Hedge against forex risks

  Serendipitous moments are crystalline in their beauty. Just as Open For Business readers figure out how to handle the continuous strengthening of the peso against the dollar (see previous post), here come your friendly central bankers explaining how YOU -- exporters, small business owners and even private investors -- can prepare. Doris Dumlao wrote after the central bank forum on the exchange rate that disadvantaged sectors could tap a wide array of hedging tools to reduce their foreign exchange risks. (Click here to read the entire article).

“The peso is expected to remain firm for the rest of the year on the back of sustained dollar inflows from overseas Filipino remittances, portfolio and foreign direct investments and export receipts,” BSP Deputy Governor Diwa Guinigundo said at a forum with exporters. Guinigundo said the uptrend would continue for the rest of the year despite jitters from rising oil prices and the credit crunch in the United States or despite the BSP’s occasional intervention at the spot foreign exchange market. The peso closed at 45.14 to the dollar Wednesday from Tuesday’s 44.915. Traders suspected that BSP intervention prevented the local currency’s further appreciation in the last few days. “A strong peso is not the BSP’s policy. Our policy has always been and will continue to be for a market-determined exchange rate, with occasional scope for official action on our part to smoothen excessive volatility in the exchange rate, and this we do whether the rate is going up or going down,” BSP Governor Amando Tetangco Jr. said at the forum. Tetangco said the volatility in asset prices, especially in the form of foreign exchange movements, could adversely affect the operations and render the investment plans of both public and private sectors highly challenging. “Hedging could, therefore, serve as a form of insurance to help businesses reduce this type of risks so businesses could plan better and reduce volatility in their cash flow,” he said. Wednesday’s forum focused on hedging against exchange rate fluctuations through the use of derivatives, or financial products whose worth are based on the values of underlying commodities or indices. “An exporter, for instance, by entering into a forward contract, could reduce the volatility of his cash flow by locking in at an agreed exchange rate the conversion of pesos of his future export earnings,” Tetangco said.

Jhunie asked if these hedging instruments are provided by the government. Gone are the days where we always have to wait for the government to solve the country’s problems for us. The free market itself should form the solution. These hedging instruments are possible through your relationship with your banks. I understand how awful this is for anyone earning in dollars and other currencies. Remember, however, that in free markets, especially currency markets, anything can happen. The peso moved from 26 to 40 in just a few days in 1997. From 54 a few years ago, it’s now at 45. If there’s anything we should all try to do is not to live in the moment, but find solutions because the financial world can change in a blink.