Iranian Gov't Approves Forex Hedging Proposal

The Cabinet announced the details of foreign exchange hedging directive proposed by the Export Guarantee Fund of Iran and approved in the 17th meeting of the Cabinet members on Sunday.

Forex hedging is like an insurance policy covering currency fluctuations for exporters. The maximum duration of the policy is six months while it covers foreign exchange depreciation of 3-35% for export commodities, Banker.ir reported.

The coverage fees depend on the timing of the hedging. For one month, the fee is equal to 0.11% of the total value of the foreign exchange while the rates for two-month and three- to six-month coverage are 0.17% and 0.25%, respectively.

The directive has been notified by Vice President Es’haq Jahangiri for implementation.

A foreign exchange hedge transfers the foreign exchange risk from the trading or investing company to a business that carries the risk, such as a bank.

By setting up a hedge, the company also forgoes any profit if the movement in exchange rate is favorable.

EGFI Director Kamal Seyyed Ali had earlier said that the Central Bank of Iran would allow the banking system to cover the risk of fluctuations in foreign exchange rates, when it manages to unify the forex rates.

The currency market volatility in the final months of 2016, which saw the rial hit record lows against the greenback (reaching 41,500 rials to the dollar in the free market in late December), put the kibosh on CBI plans to scrap the country’s dual exchange rate regime by the yearend.

The business community and independent observers have made strong demands that the government unify the exchange rates and stop its forex market intervention for propping up the rial.