So far, the discussions have focused on the derivative “products” - whether or not they should be banned; and whether there is a need for greater education regarding these “products”. Ironically, there has been no talk about the need to strengthen the very process of corporate FX risk management .

Of course, it is to be acknowledged that on the insistence of the RBI, many companies have adopted a Currency Risk Management

policy at the board level. However, a policy is not the same as a process.

While a “policy” is more philosophical, outlining the overall guiding principles of an activity, a “process” is more practical, involving itself with the nuts-and-bolts issues of the day to day performance of the activity. And derivative “products” are something else altogether. They are merely the instruments used to implement the objectives of the hedging policy and process.

The global currency market has traditionally been driven by the “Sell Side” i.e. Banks. It is a testimony to the salesmanship of the Sell Side that the Buy Side has, quite often, been charmed into buying derivative products, without adequately evaluating their suitability. As in the case of any other product, while buying a derivative, it should be seen whether the product serves the overall objectives of the Customer.

Hedging Process needed
Herein lies the need for a Hedging Process, as outlined in the table alongside. Notice that “Which product to use” is only one out of the seven questions that a Hedging Process is intended to answer. As can be seen, the overarching emphasis on derivative products leads to a neglect of the other equally vital aspects of a complete hedging process.