THE HINDU-16/jan/2014

Ques. What do you mean by currency hedging? What

are the steps taken by the RBI to ease currency
hedging?
Currency hedging is the act of entering into a financial
contract in order to protect against unexpected,
expected or anticipated changes in currency exchange
rates. Currency hedging is used by financial investors
and businesses to eliminate risks they encounter when
conducting business internationally.
Currency hedging is an approach that is intended to
manage the degree of risk that may be present when
engaging in some type of foreign investment strategy.
Essentially, the structure of a currency hedging process
would attempt to compensate for any shifts in the
relative value of the currency type utilized in the
investment scheme. The hope is that by minimizing the
exposure of the investor to unfavourable shifts in the
money market, a reasonable return on the investment
will be achieved even if the currency involved takes a
fall.
The guidelines provided by the RBI to ease currency
hedging:-
1. RBI advised banks to closely monitor the unhedged
foreign currency exposures of their borrowing clients
and also factor this risk into the pricing.
2. Banks may disclose their policies to manage
currency-induced credit risk as a part of financial
statements certified by statutory auditors.
3. Where UFCEs (unhedged foreign currency
exposures) are high, the options available to the banks
to reduce the associated risks may include reducing
these exposures, encouraging borrowers to reduce
their currency mismatches by hedging foreign currency
exposures and maintaining higher provisioning and
capital, among others.

For more detail-
http://www.rbi.org.in/scripts/NotificationUser.aspx?
Id=8694&Mode=0