By Babajide Komolafe
The recently intro- duced  foreignexchange forward market has been described as a good development for manu-facturers, importers and cross border borrowing.

“There is no better time to introduce forwards and options contracts than now”, says Bismark Rewane,  MD/CEO, Financial Derivatives Company.

It would be recalled that the Central Bank of Nigeria (CBN), earlier this month, introduced forward market for foreign exchange by approving derivative products to that could be used to hedge against foreign exchange risk.

“CBN’s announcement allowing trading in forward contracts and futures options in the Nigerian foreign ex-change market was greeted with indiffer-ence by end users”, Rewane said while commenting on this development in the Bi-Monthly Business and Economic Update of the company.

“This is because many see forex hedging as unnecessary and an additional expense with no value-add. When you analyse the exchange rate trend in Nigeria, you will see an historical level of stability in its value relative to the U.S dollar,” he said.

“The Nigerian currency is definitely heading towards current and capital account con-vertibility. The Nigerian government had earlier accepted the article VIII of the International Monetary Fund (IMF) terms of agreement, which encourages coun- tries to move towards currency convertibility and reduce forex market seg-mentation and imperfections.

“In an efficient market like most others, currency and price volatility are a natural and constant pheno-menon. Efficient markets usually metamorphose into sophisticated markets, which allow informed buyers and sellers to hedge their positions to mitigate risks.

“Nigeria’s flow of imports is changing in favour of countries that have deliberately and strategically embark upon competitive devaluations.

“Countries like China and U.S. are gaining market share at the expense of the EU where the currency is relatively strong.

“This supports the argument that Nigerian importers are becoming not only value but price and currency sensitive or elastic in their demand behaviour.

“That is why there are more Kia, Hyundai cars and Tata buses than BMW’s and Mercedes amongst imported cars.

“Manufacturers also need to plan and guarantee margins on imported raw materials or finished goods. These are some of the reasons why the hedging of the Naira is likely to become very prevalent amongst the leading manufac-turers and corporates in 2011/2012.

“Last but not the least, but infinitely more important is the question of the cross border borrowing. The differential between borrowing in Nigeria and in the Euromarkets is so wide for an equiva-lent level of risk.

“This is leading most subsidiaries and affiliates of multinational to raise short term funding from international banks in U.S. dollars or Euros.

Since repayment of these facilities is in forex and their sales are in Naira, the need to cover forex exposure has become all the more imperative.

In conclusion, one can say that the forward markets in Naira, which is now being initiated by the CBN will soon erupt into something much larger than was originally anticipated. It will make planning easier and smoothen the peaks and troughs of currency swings in what is one of Africa’s most potent frontier markets.”