The Central Bank of Nigeria’s (CBN’s) foreign exchange (Forex) sales was dominated by Forwards contracts last year, accounting for $11.2 billion or 70 percent of the year’s total sales.
Forwards are transactions which involve delivery of forex at a future agreed date but at current exchange rate unlike spots transactions which demand immediate delivery.
The Annual Report of the Financial Market Department of the CBN for 2017 showed that forex sales for forward contracts grew by 44 percent to $11.2 billion, up from the $5.8 billion sales in the preceding year.
The forwards contract sales in the year under review exceeded the 30 percent increase in total foreign exchange sales by the apex bank which rose to $15.8 billion, up from $12.2 billion sold in 2016.
The report stated: “In 2017, the CBN maintained its direct intervention in the inter-bank foreign exchange market to cushion the demand pressure and ensure exchange rate stability. Consequently, a total of $15.82 billion was sold at the inter-bank segment.
“This comprised $1.53 billion at the inter-bank spot, $1.39 billion for invisibles, $1.07 billion for SMEs, $622 million at the I & E, while forwards sales were $11.19 billion. On the other hand, the Bank purchased $6.09 billion at the inter-bank market. Thus, net sales by the Bank amounted to $9.73 billion. The sum of $10.73 billion matured at the forwards segment, while $1.92 billion remained outstanding at end-December 2017.
“In the preceding year, $12.16 billion was sold at the inter-bank market, comprising $6.30 billion spot and $5.85 billion at the forwards. In the same vein, the Bank purchased $130.98 million, resulting in a net sale of $12.24 billion. The sum of $4.29 billion matured at the forwards, while $1.56 billion remained outstanding at end-December 2016.”
Generally, forward markets and derivatives markets are used as hedging instruments to manage financial market risks for its users and in some cases, redistribute such risks.
