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The move by the
Central Bank of Nigeria (CBN) to introduce derivative foreign exchange
products will eventually allow for a more stable national currency.

According to the
Financial Market Dealers Association (FMDA), the body of financial
instruments brokers, the commencement will be beneficial to the end
users of foreign exchange.

Akinsowon Dawodu,
president of the FMDA, said the framework, as released by the Central
Bank, would also help to check speculation on the products.

“The problem is
people may be carried away to speculate using the product. What the CBN
has done by tying the trade to underlying transactions is to reduce
speculation and reduce panic demand. It will keep demand within proper
tenor limits,” Mr. Dawodu said.

According to him, this will help in the long term to reduce fluctuations in the value of the naira.

On the introduction
of the product, he said, “The substance is what we wanted. It is good
for the market, for the end users, and the companies and for the
economy.”

He said though hedge
products do not guarantee stability, but used properly, can help to
reduce the volatility: “Futures, options, forwards, swaps; all these
products are originated as hedge products to mitigate risk.”

Given the current
state of the Nigerian financial market, Mr. Akinsowon said trading
forward instruments could begin anytime soon.

“Options will take awhile. But forward can start in a few weeks with the regular WDAS (Wholesale Dutch Auction System).”

The CBN on Monday
released guidelines for Foreign Exchange Derivatives and Modalities for
CBN foreign exchange forwards. The guidelines cover products, practices,
regulation, and supervision of the foreign exchange derivatives market.

“The objective of
the CBN is to make our financial markets global, organised, liquid and
diversified. The development of the financial markets will enhance the
transmission of the monetary policy and minimise the risk to financial
system stability,” the CBN said.

According to the CBN
governor, Lamido Sanusi, the move is to discourage currency
speculation, which has been blamed for the volatility in the value of
the naira.

“Part of what we are
trying to do in the Central Bank is introduce a forward market so that
people can hedge that risk and then don’t feel any urge to pre-liquidate
outstanding dollar exposure,” Mr. Lamido said.

As part of moves to
reduce volatility, the CBN, at the last monetary policy committee (MPC)
meeting introduced some measures to tighten liquidity in the system.

Analysts are, however, skeptical about how far this would help mitigate demand for foreign exchange.

According to Razia
Khan, Regional Head of Research, Africa Global Research at Standard
Chartered, London, “we question whether this will be sufficient to quell
FX market nervousness.”

“In view of the wider risks, more ‘complementary measures’ may be needed to calm FX-market sentiment,” she added.