In more advanced markets, derivatives constitute the largest segments of the securities traded. When trading in shares and bonds, for example, investors are not privy to all information relating to the companies concerned and often make a dive for the investment without much of protection in the Kenyan market.

With the launch of the new instruments, investors expect to be able to hedge the risks inherent in the trading in the stock market.

Shareholders continue to be warned of the risks of taking advice even from experts because there are hardly any formalised mechanisms of hedging against risks in the market.

The NSE see the introduction of the risk-mitigation instruments by the end of the second quarter of the year, meaning that this year should mark increased activity at the stock market should investors welcome the opportunities provided.

However, we expect that the authorities will be keen to keep investors aware of the potentially toxic nature of derivative products even when there are rules and regulations relating to their use in the market.

The problem with the instruments is that they are based on other assets, say shares, currencies, real estate, bonds, or commodities.

If there is misinformation relating to these assets arising from poor regulation, then an investor will be buying a derivative of something they really do not know much about.

In the period 2008 and 2009, markets in Western countries went into a major turbulence when the property bubble that had been building up in the United States bust.

There were securities packaged on the basis of the real estate assets and these had been on sale to investors for years.

However, little did the investors know that some of the derivatives were based on mortgage assets that were sub-prime. This meant that the mortgages were of low quality in the sense that they had been taken by borrowers who did not have the best credit record.

The regulator in Kenya, the Capital Markets Authority, is expected to closely monitor the derivatives markets taking account of what has happened in other countries.

One major development that is also expected to take root in the country is the use of credit rating agencies to value securities.

This valuation should be done properly to avoid the situation in western countries where worthless securities were given top ratings, only for them to prove toxic during the financial crisis.