Hedging FX in illiquid markets

Analysts at Standard Bank emphasize the importance of considering FX hedging in illiquid markets primarily as a risk management strategy rather than a speculative activity. In a recent interview with Nana Nkansah Asare, Head of Structured Products for Africa regions at Standard Bank, key insights into trends and mindset shifts regarding FX hedging were discussed. Addressing the perception issue surrounding FX hedging, Nana highlighted the varying mindsets of clients, ranging from those who have never hedged to those who have had both successful and unsuccessful hedging experiences. He stressed the significance of viewing hedging not as a tool for winning or losing but as a means of achieving budgetary goals and ensuring risk management certainty. One of the challenges mentioned was the potential costliness of FX hedging, particularly in illiquid markets where supply and demand dynamics heavily influence hedging costs. Despite the potential expenses, Nana emphasized that the focus should be on certainty, access to liquidity, and overall risk management rather than solely on cost considerations. In terms of available options for FX hedging in illiquid markets, Nana highlighted the use of FX forwards as a simple yet effective strategy. He also mentioned the availability of more sophisticated products like FX options, which can provide clients with diverse hedging opportunities. With the FX landscape in Africa constantly evolving, especially in markets like Tanzania, Angola, and Ghana, securing liquidity at future dates through hedging becomes essential for business sustainability. When discussing the suitability of various structured products for the sub-Saharan African market, Nana differentiated between vanilla and exotic options. While vanilla products like forwards and simple options remain relevant, he acknowledged that more advanced structures cater more to developed markets. The primary goal in offering these products is to ensure clients have access to liquidity when needed at reasonable costs. Looking ahead at the FX market outlook for the rest of the year, Nana highlighted the contrasting scenarios faced by clients who have and haven't hedged in illiquid markets. While unhedged clients may face challenges with loan and supplier payments due to FX volatility, those who have hedged can benefit from locking in rates below budget levels for business viability. Emphasizing the importance of long-term business sustainability over short-term market fluctuations, Nana underlined the role of FX hedging as a strategic risk management tool. Overall, the discussion with Nana Nkansah Asare shed light on the complexities and nuances of FX hedging in illiquid markets. As businesses in Africa navigate the challenges posed by FX volatility, the shift towards viewing hedging as a risk management strategy rather than a speculative endeavor is crucial for mitigating risks and ensuring financial stability.