In a significant development, the Central Bank of Kenya CBK) has announced a shift in its methodology for determining the official exchange rate. The institution has embraced a weighted average approach based on forex interbank trades, specifically utilizing the Volume-Weighted Average Price (VWAP) to enhance market functionality and potentially facilitate more accurate price discovery.
The decision to adopt VWAP is rooted in its superiority over a simple average, as it takes into consideration the volumes transacted. Calculating the VWAP involves dividing the total turnover by the volume of transactions, providing a more nuanced and representative expression of the prevailing price. This strategic move is poised to bring about a more comprehensive understanding of market dynamics.
The significance of VWAP extends beyond the central banking realm, as it finds application in determining the stock prices on the Kenya National Stock Exchange (NSE). Without accounting for volumes, relying solely on average or extreme prices may lead to misleading interpretations, as the actual transaction volumes remain unaccounted for.
The CBK’s decision to incorporate VWAP in exchange rate determination signifies a commitment to refining market mechanisms and fostering a more transparent and informed trading environment. Analysts anticipate that this move will not only bolster the interbank forex market’s efficiency but also contribute to more accurate price evaluations, benefitting market participants across the board.
By: Delino Gayweh
Serrari Financial Analyst
January 10, 2024
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