Bangladesh Bank introduces hedging facility to reduce commodity price volatility risks

Bangladesh Bank has introduced a Commodity Price Risk Hedging facility for importers to reduce the risks associated with fluctuations in commodity prices in the international market. The central bank issued a directive in this regard on Monday.

Under the new arrangement, Authorised Dealer (AD) banks will be able to provide various facilities to eligible importers in managing commodity price risks. If commodity prices rise abnormally in the international market, importers will be able to reduce financial risks through this mechanism. This will also make it easier to plan business costs.

Both buyers and producers remain at risk of financial losses due to changes in commodity prices. If prices rise, the purchase cost increases, which can reduce business profits. Conversely, if prices fall, producers face the risk of losses.

Various hedging strategies are used to reduce such risks. Through these contracts, it is possible to take advance measures regarding future prices. As a result, uncertainty in business is reduced. This facility will be particularly useful for commodities such as oil, steel and agricultural products, whose significant price changes affect production costs, transport expenses and business profits and losses.

According to the Bangladesh Bank directive, eligible importers will be able to use various internationally practised hedging methods, including commodity futures, swaps, commodity index-based forward contracts and options, against actual import liabilities.

Importers of various important commodities, including raw materials, intermediate goods, fuel, edible oil, metals, grains and fertiliser, will come under this facility. Importers will be able to hedge up to a maximum of 100 percent of their actual import risk. However, they must preserve the necessary documents and follow the prescribed risk management guidelines.

Bangladesh Bank said hedging is not an opportunity for speculative business. Its purpose is to reduce the risks associated with commodity price fluctuations in the international market. AD banks must ensure proper verification, document preservation, risk disclosure and reporting to Bangladesh Bank.