A division of the Dutch ministerie van Financiën is reviewing its credit and foreign exchange rate exposure and may use derivatives for the first time to hedge its risk. "We want to get a better understanding of the risks we are facing. The next stage is then to manage those risks," said Maarten Verway, head of the export credit insurance and investment guarantee division in the Haag.
The agency guarantees the repayment of loans Dutch exporters have extended to clients and guarantees foreign exchange rates for exporters. One of the reasons it is reviewing risk management now is that the European Union has clamped down on export credit agencies running deficits, which can be seen as subsidies. As a result, the agency wants to flatten the volatility of its returns. "In the old days it did not matter what the result was on a yearly basis as long as on average there was not a subsidy," explained Verway. He declined to detail the size of the portfolio.
The ministry is looking at derivatives in an "explorative fashion" and sees execution as a long way off. Verway said it is examining all the major aspects of the instruments, including liquidity, documentation and pricing.
The foreign exchange rate hedging strategy is more complex. "This is tricky because the Dutch state does not only have FX exposure in our department," explained Verway, adding, "If you want to do this correctly you should take into account all the FX exposure."
Alistair Mullen, global head of structured credit marketing at ABN AMRO in London, said more government agencies are starting to look at using credit derivatives to hedge their risk. Some of the names they are exposed to are too esoteric to trade in the liquid market, however, so they should look at buying protection on the sovereign, especially for emerging market risk.