Commercial banks taking dollar-denominated loans should hedge the facility against risk of currency fluctuations, FMDQ OTC Securities Exchange Managing Director/CEO Bola Onadele has said.
Speaking during the financial markets workshop in Lagos, he said banks borrowing dollars needed to protect themselves through hedging. “Anyone that takes foreign currency loan should hedge, that is the opportunity the Central Bank of Nigeria (CBN) has provided,” he said.
He explained that hedging/derivatives were primarily risk management instruments that enable participants to price and transfer (hedge) financial risks such as market/price risk, foreign exchange risk, and interest rate risk.
According to him, hedging reduces the risk of exposures to unforeseen circumstances. Hedging is a risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities.
Also speaking at the event, Chairman, Swaps & Derivatives Workgroup and FMDA President, Samuel Ocheho, said the workshop with the theme: Legal Documentation as Driver to introducing New Products and a Healthier Financial Market in Nigeria was organised by the Swaps and Derivatives Workgroup of the FMDA to sensitize people, members of the FMDA and other market operators on the need for hedging products and proper documentation in the market.
The International Swaps and Derivatives Association (ISDA) Africa Chairman, Brett Gallie and Partner at Clifford Chance, Derivatives and Structured Trades, Matthew Grigg were also at the event to support the Nigerian derivatives market.
Onadele said that pension fund managers also needed to understand the impact of hedging on their operations, especially as interest rate that was 17 per cent today could suddenly become 11 per cent in the nearest future.
According to Ocheho, FMDA is a partner in progress in developing the Nigerian financial and derivatives market, adding that the programme was supported by FMDQ OTC Securities Exchange to impact positively on the derivatives market.
Ocheho stated that there is need to have proper documentation for all the products that we are doing in the financial market, explaining that in Nigeria, they do not want to lose revenue that one way to ensure that oil price remains high is by creating a hedge product for the oil price.
He mentioned that most government doesn’t want to hedge because they believe the price is expensive also adding that the level of adoption of hedging in Nigeria is still very low because most people do not understand why they need to hedge.