Delta Agro: Hedging a USD Loan When the Forward Market Only Reaches Twelve Months

Separate the exposures.

Transaction exposure (cash flows). The USD 18m principal is repayable in December 2027, outside the forward window. Quarterly interest is roughly 18m x (SOFR + 6.5%). If SOFR is around 4%, interest is about 10.5% = USD 1.89m a year, i.e. USD 0.47m a quarter. Export receipts: 38% of NGN 62bn at NGN 1,610 is about USD 14.6m a year, arriving roughly 75 days after shipment as a continuous stream. Imported input payments add an offsetting USD outflow.

Translation exposure. Export receivables and any USD cash translate at closing rate; a 10% naira depreciation on, say, USD 3m of receivables is a NGN 48m hit.

Natural hedge. The annual export inflow of about USD 14.6m broadly covers the USD 1.89m of interest and the imported-input payments with a surplus, so interest and trade flows are largely self-hedging - provided shipments continue. The principal, however, is a stock obligation of USD 18m due on a single day, against a flow that is collected continuously and converted to naira to fund local costs. Only the surplus export cash genuinely accumulates to meet it. That principal is Delta's real unhedged exposure: a move from NGN 1,610 to NGN 1,800 adds NGN 3.4bn to the naira cost of repayment, which is close to the entire profit before tax of NGN 4.1bn.

Sensitivity disclosure. IFRS 7 requires a sensitivity analysis; a 10% depreciation on the unhedged USD 18m is NGN 2.9bn at the closing rate - worth quantifying to the board before setting a policy.

Price the forward. Forward premium = (1,668 - 1,610) / 1,610 = 3.60% for 12 months, i.e. the forward locks in a rate 3.6% above spot. Hedging USD 18m at 1,668 would cost NGN 30.02bn against NGN 28.98bn at spot - a NGN 1.04bn certain cost if the naira were unchanged, but it removes the downside if the naira depreciates further.

The mismatch. The exposure matures in December 2027; the market quotes only 12 months. A single 12-month forward on the full USD 18m would create a new risk: at maturity in December 2026 the hedge settles but the loan remains outstanding, so Delta would be left with an open position plus the cash cost of the roll. Rolling three times introduces rollover and basis risk, and the roll cost is unknown today.

Options. (i) Layered hedging - cover 60-70% of the next twelve months of cash-flow exposure, roll annually, and increase cover as the maturity approaches so the hedge ratio rises towards 100% in the final year. This matches hedging to liquidity rather than to ambition. (ii) Options - buy USD put/NGN call or a collar; the premium is a known cost and the upside is retained, useful if export receipts are uncertain, but the market depth may be limited and pricing opaque. (iii) Natural hedging - hold export proceeds in a USD account and match import payments from it, reducing the need to buy dollars. (iv) Liability management - negotiate a naira tranche or extend to a multi-year facility with a development finance institution able to price longer tenors.

Recommendation. Do not hedge 100% of the principal with a 12-month instrument. Adopt a board-approved layered policy targeting the interest and the first-year principal instalments, keep the hedge ratio within a stated band, and disclose the residual rollover risk.

Accounting answer. The request cannot be accommodated. A forward is a derivative within IFRS 9, recognised at fair value from the trade date (or settlement date under the trade-date policy) with changes in fair value through profit or loss unless hedge accounting is applied. Keeping it off-statement of financial position is not a presentation choice; it would be a misstatement and potentially a misappropriation of the financial statements' purpose. If hedge accounting is desired, Delta must document at inception the hedging relationship, the risk management objective, the hedged item and the hedge instrument, and demonstrate that the critical terms align and the hedge is expected to be highly effective. Given the 2027 maturity against a 12-month instrument, critical terms will not align, so full cash-flow hedge accounting is unlikely; a rollover strategy may qualify only with careful designation and a rollover/hedge-ratio plan.

Governance. FX risk is a board matter. Require a written treasury policy: permitted instruments, counterparty limits per bank, maximum hedge ratios (e.g. 50-80% of committed exposure), prohibition of speculative positions, dealing limits and segregation between dealing and settlement, and monthly reporting to the audit committee. The CFO's instinct to hedge is sound; the execution and the accounting question are not.

Ethics and professional conduct. The request appears to be an attempt to smooth reported earnings, which creates a self-interest threat for the CFO and an intimidation threat for the finance team. A member must not be associated with misleading information; raise the matter with the audit committee, document the advice given, and consider whether the external auditor should be informed. Disclose the hedging policy, the outstanding derivatives and the IFRS 7 sensitivity in the financial statements, and explain the rollover risk to shareholders.