Egypt’s central bank has opened up the possibility for banks operating in the country to value the dollar against the pound at fair value in order to control the crisis of market fluctuations and lack of liquidity.
According to the Cairo 24 website, this is in line with International Monetary Fund requirements and speeds up approval of a new loan to the Egyptian government.
A bank source familiar with the Central Bank said that the mechanism of foreign exchange futures contracts is currently being scientifically studied by the Central Bank in order to gradually begin the actual application process.
He pointed out that futures contracts, which are a type of derivatives, are the least risky and work to stabilize the price of the pound against these foreign currencies, especially the dollar, during the year.
He added that the contract starts from the third day and goes up to 360 days, and this type of derivative is aimed at providing liquidity in the market from foreign and local currencies, and works to determine the real value of foreign currency against the pound sterling. .
He explained that the Central Bank will not play a direct role in the mechanism of future contracts, as it is limited to preparing studies and allowing banks to practice this type of contracts and follow their implementation in an optimal and gradual manner, but banks are those who edit contracts in the interests of their clients.
He continued with a case in point: “The merchant has no money at the moment and needs a dollar in three months, so an agreement is made with the bank for a specific price per dollar to be received in three months at the agreed price. meaning, and there are three scenarios.”
He added that “the first scenario is to agree on a specific purchase price of the dollar, and let it be 20 pounds, to be received in three months, and when the second delivery comes, the price of the dollar will be the same as the value of the agreement. . In this case, the import of the currency that the job requires is done without calculation.”
And he added: “The second scenario, in the event of a change in value upwards or downwards, and at this time the difference is calculated in the bank on the profit and loss account, that is, the price in dollars changes at the time of maturity, lowering, for example, to 19 pounds, but the stipulated 20 pounds per dollar, in which case the buyer receives the value of the dollar, according to the contract, about 20 pounds, regardless of the fall in price, and he sells the dollar to the bank at the market price of 19 pounds, and takes a loss of 1 pound, and this is considered a profit for the bank.
He pointed out that the third scenario would arise if the dollar price rose to £21 on the maturity date, in which case the buyer would receive the contract price, estimated at £20, and sell it to the bank at the market value, estimated at £21, and the difference is settled, which is a profit for the client and a loss for the bank.
The source clarified a number of conditions that must be met by those wishing to draw up a deferred contract, the need to be a client of the bank from which he wants to receive a dollar, since the account must have a margin within 10% to cover the difference in losses or its value to pay losses, and in the case of a credit line there is no need for margin.
He stated that futures contracts will stabilize prices and provide local liquidity, noting that the implementation process will be easy if banks train employees with a high degree of efficiency in understanding how to work with automated contracts, and the training and qualification process can be carried out from one to two months.
He added that the central bank will allow this mechanism to work gradually, starting with small amounts and then gradually increasing them.
He stressed that foreign banks in Egypt such as HSBC, Citibank, Commercial International and Qatar National are ready to work with this mechanism at this time.
He explained that the Central Bank will receive a report on the meeting of the Assets and Liabilities Committee for each bank, and he must clarify the nature of the clients who will trade in futures contracts.
He pointed out that no commission is charged for the execution of a fixed-term contract, and the difference in buying and selling between the client and the bank is the fee for concluding the contract.
Source: Cairo 24