FOREIGN EXCHANGE RISK MANAGEMENT 1FMD, RBI14-12-2011
RISKS BEING COVERED •Foreign Exchange Risk Managementprimarily tries to mitigate theExchange rateriskarising out on the risk of an investment's value changing due to changes incurrency exchange rates. This risk usually affects exporters and/or importers, but itcan also affect investors making international investments.•The guidelines are enunciated in the Master Circular on Risk Management andInter-Bank Dealings issued by Foreign Exchange Department of Reserve Bank ofIndia as amended and issued in July 2011.2FMD, RBI14-12-2011
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 performance3) Special Dispensationfor SMEs and Resident Individuals3FMD, RBI14-12-2011
Hedging / Instruments for Contracted ExposureI.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 FEMA1999•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 thecancelled contracts–Ifahedgebecomesnakedinpartorfullowingtocontraction(duetopricemovement/impairment) of the market value of the ODI, the hedge may be allowed to continueuntilmaturity, if the customer so desires. Rollovers on due date shall be permitted up to theextent 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. 4FMD, RBI14-12-2011
Contd…. . Forward Foreign Exchange Contracts Operational Guidelines : •Maturityof the hedge should not exceed the maturity of the underlying transaction. •Currencyof 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.
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