Hungary’s forex dilemma

Hungary’s ‘yes’ vote in last month’s referendum on EU accession has sent another positive signal to investors that the country is quickly taking its place in mainstream Europe. As Hungarian economic integration gathers pace and the foreign exchange market continues to liberalise and gain liquidity, the corporate sector will have to hone its fledgling currency hedging skills. Since February, the forint has been trading within a stable band. However, in January it depreciated rapidly by 6% after the National Bank of Hungary slashed interest rates by 200 basis points, causing corporates to seek hedges through the currency derivatives market. Some economists believe the forint could be in for a wild ride in the run-up to EU accession on May 1, 2004, and dealers are rolling out hedging tools to cater for what they hope will be growing demand.

“The referendum is a further signal to both domestic and international corporates that, as Hungarian capital markets become more integrated into Europe, and cross-border flows increase, the need for more sophisticated financial instruments to manage market risk will develop in the run-up to EMU entry,” says Anne Louise Gibbins, an emerging markets specialist at JP Morgan Chase in London.

Hedging foreign currency risk, once rare, has become more common following the central bank’s decision to