FOREIGN_EXCHANGE_RISK_MANAGEMENT.pdf - FOREIGN EXCHANGE...

FOREIGN EXCHANGE RISK
MANAGEMENT
1 FMD, RBI 14-12-2011

RISKS BEING COVERED
• Foreign Exchange Risk Management primarily tries to mitigate the Exchange rate
risk arising out on the risk of an investment's value changing due to changes in
currency exchange rates. This risk usually affects exporters and/or importers, but it
can also affect investors making international investments.
• The guidelines are enunciated in the Master Circular on Risk Management and
Inter-Bank Dealings issued by Foreign Exchange Department of Reserve Bank of
India as amended and issued in July 2011.
2 FMD, RBI 14-12-2011

Basis for managing risk / hedging
1) Resident hedges based on contracted Exposure
(to be verified by the AD Category I bank through documentary evidence)
2) Resident hedges the Probable Exposure based on past performance
3) Special Dispensation for SMEs and Resident Individuals
3 FMD, RBI 14-12-2011

Hedging / Instruments for Contracted Exposure
I. Forward Foreign Exchange Contracts:
– Market Makers : AD Category I banks ; Users :Persons Resident in India
– Transactions permitted:
• transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999
• market value of overseas direct investments (in equity and loan)
– Can be cancelled or rolled over on due dates ; Rebooking permitted only upto 50% of the
cancelled contracts
– If a hedge becomes naked in part or full owing to contraction (due to price
movement/impairment) of the market value of the ODI, the hedge may be allowed to continue
until maturity, if the customer so desires. Rollovers on due date shall be permitted up to the
extent of the market value as on that date.
• Transactions denominated in foreign currency but settled in INR.
– Settled on cash on maturity
– once cancelled cannot be rebooked.
– change of rates due to Government notifications / duty rates - importers can cancel and rebook
the contract.
4 FMD, RBI 14-12-2011

Contd ….
. Forward Foreign Exchange Contracts
Operational Guidelines :
• Maturity of the hedge should not exceed the maturity of the underlying transaction.
• Currency of hedge and Tenor , subject to the above restrictions, are left to the customer. Where the
currency of hedge is different from the currency of the underlying exposure, the risk management policy
of the corporate, approved by the Board of the Directors, should permit such type of hedging.
• Where the exact amount of the underlying transaction is not ascertainable, the contract may be booked
on the basis of reasonable estimates. However, there should be periodical review of the estimates.
• Foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the
Reserve Bank, where such approval is necessary or Loan Registration Number is allotted by the Reserve
Bank.