Asset Price Movements and Derivatives: implications for monetary policy in Nigeria

Abstract

The article highlights the importance of maintaining accurate market value for a wide variety of asset classes. From the perspective of speculators, the author discusses the methodology for identifying undervalued or overvalued assets for taking appropriate bet on such assets. From analysts, hedgers or investors perspective, this paper discusses how financial instruments derivative could be used to protect financial assets and return on such assets against volatility. The author highlights application of the same set of derivative instruments for speculative, regulatory arbitrageurs and other purposes. For the same group, this paper identifies fundamental variables that determine assets' prices in a free market economy. The author specifically identifies interest rates, exchange rates, rates of inflation as well as monetary and macroeconomic policies as the main asset-price determinants. This article offers a set of mathematical models for pricing different categories of financial assets. The author maintains that financial engineering has ushered in a new set of financial assets, such as catastrophe bonds and collaterized debt obligations (CDOs), which are inherently difficult to price. At every opportunity, the author elucidates the roles of monetary policy makers in fostering efficient financial market system in an emerging economy like Nigeria.