In his presentation at the well attended Bank of Jamaica (BOJ) Foreign Exchange Market symposium last Wednesday, Canadian central banking and financial risk management consultant Sylvain Choquette argued that Jamaica is in a “new environment” where “the foreign exchange market is not a one-way bet anymore”.

Before 2016, we knew that the US dollar would always buy more Jamaican dollars, so businesses would buy US dollars as soon as possible (and delay sales), as the profit from speculation “could be as large as operational margin”.

In the new environment, since 2016, there is a two-way market (over the last three years it has been roughly a six per cent range around the rate of 131 Jamaican dollars to one US dollar) so foreign exchange-driven speculative profits can no longer be planned for.

Choquette argues “real planning” would be for businesses to focus “on what you are good at” and protect the operational margin of the business through hedging, meaning fixing the future price at which they buy foreign exchange, thereby allowing planners to protect their operational margin and forget about foreign exchange movements.

Because it is a two-way market, planning to protect their operational margin also applies to sellers of US dollars.

Choquette noted that protecting operational margin does not necessarily require buying foreign exchange forward directly from a bank, as one can do it yourself (DIY) by converting excess Jamaican dollars not currently needed to US dollars, thereby earning a US dollar return while one waits.

One could also borrow Jamaican dollars to buy US dollars, making a return on the US dollars.

http://www.jamaicaobserver.com/business-report-daily-biz/jamaica-s-fx-market-no-longer-a-one-way-bet_170854