A US-based Associate Professor of Finance at Andrews University, Professor Williams Peprah, is advising the Bank of Ghana to tread cautiously, going into financial hedging.
According to him, there are issues such as basis risk, where the hedge does not perfectly match the actual exposure, therefore going into hedging without a strong understanding of the derivatives market could complicate matters.
Speaking in an interview with Joy Business, he said the Bank of Ghana would need a competent investment firm to support the hedging process and clearly identify which segment of the exchange to use. “Without this, even a slight deviation could result in significant losses”.
“Hedging can be a zero-sum game, you may gain, or you may lose substantially, so caution is critical”, he mentioned.
Hedging is essentially about risk reduction and is typically done in the derivatives market. There are issues such as basis risk, where the hedge does not perfectly match the actual exposure.
Meanwhile, Professor Peprah says the Bank of Ghana’s gold purchases and sales can still have an impact on the forex market going forward.
According to him, the gold trade, even without intervention, is a commodity trade that brings in forex through exports. “What has really happened is the introduction of a new model using the GoldBod approach, where the government buys all the gold through the GoldBod, and the Bank of Ghana off-takes and sells it externally. This has improved liquidity within the entire system”.
“However, as we know”, he said, “it is a new programme, so there are still some distortions that need to be smoothed out, which explains the current challenges”.
“With time, it should help significantly. One key aspect is that it addresses expectation challenges in the forex market. Expectations play a very important role in determining forex movements. Once people know that Ghana will have gold to sell and that forex inflows are coming in, speculative behaviour is reduced. Expectations are managed, and speculation is minimised through this programme”, he added.
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