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Dollar and Naira

How Nigerian Investors Can Hedge Against Currency Fluctuations

Oloade Omosan-Agie

Nigerian investors are losing a lot to the devaluation of the naira, but they must invest in dollar denominated assets to hedge against the depreciation, the Managing Director of Afrinvest Securities Limited, Ayodeji Ebo, has said.

Dollar denominated investments are assets, securities and transactions priced in US dollar.

Most investors and regular traders in Nigeria have seen their purchasing power and assets diminish over the last few years.

Naira denominated investments have lost their value, while the regular staple items have seen their prices rise by over 50 per cent.

Most Nigerians have recently resorted to storing their savings in dollar.

The fate of the naira has been worsened by the outbreak of the Covid-19 pandemic.

Covid-19 had last year eroded revenue earnings from export of crude oil which makes up over 90 per cent of foreign exchange earnings.

“The devaluation of the currency also matters to you as an investor because it has a direct upward price impact on imported items as well as locally produced items,” Ebo said on Monday.

He disclosed that the naira at the Central Bank of Nigeria official foreign exchange window has depreciated by an average of 7.7 per cent annually in the last ten years and has devalued by 59 per cent from N150.29/dollar in 2011 to N379/dollar 2021.

He said, “In view of these considerations, it is imperative to have savings and investment in foreign currency to hedge against currency devaluation or depreciation, especially if you have potential FX obligations.

“Most foreign currency investments are typically denominated in US dollars. Investment in dollar-denominated investments generate two types of returns.”

The first return advised by the Afrinvest MD is the interest payment in the case of Eurobonds and periodic payout for dollar mutual funds.

The second is the return from the changes in the value of the naira against the dollar.

Ebo said if an investor puts N1m in a dollar denominated investment with an annual return of 7 per cent, at N400 per dollar exchange rate.

This translates to an initial investment value of $2,500.

He explained that when the naira devalues by 16.7 per cent, the exchange rate becomes N480/dollar.

Considering the changes, at seven per cent annual returns, the investor will earn $2,675 in one year.

“If you decide to liquidate your investments and convert back to naira at the N480/$1, the value of the investment becomes N1.284m,” he said.

By implication, the investor has made additional N284,000 following the devaluation of the naira, he noted.

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