Promoting pro-active FOREX management

An actively managed portion of foreign currency is approximately 1/4th of the reserve. The currency portion will be invested in the following currencies: USD, GBP, JPY, EUR, CNY, SAR. This will not only act as a hedge against exchange rate volatility but will also allow for the ability to benefit from global market opportunities as well as smooth the domestic economy vs external volatility. The portion held in each currency should be established in conjunction with the treasury department and will be determined by foreign debt, trade, and market opportunities.

Once properly allocated between currencies, the implementation of writing covered calls will be used to subsidise those holdings. While the implementation of foreign currency may provide additional yield by fluctuating interest rates, the target goal will be solely focused on the yield produced by writing calls. Thus, the target goal is an additional 4.0-8.0 per cent annual yield from covered call position. This target accounts adverse market conditions but leaves room for potentially higher yields. It should be noted again that the premiums can be used to finance the Treasury's needs. As an example, a $1.0 billion position has a potential approximate monthly return of $6.0 million based only on the option premium. A $10 billion position could boast an annual revenue of $600 million.

BUY/SELL PARAMETERS: The buy and sell strategy will be based on the ability for the security to both operate successfully within the portfolio as well as meeting any government funding requirements. Security holdings will change with changing interest rates in both the Treasury and forex exchange (FOREX) marketplace, and adjusted to take advantage of favourable positions.

What happens if a security is called away?

If a covered call position is called away, that given security will be assessed based on the overall strategy and financial needs. Depending on current or future needs the funds may be used to fund current needs, or the funds may be used to establish a new position in the marketplace. If it is deemed that the call was caused by a random market walk, or that the security is one which has a large upside potential, then buying back into that position at a higher price may still be considered favourable to take advantage of the additional upside.

Order of operations:

n Evaluate Current Economic Position with Treasury Board

n Determine Financial Funding Requirements

n Adjust Portfolio Holdings and Establish Option Positions

n Reevaluate with Treasury Board to Ensure Funding Requirements were Met

n Evaluate Ability to Meet Portfolio Goals and Objectives

Continued growth will be reliant on building off a solid financial foundation. There needs to be a financial plan put in place which accounts for the national debt, government spending, current and future cash flows, diversifying its revenue stream, and hedging its currency. In an effort to do this I believe the first step should be the Treasury's implementation of active foreign currency trading and the use of derivatives. At the moment, it would appear as though the simple plan is to purchase and hold U.S. Treasury securities until the funds are needed, but the use of derivatives and currency trading has the capability to increase yields and decrease risk.

Actively seeking out opportunities in the global financial markets needs to be a priority of those in the treasury that is responsible for managing the reserve. Simply buying and holding US Treasuries does not take advantage of the financial marketplace. Implementing derivatives with these holdings, however, can increase these returns. The additional implementation of actively trading foreign currencies also not only potentially increases cash flows, but it can also hedge against exchange risks that may arise when trading or paying debts in foreign currencies.

The repayment of debts can also be hedged given a proactive financial plan that looks to add cash flow in order to make these payments, and actively trading in those currencies that the debt will be paid in adds another level of financial support. Market volatility may adversely affect exchange rates, but hedging against those conditions will ensure that this will have minimal impact on the treasury. The bottom line is that the Bangladesh government needs to take advantage of every opportunity and put in place as many hedges as they can while they have the chance and while economic situation is still positive.

Looking at the national economy as a business there is much to be excited about, but in business, it is known that historic success does not guarantee future success. The current situation sees an economy which is heavily reliant on a single export to a single market. National debt is also a large portion of the country's financial structure which translated to 27.2 per cent of gross domestic product (GDP). The nation's credit rating is also rather poor. While things are positive now, there are no strategies in place to prepare for potential negative economic forthcomings.

If the US market for one reason or another loses interest in importing clothes made in Bangladesh, the cash inflows will take a major hit. If exchange rates become volatile then Bangladesh may find itself paying more for the debt than it could have by virtue of unfavourable exchange rates. Looking for additional revenue streams in the global financial marketplace will add diversification to cash flows which can support future debt payments, increase government spending, and create a nation which has a greater financial independence.

As financial independence grows, the economy will also be able to adapt to changing conditions and have a stronger presence in the global economy. If the treasury waits until a time that this becomes a requirement based on negative conditions it will see a nation take a major step backward. Recent history has seen a country achieve economic success, but if they wish to continue that success into the future, and do so to their best degree, then an immediate emphasis should be placed on establishing a solid financial foundation to build on.

Mazher Mir works in the US financial industry and has 15 years'

experience in the sector.

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