MFX offers hedging services to the microfinance industry, for both MIVs and MFIs. We offer:
Currency Forward Contracts
In the Foreign Exchange market, a forward is a contract that locks in the price at which an entity can buy or sell a currency on a future date. A forward can be used to hedge the exposure to foreign exchange in a microfinance loan when the client only wants to protect principal repayments.
Cross Currency Swaps
In a cross currency swap, the parties exchange a stream of payments in one currency for a stream of cash flows in another. The typical cross currency swap involves the exchange of both recurring interest and principal (usually at the end of the swap) and thus can fully cover the risk of a microfinance loan transaction. Conceptually, cross currency swaps can be viewed as a series of forward contracts packaged together.
Option products are used when cash flows are not certain or when the client is looking for both downside protection and upside potential. Available option products include plain vanilla call options, which give the right (but not the obligation) to buy currency at a given price in the future, and range forwards (collars), which allow for risk within a band of currency movement but provide protection for loses above a certain threshold.
Spot transactions and currency delivery
MFX provides currency exchange and delivery services for clients in selected currencies and in the context of deliverable hedge transactions.
Portfolio risk management
For fund clients managing open currency positions, MFX can provide comprehensive portfolio risk management services. MFX uses a proprietary risk modeling system that provides portfolio valuation, potential portfolio returns under various scenarios, value at risk and correlation analysis. The model allows the fund to set stop-loss and stop-gain limits, hedge risk at the most advantageous time, and monitor exposure limits. All valuations and stress tests are done using the most updated market information allowing for real-time monitoring.
To read more about how these instruments work please visit our Education Center.
How Our Products Serve Microfinance
Serving both MIVs and MFIs
Providing a currency swap to an MIV allows it to make a local currency loan without incurring additional risk. Hedging with an MFI allows it to reduce the mismatch created by hard currency borrowing. Both achieve the same goal: allowing the MFI to repay its loans in its own currency.
Small transactions sizes
MFX can provide contracts as low as $100,000 at the same price as for higher denominations. This allows smaller lenders to maintain their price competitiveness.
Focus on the frontier markets where no commercial hedging options exist
MFX can provide hedging contracts in most frontier currencies, including sub-Saharan Africa (See Available Currencies).
Exemptions of collateral requirement
Most commercial counterparties require collateral, a major barrier to accessing hedging products. MFX removes this burden for MIVs and offers better conditions for MFIs. Read more about our partnership with OPIC.
Advantageous conditions of collateral requirement for MFIs
Collateral requirements are one of the main burden for MFIs to access financial derivative markets. Aiming at supporting the microfinance sector, MFX offers better collateral terms for MFIs compared to commercial banks and is set to keep working on improving conditions offered in the sector.
MFX is designed to maximize the benefits it brings to its clients, not its own revenue. MFX hedging clients pay only a 40-60 bps credit spread over what MFX must pay to hedge its own risk. There are no management or other fees to be paid by either client or investor.
Both non-deliverable and deliverable contracts
MFX swap contracts can be settled in dollars on a net basis (non-deliverable) rather than physically exchanging two income streams. This can lower the costs and risks of hedging, making it more accessible to microfinance lenders. In many currencies MFX can also exchange full currency flows based on client need. (To read more, visit our Existing Clients section.)
MFX works with clients on how to define a hedging strategy, set up hedging operations and manage the legal and documentation process.