Financial derivatives are important tools that the Egyptian market was missing, because of their importance in increasing investment, supporting importers and manufacturers, hedging against foreign exchange rate fluctuations, and increasing liquidity, according to Tarek Metwally, the former vice president of BLOM Bank Egypt.
One of these derivatives is the Forward Contract that is used between two parties to buy or sell an asset, whether shares, securities, commodities, or currencies, at a specific price on a future date. It aims at reducing the risks of price fluctuations. Forward Contracts are legally binding and must be fulfilled either by physical delivery or cash settlement.
Metwally added that there are also Non-Deliverable Forwards (NDF) which are the same as futures contracts, but in which cash is not exchanged for the original, but only the gain or loss is exchanged, which is why they are called “non deliverable”. They are tools used to hedge against fluctuations in the exchange rate. They are priced according to the interest rate difference between the Egyptian pound and the dollar, for example.
The question here is: Will this NDF mechanism reduce fluctuations and tensions in the exchange market?
Metwally says that as long as there are two exchange rates; one official and another parallel, this mechanism and financial derivatives in general will have less impact, and therefore in order for this mechanism to work efficiently in any country, there must be a regular exchange market and one price for the dollar, as well as sufficient foreign exchange liquidity in the official market.
With regard to the rumours about the possibility of launching these tools in the Egyptian market, Metwally believes that it is certainly a benign trend and a required and welcome step, but it must be followed or accompanied with creating a stable and flexible exchange market with sufficient liquidity, which is what we expect to happen after reaching a loan agreement with the International Monetary Fund.
