The Central Bank of Hungary's recent move to widen the band in which the forint trades to 15% from 2.25% is seen as a step towards the development of a liquid derivatives market, according to Budapest market watchers.
"Currently, investors who want to play in the local Hungarian market can only do so via non-deliverable forward contracts," said Amir Ben Gacem, London-based local-market analyst at BNP Paribas. "With the prospect of further liberalization, we will start seeing swaps, etc.," he continued.
Added a London-based derivatives professional: "We're getting ready to see a real options market in Hungary with the liberalization of the [foreign exchange] bands." Such a development would be consistent with Hungary's aspirations to join the European Union. Poland and the Czech Republic already have developed local options markets.
The forint has appreciated roughly 7% in the last month against the euro on the back of the move, and analysts expect further appreciation as central bankers bid to continue with reforms.
The prospect is significant to investors, who currently must buy longer-dated Hungarian assets without the options available that would allow them to play on the currency. Observers said demand is likely to come from Western Europe, especially Germany. "We expect non-residents to buy any part of the Hungarian curve; it's another way to diversify in the region," BNP's Ben Gacem said.
