Articles
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Mitigating exchange rate volatility risk
By Thehimalayantimes.com
KATHMANDU: Commercial banks are engaged in hedging of the dollar and other major currencies through non-deliverable forward (NDF) contracts with international banks. Bankers believe that it is the best possible instrument for them to mitigate the risk associated with exchange rate volatility and to offer an adjusted exchange rate too. Currently, it is believed that USD worth of Rs 15 billion has been hedged under the NDF.
The Nepali currency is not recognised in the international market, so the dollar exchange rate is maintained against the Indian currency, with which the Nepali currency is pegged. Under NDF, the international banks give certain exchange rates for the USD to Nepali banks. If there is any changes in exchange rate in the market on the expiry date of contract or settlement date, the Nepali and international banks settle the NDF by paying the difference amount in USD itself as it is called ‘NDF contract’. Before expiry also it is possible, but the difference amount will be calculated based on forward exchange rate itself.
The prevailing provision in the law restricts participants other than banks for such transactions though exporters and importers (EX-IM) are the foremost victims of such exchange rate volatility. The Nepali market is essentially based on imports and as the USD becomes strong, importers have to pay more Nepali currency to import the same products. Consequently, the imported products are becoming more and more expensive day by day.
Volatility in the exchange rate is significantly hindering the import business cycle. So, the presence of hedging opportunity could significantly help the EX-IM to manage their differential exchange rate risk. Besides the prevalence of hedging, the absence of permissible FOREX trading is giving enough room for international FOREX brokers to illegally penetrate the Nepali financial market to offer FOREX trading facility. Consequently, government is losing tax revenue and such activities are also encouraging illegal hundi operations which spells further doom for the economy.
The equivalent nature of NDF mechanism can be developed as currency futures which is second-largest tradable market in the world behind stock markets. Currency futures usurps hedging needs and will also provide alternative form of investment to
concerned parties seeking for such speculative opportunities in FOREX trading. The government would also add taxes to their coffers and simultaneously enhance requisite money flow in the economy.
Since currency futures affect economic activities as a whole, the stated market require a stringent regulating authority to oversee the market, thereby fostering fair and transparent trading practices. With upcoming regulations in commodity market around the corner, the concerned authority could also incorporate currency futures since the markets are very much aligned to each other.
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