BOJ survey shows paucity in banks offering FX hedging contracts

More hedging contracts needed to cushion FX losses among local businesses, says JCC past president

Observer writer

Wednesday, July 17, 2019

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A recent survey by the Bank of Jamaica (BOJ) has shown a paucity in local banks offering foreign exchange (FX) forwards or hedging contracts to businesses seeking to mitigate foreign exchange losses during periods of volatility.

The survey showed that over the past six months only 54 hedging contracts were done, an average of nine per month. Sagicor Investments was among the financial entities which offered hedging contracts so far this year.

In January, Sagicor successfully concluded a foreign exchange forward sale contract for US$80 million with a major Jamaican corporation, setting a fixed price for the US dollar as of a certain future date.

A forward buy or hedge is an investment position locking foreign exchange in at a certain price now to be paid over at a future date at the agreed price, irrespective of any movement in the exchange rate.

Forwards or hedging is one of the tools used by businesses in reducing their FX risk exposure. If a business makes frequent transactions with foreign currencies, a forward contract is a helpful tool to protect transactions against market fluctuations.

Immediate past president of the Jamaica Chamber of Commerce (JCC), Larry Watson, who mentioned the BOJ's survey during his presentation at the launch of the chamber's second-quarter Business and Consumer Confidence Survey recently, highlighted the poor offering and marketing by local banks of future and hedging contracts.

He said the survey showed that the average amount for each hedging contract was about $4.4 million per transaction. Watson told the Jamaica Observer that the most used period for hedging or forward buying was 30 days.

”Based on this, it is fair to assume that it's the larger institutions that are doing the forward-buying,” Watson lamented, as he sought to make a case for small and micro businesses being provided with access to such forwards and hedging contracts to stave off the foreign exchange losses and vulnerability which they are now facing.

He advised that the BOJ foreign exchange committee has been encouraging companies and institutions to do more FX forward contracts to reduce their volatility to foreign exchange swings, as they seek hard currency to pay for raw materials, goods and services.


Watson went down the wicket in demanding that the banking sector unbridle itself in the provision of more hedging contracts, particularly among small businesses.

“I am encouraging the financial institutions to become more active, not only in doing it (offering FX forwards) but also marketing it and explaining to businesses so that they can be more aware of what is available to reduce their risks,” Watson told the Business Observer.

According to Watson, “my message to financial institutions is to develop and become more active in marketing forward contracts for small, medium and large institutions…just like how a financial institution is launching a credit card everybody knows that they (institution) have a new credit card, it's the same way they can go with forward contracts.”

Earlier this year, the BOJ issued a news release strongly encouraging businesses to use forward contracts with their dealers to manage their foreign exchange transactions.

“Fluctuations in the rate can be inconvenient, but it is those very fluctuations which create the opportunity for using forward contracts to manage foreign exchange transactions more efficiently and to plan more long term,” the bank said in its release.

The BOJ supports the use of forward contracts to lock in the price of hard currency today for future delivery, saying it gives certainty to businesses that have future foreign exchange obligations to fulfill. Authorised dealers and cambios do not require the authorisation of the BOJ to offer forward contracts, nor is their any limitation on the size of the contracts.

However, the process is not fully transparent.

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