challenges currently facing the economy. The impact of market risk on corporate activities should never be undermined and hence the corporate sector should be aided in the elimination of market risk. The study is a policy prescription, which examines the importance of derivatives and their suitability in Zimbabwe, to strengthen the financial sector. The study identified the derivatives sector as the missing link to viable financial sector and hence economic growth