A Comparative Analysis of the Conditions Necessary for Derivatives Markets in Botswana and Zimbabwe

The study investigates the conditions necessary for derivative markets in Botswana and Zimbabwe. The study employed mixed method research based on convergence design. 762 respondents from the financial markets of both countries took part in the study. Stratified sampling and purposive sampling were used in selecting participants and respondents to the study. The study involved hypothesis testing using AMOS to run Structural Equation Modelling. A model was invented that fits the data provided in the study. The qualitative part of the study revealed liquidity requirements, existence of foreign subsidiary, foreign trade, financial distress, leverage, derivatives regulations and financial development as the conditions necessary for derivatives market to flourish in Botswana and Zimbabwe. The study further uncovered that the main forms of derivatives used in both countries were employee stock options, futures, simple forward contracts, currency swaps and options. In addition, lack of liquidity, profitability concerns and derivative aggravated risks were observed as challenges to the institutionalization of derivatives markets in both countries. The model invented for the study displayed that derivative markets are significantly and positively correlated with investors financial awareness and the level of financial regulations. In addition, the new model created manifested that derivative markets are significantly and negatively correlated with firm specific performance as measured by financial performance. Therefore, market makers are encouraged to develop derivative markets in line with the global derivative markets regulatory reforms and focus more on providing a wholesale variety of derivative products that are appealing to the local markets. This paper helps policy makers in guiding strategic actions towards global integration of derivatives markets and implementation of rigorous derivatives regulations reforms.