12:25 PM
Saturday 08 October 2022
I wrote – Manal Al-Masry:
Official sources in some banks told Masrawy that the Central Bank directed the banks, during a meeting it held with them in the past days, to prepare to launch new financial derivative tools for clients to protect them against the risks of currency exchange rate fluctuation for a specific period of time.
The sources pointed out that the Central Bank’s directive to banks to complete the infrastructure necessary to work with the new financial derivatives is an attempt to achieve the goal of securing customers against the risks of currency fluctuation, which was taken in the largest international banks as it was taken in Egypt in a previous era, but the work was stopped.
These financial derivatives, as Masrawy will discuss in the following lines, also guarantee insurance against the risks of interest rate fluctuation globally by providing flexibility by converting the fixed rate of return to a higher variable rate, according to the sources.
According to the sources, the Central Bank has identified 5 financial derivatives to hedge against currency and interest rate fluctuation risks, namely (IRS), (SWAPS), (Options), (FWD) and (NDF), which will be explained in detail in the following lines.
These derivatives aim to provide reassurance to customers, whether importers, exporters or foreign investors, in securing the fluctuation of the exchange rate or return for a specific period of time and according to the nature of each financial derivative.
First- Financial Derivative Options: It allows the customer to set the exchange rate with the bank at a certain price even after a specified period of time, while allowing him the flexibility to choose another exchange rate, provided that a specific percentage is paid to the bank, such as 0.5% of the total value of the transaction.
For example, if the customer agrees to set the exchange rate at 20 pounds for a period of one year, he will not be affected in the event that the exchange rate rises above this number.
But if the exchange rate drops from the predetermined figure of 20 pounds at the end of the time period to 19 pounds, he will have the right to implement his deal with the bank at this lower price, and thus the customer will get the currency at a cheaper price than the agreed upon.
Second – the financial instrument FWD: It aims to insure the customer against the risk of the exchange rate rising and fixing it at a specific number for a period of one year or 6 months until the arrival of his goods, but if the exchange rate falls at the end of the period from the specified price, he will not have the right to choose the lower price, such as the first derivative.
Third – the financial derivative SWAPS: It includes the insurance of customers against the risks of fluctuation in the exchange rate and the return at a certain price after 6 months or a year in cases of uncertainty, so that it gives reassurance to the investor, exporter or importer.
Fourth – NDF: It is close to the financial instrument FWD, but in the event of the exchange rate falling or rising from the specified number, one party pays the difference to the other party.
Fifth- IRS: It aims to hedge against the fluctuation of the interest rate at times when the interest rate is expected to rise globally, that is, in the event that a customer purchases bonds at a fixed price, he will have the right to move to a variable rate in the event of an increase in the interest rate globally, or it can be used to exchange between two currencies.
The sources confirmed that these financial derivatives are not new to the Egyptian banking market, as they were implemented in a past era and then were stopped due to the difficulty of implementation, as well as the volume of clients in Egypt, which did not rise to the level of major clients or foreign investors.
She added that these new financial tools will be applied as soon as the dollar is abundant and the current crisis passes, which contributes to achieving positive targets to insure customers against the risks of currency fluctuation that the Central Bank is looking for.