Foreign Exchange Risk Management Guidelines

Hedging

This is the most visible and glamourised part of the Exposure Management function. However, the Trader is like the Driver in a car rally, who needs to follow the general directions of the Navigator.

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1. Hedging strategies will be designed to meet the Exposure Management objectives, as represented by the Benchmarks
2. The Exposure Management Cell will be accorded full operational freedom to carry out the hedging function on a day to day basis
3. Hedges will be undertaken only after appropriate Stop-Loss and Take-Profit levels have been predetermined
4. The company will use all hedging techniques available to it, as per need and requirement. In this regard, it will pass a Board Resolution authorising the use of the following:

Rupee-Foreign Currency Forward Contracts
Cross Currency Forward Contracts
Forward-to-Forward Contracts
FRAs
Currency Swaps
Interest Rate Swaps
Currency Options
Interest Rate Options
Others, as may be required

Suggestion:
Indian companies with sizeable US Dollar denominated exposures are extremely vulnerable to sudden drastic moves in the USD-INR rate. They can, to an extent, insulate themselvs from such shocks by undertaking hedges in currencies other than Rupee-Dollar.

For instance, a Dollar payable can be hedged by selling a currency (say Sterling Pound) in order to buy Dollars, instead of selling the Rupee. The choice of currency would, of course, depend on the trend and forecast for the currency(s) at that point of time.

It is easier and safer to generate profits from a Cross-Currency Forward Contract and a Rs 1 Lac profit thereon is equivalent to saving a 10 paise depreciation in the Rupee (on USD 1 million)