Everybody knows that the majority of the microfinance institutions are running in under-developed or developing countries, which are characterized by high risks regarding currency depreciation or debt restructuring. Such jeopardy keeps occurring periodically. So they’re especially exposed to the risk of forex rate fluctuations.
Recently a CGAP survey found that 50% of the MFIs have zero protection mechanisms against such risks. Yet, they’re as well indicating an overall lacking in their understanding regarding forex risks and/or the degree to the MFIs are vulnerable to those risks.
Thus researchers keep seeking ways to raise awareness among those people regarding the risk of forex rates in microfinance sectors. They are ready to provide them with brief overviews of a variety of components related to those risks. Secondly, if you look at the recent techniques employed by most microfinance institutions (or MFIs) and/or investors managing such risks, it will become clear how urgent it is to clarify to them the strategies of mitigating and avoiding exposures to such exchange risk.
However, there are basically 3 components related to forex rate risks, namely –
Devaluation/depreciation risk
Convertibility risk
Transfer risk
The first category of risk however arises within microfinance arena whenever an MFI ends up acquiring debt in any foreign currency (typically USD and/or EUR) and after that on-lends within any domestic currency (or DC). Since after that, the MFI comes with a liability in hard currency, while it’s assets remain in DC, it all results in a horrible “currency mismatch” – which refers to a fluctuation in terms of those 2 currency’s relative values. Such miss matches might threaten the institution’s financial viability.
The 2nd component regarding the risks of forex rate is the convertibility risk. This refers to a particular risk that your national government decides to take a policy that forbids selling foreign currencies to those who have hard currency debts.
And finally, transfer risk refers to that risk that arises when the government forbids people from sending any particular currency out of the country, disregarding which source it came from.
In both of these latter cases, the MFI does have the right to make payments with hard currencies, but they’re not allowed to make those payments in real world, since there are a number of restrictions that the governments impose on them.
Nevertheless, there’re multiple options for these organizations which are exposed to risks of forex rate. Whatsoever, “hedging” happens to be among the most popular options. As you might know, it involves using some special hedging instruments against those risks. Among those instruments, forward contracts are most notable. They are special agreements for exchanging or selling foreign currencies at a pre-set price at some point.
Another instrument is called ‘swap’. It is another special agreement that involves simultaneous exchanging or selling of a particular sum of any foreign currency at the present and reselling or repurchasing that currency on a future date. And finally, you might have heard of ‘options’, which are special hedging instruments providing you with the option of buying or selling a particular foreign currency on a future date.
Originally posted 2009-11-07 04:22:04. Republished by Old Post Promoter
Popularity: 10% [?]
Like a lot other markets, the forex trading arena is decisively driven by consumers’ supply as well as demand. Whenever there’s an astute demand for a particular currency, you will see its price to rise. At the other side of the spectrum, whenever there’s any excessive supply (even if for a short lived period of time) of a particular currency the price will fall substantially (at least enough to bring some profits or losses for traders).
On the first thought, all that seems pretty simple. But unfortunately, it is very tough to successfully or flawlessly predict movements in the prices of currencies. And that is hugely related to price forecasting systems. Trading and profiting is greatly related to it.
Till date, there’re 2 main procedures for predicting the movements with forex markets:
1) Fundamental Analysis
2) Technical Analysis
Fundamental Analysis
Fundamental analysis had previously been a dominant tool for predicting price movements in forex markets till the mid 80s. Today, it does not remain the 1st priority choice of traders. The motto of fundamental analysis is to focus on political, social as well as economic factors that drive supply-demand. This means that the fundamental analyses are based upon things like interest rates, deflation/inflation, rate of unemployment and current growth rates within the economy. All these dissimilar indicators are utilized for assessing a particular currency’s current performance along with subsequent predictions regarding its upcoming movements.
The major limitations of fundamental analyses are that a trader must stay abreast of concurrent events for being able to realistically analyze a large chunk of data. In addition, there’s a huge debate among experts regarding which data should or shouldn’t be incorporated in the fundamental analyses. In addition, experts differ in their opinion regarding the extent of weight to assign on each and every one of those fundamental indicators.
One thing that everybody agrees upon is that a nation’s balance of payments has always been and still is the key to the internal mechanism of fundamental analysis, since it projects the money flow in the economy or out of it. Speaking theoretically, a BOP of zero is destined to produce a pretty stable price even though the BOP deficit/surplus causes the nation’s currency to fall/rise.
Technical Analysis
And here comes the modern solution for leveraging trading systems. Trading has gotten considerable boost when traders started using technical analyses. This system is all about gauging and alerting regarding movements among currency prices. However, it makes use of historical price records/data for predicting future prices. Or at least, that is the most simplified way you can put the technical analyses used by traders in 21st century.
The core principle for technical analyses is that in almost all the instances (there are less frequent exceptions, of course) the history keeps on repeating itself. So price movements of the current date will hopefully go along well established price fluctuation patterns.
However, the 2nd principle is, there’s no need to probe current market info for predicting movements within the forex market, since this is before now reflected within the currency prices. So it’s just the price movements themselves, which deserve to be analyzed for predicting the direction of price movements.
Originally posted 2009-11-07 06:40:33. Republished by Old Post Promoter
Popularity: 15% [?]
