The FMDQ OTC Securities Exchange and Financial Market Dealers Association of Nigeria (FMDA) have urged the Federal Government, banks and other enterprises to embrace hedging to reduce 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.
Speaking at the financial markets workshop organised by the Swaps and Derivatives Workgroup of the FMDA in Lagos, Managing Director/CEO, FMDQ OTC Securities Exchange, Bola Onadele said that banks can hedge their foreign currency loans to reduce exchange rate risks and improve their operations.
Also speaking at the event, Chairman, Swaps & Derivatives Workgroup and FMDA President, Samuel Ocheho, said the workshop with theme: Legal Documentation as Driver to introducing New Products and a Healthier Financial Market in Nigeria was organized by the Swaps and Derivatives Workgroup of the FMDA to sensitize people, members of the FMDA and other market operators on the 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.
Speaking further, Onadele said: “The banks that are borrowing dollars when they have to pay back, they have to pay back in dollars. They have 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. The rates are low in dollars, so you are tempted to borrow in dollars at four per cent instead of borrowing in naira at 20 per cent”.
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.
“There is need to have proper documentation for all the products that we are doing in the financial market. In Nigeria, we do not want to lose revenue. One way to ensure that our oil price remains high is by creating a hedge product for the oil price. Most government don’t want to hedge because they believe the price is expensive. The level of adoption of hedging in Nigeria is still very low because most people do not understand why they need to hedge. I understand the reason is cost but hedging gives you a better way for planning,” Ocheho said.