Bangladesh Allows Hedging Price Risk Of Commodities

May 27, 2008 11:38 a.m. EST

Dhaka, Bangladesh (AHN) - The central bank of Bangladesh on Tuesday allowed hedging the price risk of commodities to offset volatility cost of essentials, including petroleum products, in the global market, officials said.

"We have allowed the use of different foreign exchange derivatives by the local importers to hedge price risk of commodities in the international market," a senior official of the Bangladesh Bank (BB), the country's central bank, told AHN Media Corporation in Dhaka.

Hedging is a strategy designed to minimize the exposure to an unwanted business risk while still allowing the business to profit from an investment activity.

The official also said the central bank took the move against the backdrop of price volatility of some essential commodities in the global market to help importers reduce their risks in business.

The central bank also allowed commodity options for buying or selling a product at a predetermined price within a specified period of time, they added.

"It has now been decided that authorized dealers can hedge the price risk of commodities that are traded both on exchanges or over-the-counter (OCT) of their customers through standard exchanged traded futures or options and OTC derivatives on commodities subject to prior approval of Bangladesh Bank," the BB says said in a circular issued.

Under the new provisions, all the details of commodity hedge transactions that have been approved and booked with the clients should be reported to the central bank on a monthly basis.

Commercial banks will also have to send a detailed report to the BB on maturity of each transaction, according to the circular.

"We will initially allow such transactions on case to case basis," another BB official told AHN Media Corporation in the capital, Dhaka, said, adding that the central bank has already allowed at least two such transactions.