RISK HEDGING INSTRUMENTS AND CAPITAL MARKET PERFORMANCE: EMPIRICAL EVIDENCE FROM DERIVATIVES FINANCE IN THE NIGERIAN EXCHANGE GROUP

Abstract

The development of a vibrant financial derivatives market on the Nigerian Exchange Group faces critical structural, liquidity and awareness challenges that limit its effectiveness in modern risk management. This study examined risk hedging instruments and capital market performance in Nigeria, with specific emphasis on derivatives finance in the Nigerian Exchange Group. The study focused on the effects of interest rate swaps and spot exchange rate on market capitalisation, while money supply and inflation rate were included as control variables. Monthly time-series data covering January 2021 to December 2025 were obtained from Central Bank of Nigeria, Nigerian Exchange Group data library and analysed using descriptive statistics, Augmented Dickey-Fuller unit root test, ARDL bounds test, short-run and long-run ARDL estimates, and diagnostic tests. The unit root results showed a mixture of variables integrated at level and first difference, justifying the application of the ARDL approach. The bounds test confirmed the existence of a long-run relationship among market capitalisation, interest rate swaps, spot exchange rate, money supply, and inflation rate. The findings revealed that interest rate swaps had a significant negative effect on market capitalisation in the short run but a significant positive effect in the long run. Spot exchange rate and money supply exerted positive and significant effects on market capitalisation, while inflation was significant in the long run. The study concluded that risk hedging instruments improvedNigerian Exchange Group performance whenit is well designed and well regulated. Based on the findings, this study suggested that regulators should strengthen derivatives market through increasing the disclosure obligations, standardising derivatives contract documentation, deepening central clearing and strengthening the supervision of counterparty risk. The NGX, SEC, CBN and market operators should also conduct regular investor education programmes, print simplified futures, swaps and currency hedging manuals and make it a requirement for brokers to explain risk before investors trade derivative products.