Chamber seminar on managing risks on fluctuations in interest

Sri Lanka has been experiencing chronic high interest rates and frequent exchange rate fluctuations and this has become a hotly debated topic in both business and academic circles.

High inflation in Sri Lanka has pushed interest rates upward causing a sharp increase in the cost of borrowing for businesses.

This increase in interest rates and the fluctuations of the same has forced companies to re-look at their capital structure and cash flow management. Similarly, exchange rate fluctuations also cause revenues and profits of companies (mainly importers, exporters and banks) to fluctuate greatly and this makes business plannig difficult for such companies.

In addition to this, the global demand is contracting due to the credit crisis and the recessionary situation in the west, impacting on the bottom line of companies. All these factors make cost management increasingly important, not only to remain competitive but also to survive in such a turbulant environment.

The interest and exchange related risks however could effectively be managed by using hedging instruments such as derivatives and other financial techniques. World over, companies effectively use hedging instruments such as derivatives and other financial techniques to effectively mitigate such risks and prevent surprise losses.

Main types of derivatives include futures, options forwards and swaps. Essentially, these instruments are used to insure against uncertainty by fixing the price/quantity of an underlying commodity for a future date. In the case of interest and exchanage rates, the underlying commodity is money and the parties to the hedging contract agree on the interest rate/exchage rate for a future date at the time of entering in to the contract.

Management of interest and exchage rate risks using such instruments prevent companies from experiencing surprise losses (unfavourable movement in rates).

The seminar will be held on Friday, May 9 from 8.30 a.m. - 12.30 p.m. at the Ground Floor Auditorium of The Ceylon Chamber of Commerce.