RBI revises guidelines on OTC forex derivatives and hedging of commodity price and forex risks

29 Dec 2010

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The Reserve Bank of India (RBI) has issued fresh guidelines on over-the-counter (OTC) foreign exchange derivatives and overseas hedging of commodity price and freight risks, by permitting the use of cost reduction structures while also allowing embedded cross currency options in case of foreign currency-rupee swaps.

RBI said companies can use cost reduction structures, both, under the contracted exposures and past performance routes, subject to certain safeguards like minimum net worth, compliance with norms regarding risk management capabilities, turnover, tenor, etc.

The new norms will be effective from 1 February 2011, RBI said.

Companies, however, are not allowed to have embedded cost-reduction structures, especially zero-cost ones, in derivatives.

While RBI has allowed companies having net worth of Rs100 crore to enter such contracts, they cannot, however, write options on a stand-alone basis and cannot also enter exotic options such as leveraged structures and barrier options.

The maturity of the hedge by the companies must also not exceed the maturity of the underlying value of the transaction, RBI said.

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