Effects of Derivatives on Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

Derivative markets have changed overtime from trading with simple contracts to very advanced financial instruments. The benefits and costs of derivatives on the financial performance of listed firms remains the subject of debate. This study, therefore, sought to establish the effect of derivatives on the financial performance of firms listed at the Nairobi Securities Exchange. The study targeted all 62 firms listed at the NSE as at 31^st December 2016. A questionnaire was used to collect primary data. The study applied both descriptive and inferential statistics to analyze collected quantitative data. The study used Statistical Package for Social Sciences (SPSS version 22) for analysis. Return on Assets (ROA) was used as the proxy for financial performance while risk management, efficiency in trading, price stabilization and price discovery were the predictor variables. The findings of the study indicated that there is a significant relationship between the financial performance (ROA) of firms listed at the NSE and derivatives. Additionally, the positive nature of the relationship means that a unit change /increase in derivatives will result to an increase in financial performance of firms listed at the Nairobi Securities Exchange. This study recommends that listed firms put in place adequate risk measuring systems and appropriately create structured limits on risk taking. Consequently, derivatives should also be properly used in a manner that is instrumental to the goal of a firm.