OFW Hedging Instruments For Peso-USD rates by DBP

For the longest time, there was no organized way for each OFW to work out a hedge for the value of his remittance. The Development Bank of the Philippines (DBP)
The first is a basic insurance policy with a “put” feature twist. Essentially, the OFW makes up his mind what exchange rate he wants to target, then buys an insurance contract from DBP for a minimum insured amount of $1,000 where the insurance fee increases with the amount insured. The fees will be determined according to market conditions. The insurance contract then is a guarantee that once the insurance matures, the OFW can exchange his dollars at the agreed rate.

There is another upside to this contract. If the insured exchange rate is P39 per dollar and the peso further appreciates to P35 per dollar, the OFW is fully protected because the insured rate of P39 prevails. If, however, the peso reverses to P45 per dollar, the OFW has the option to remit through DBP at the prevailing market exchange rate instead of the insurance rate of P39.

This gives someone peace of mind because he does not have to act on his dollar deposits by speculating on the future rate of the pesos versus the dollar. More importantly, the peace of mind means that his beneficiaries can plan their spending ahead of time using the exchange rate that himself chose as his “protection rate”.

Another hedge is a forward contract. With outright forwards, the future conversion rate of dollars to pesos is set in advance. However, you can no longer chooses this future rate directly and instead is set according to prevailing market parameters (presumably using something like an implied forward rate calculation). At maturity of the forward contract, the exchange of foreign currency into pesos is made at the forward rate, regardless of the prevailing market rate. Like the insurance hedge, this gives a peace of mind because the beneficiaries future purchasing power can be planned ahead of time.
These two hedging products should be useful. Without them, OFWs are either forced to remit more, OFW beneficiaries are asked to cut back on expenses or some combination of these two extremes.
Also qouted below is further info about the said DBP program.

New DBP Program Shields OFWs Against Strengthening Peso
December 17, 2007
Overseas Filipino workers (OFWs) and their families can now benefit from a new program being offered by DBP that seeks to help cushion their remittances against the continued appreciation of the peso.

President & CEO Reynaldo G. David announced that the DBP OFW Hedging Program is being made available through authorized manning companies or OFW associations. OFWs may hedge their remittances through two products, namely: the FX insurance and outright forwards. All transactions under the program, he added, must be in US dollar or Philippine peso, thus remittances in other currencies must be in equivalent US dollar amount.

“Through the FX insurance, OFWs may opt to sell their US dollars against the peso to DBP at a specified price on a specified date, thus offering them the opportunity to gain from peso depreciation. It also shields their remittances against a strengthening peso based on an agreed protection rate to be determined by the client,” President David explained.

Minimum amount that may be hedged through the FX insurance is $10,000 at a maximum term of three months. The insurance fee shall be dependent on market rates, the movement of the US dollar/Philippine peso, and the agreed protection rate.

The outright forwards, meanwhile, is a foreign exchange contract where the OFW may sell his US dollars and buy Philippine pesos at a pre-agreed rate for delivery on a future date. “OFWs availing themselves of this product will not have to pay any fees, plus they get the major benefit of security against foreign exchange fluctuations,” President David added.

OFWs may opt to hedge a minimum amount of $10,000 under the outright forwards at a maximum term of six months. The forward rate shall be determined by DBP. Manning companies or OFW associations participating in the program must place a holdout deposit with a minimum maintaining balance of $1000 with DBP depending on contract amount, or establish a credit line subject to Bank approval.

The following documents must also be submitted: authorization of manning company/OFW association to engage in the DBP OFW Hedging Program, employment contract or schedule of salaries from manning or principal institutions, and other documents as required under the DBP guidelines.

For more details on the DBP OFW Hedging Program, interested parties may contact the DBP Remittance Center or Treasury Department at telephone numbers 8921232 (direct line) or 818-9511 locals 2224 and 3219.