The naira practically fell off the cliff yesterday as it sold for N280 to one dollar after the Central Bank of Nigeria (CBN) removed the pegs that held the local currency in a fixed point to the dollar, losing 42.13 per cent of its value at the spot market.
But on the forward market, the naira traded for N317 to the dollar. In spot markets, spot trades are made with spot prices. Unlike the futures market, orders made in the spot market are settled instantly. Spot markets can be organised markets or exchanges or over-the-counter (OTC) markets.
A forward market is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery. Contracts entered into in the forward market are binding on the parties involved.
The move was an attempt to allow the naira free rein in response to tumbling crude oil prices. But the central bank said it will clear a backlog of hard currency through currency forwards and spot trades on the interbank market.
The fall of the naira is not unexpected, as analysts have earlier predicted that the moment the naira is freed, it is bound to find its true value during the process of floating.
The naira lost almost a third of its pre-floating value in few hours after trading began. It dropped 42.13 per cent to N280 per dollar.
The removal of the naira’s peg against the dollar was announced on Wednesday last week, after long-term speculation about whether or not it may happen.
The CBN said that it would move to a “purely market-driven” currency system to help Africa’s biggest economy cope with the effects of the global oil price slump in the past couple of years. Prior to the peg being taken away, the naira broadly traded at around 197 per $1.