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Corporate bodies relying on 'hedging' to cover currency risks

Star Report
With devaluation becoming a mostly used tool to Jack up exports and foreign export reserves. corporate bodies are relying more on hedging' their currency risks through different banking products.
But lar. their only hedging mechanism Is limited to forward covering their foreign currencies through which they can fix the price of foreign currency at a certain rate for a specific time by paying a premium.
"But there are many more products to cut risks and benefit the corporate bodies for currency volatility." said a banker. "For example, there are commodity hedging and options which give better deals for customers. Unfortunately, these products are yet to be allowed by the Bangladesh Bank."
Banking sources said some banks have already sought Cermission to launch a new edging product called 'options' which is under consideration of the Bangladesh Bank.
"In forward covering, we are loosers if currency is not devalued within the specified time because the cost of foreign currency is fixed and it remains the same whether it moves or not." said the finance director of a multinational company talking to The Daily Star. "But with options, we can always buy or sell foreign exchange at the expected rate without any obli-Satlon to leave the contract at ne fixed rate. That is. if the currency becomes cheaper in future. the buyer may not exercise the contract and buy from the ready market by paying premium to the bank which may be less," he said.
"Devaluation affects projects which are under implementation." said Masud Hossain, advisor of Techno Textiles Ltd. "We estimate our projects under the current situation. But sudden devaluation increases the cost of projects because bank liabilities are created on us for opening letters of credit when snipping documents are negotiated. If devaluation takes place before document negotiation. we become victims. This is why we need to take currency hedging products."
Finance manager of a large local pharmaceutical company said tne pharmaceutical sector will be 'heavily affected' because of devaluation.
"We can not raise product prices overnight while our cost go up.” said the finance man-ager without wanting to be named. "We have to consider so many factors like whether we can stretch the people's purse to higher prices. In my view, in the name of helping the exports, import substitute industries will be affected."
His views were affirmed by Dr Fahmida Akhtar, a research fellow of the Bangladesh Institute of Development Studies.
"In fact, it is proven that devaluation alone can not increase exports, decrease imports or even improve the balance of payment situation." said Dr Akhtar who had done a study on devaluation. "If the importing country does not respond to price or if the income level of the importing country does not improve, devaluation may not have any positive impact."
"In case of imports, a large chunk is spent on essential imports which means even if taka is devalued, these will continue to be imported." she said. "It is also found that remittances from expatriates increased significantly in recent years because of an increased export of manpower, not because of devaluation."