Hedging Strategies for Foreign Exchange Reserves in the CEMAC Region: A Derivatives-Based Approach – The Case of BEAC

Abstract

This study examines how the Bank of Central African States (BEAC) can enhance the management of its foreign exchange reserves using derivative instruments. Through a dual methodology – a benchmarking analysis of central bank hedging practices and an econometric regression on BEAC data (2016–2024) – the paper identifies best practices and quantifies reserve performance drivers.

Results show that several emerging and advanced central banks (e.g. Nigeria, Ghana, U.S. Fed) use FX forwards, swaps, and options to stabilize their currency and reserve portfolios. For BEAC, the estimated regression explains only ~13.4% of quarterly reserve return variance, with no individual coefficient significant at the 5% level. Notably, higher FX volatility is associated with lower reserve returns (β ≈ –40.8, p≈0.068). These findings suggest that BEAC’s current conservative strategy limits responsiveness to shocks.

Key recommendations include developing an interbank derivatives market, deploying FX auctions with derivatives, and establishing swap lines for liquidity. Future research should incorporate additional risk factors and assess derivatives’ legal/institutional frameworks.

Classification JEL: G21, E58, F31

Paper type: Empirical Research