Hedging is basically a strategy that tries to limit the risks in financial assets. It is similar to an insurance as we take an insurance cover to protect ourselves from one or more losses. A hedge is an investment that has a similar purpose as that of insurance. The purpose is to eliminate or reduce the risk by offsetting the potential loss.

A Forex Hedging is a strategy to limit the foreign exchange risk.

Normally, a hedge consists of taking an offsetting position in a related security, which offset the risk of any adverse price movements. It can be done through various financial instruments such as futures, forward contracts, options, etc.

Forex Hedging in Nepal

Hedging is comparatively a new concept for Nepalese financial market. The Nepal government has taken steps to provide exchange rate hedging facility to the investors, particularly the foreign investors, in Nepal’s infrastructure sector. The Nepal government has introduced a regulation on hedging which has made provisions that the investors in hydro-power projects, transmission lines, railway, metro and monorail will be eligible to get hedging facility.

According to the “Hedging Related Regulation, 2075 (as amended in 2076)”,Hedging means the arrangement to stable the exchange rate of the foreign currency for repatriation of the investment under an agreement, at the same exchange rate of the foreign currency deposited in the Bank at the time of making foreign loan investment by the investor for project implementation.

Procedure of availing Forex Hedging Facilities

In order to avail this facility, the projects intending to obtain hedging facility shall obtain approval for foreign investment and bringing in foreign loan in foreign currency, in accordance with prevailing laws of Nepal. Nepal Rastra Bank (NRB) may provide the facility of hedging to the following projects with foreign loan investment:

1. Generating hydroelectricity of capacity of 100 MW or more,
2. Construction of more than 30 km length electric transmission line with capacity of 220 KVA or more,
3. Construction of Rail, Metro or Mono Rail of more than 10 km length,
4. Construction of Fast track of more than 50 km length,
5. Other projects determined through the decision of the Council of Ministers, Government of Nepal

A project intending to obtain hedging facility as per this Regulation, shall submit an application to NRB in the prescribed format along with following documents.

• A copy of license received from the concerned authority for implementation of the project,
• A copy of project investment agreement,
• A copy of approval for foreign investment and bringing in foreign loan in foreign currency.
• A copy of Memorandum of Association and Articles of Association of the Company.
• A copy of notice issued by concerned ministry where a project has been determined for providing hedging facility through the decision of Council of Ministers, Government of Nepal pursuant to Rule 3 (e).

After examination of the application if it appears to be reasonable to provide hedging facility, NRB shall provide approval for hedging facility to the applicant. After approval, the investor shall deposit foreign currency in NRB account within the time line provided by the NRB. After depositing the foreign currency in NRB, NRB shall convert such foreign currency to Nepalese Rupees at the prevailing exchange rate on the day of deposit of such foreign currency and deposit such Nepalese Rupees in the account maintained in the name of the project at any commercial bank. The NRB will lock the exchange rate maintained on that day and the investors will be allowed to repatriate at the same locked exchange rate.

The period of hedging facility provided under this Regulation shall be for a maximum of 5 years, depending on the nature of project. The period may be extended on reasonable grounds for further 5 years. In order to get hedging facility, the investors will have to contribute certain amount of fee to the hedging fund to be created by NRB. Bank shall determine the hedging fee on the basis of the foreign exchange rate risk. While determining the hedging fees, the Bank may charge different fees on every project. The hedging facility under this Regulation shall be provided for only those foreign currencies which have been specified by NRB by publishing public notice.

In relation to providing hedging facility under this Regulation, NRB shall coordinate and consult with Ministry of Finance, concerned ministry for the project, concerned authority of Government of Nepal and the investor.

Establishment of hedging fund by NRB

NRB shall establish and maintain a hedging fund for the purpose of managing foreign currency deposited in the bank and the hedging cost. The limit of the amount of the fund shall be determined by NRB. NRB shall invest and carry out necessary management of the amount deposited in the fund. The return received from the investment and management shall be deposited in the same currency as received in the hedging fund.

Reanda Biz Serve Comments

Forex hedging is a strategy that allows an investor to minimize and control the risks involved in his foreign investment.  This strategy aims to compensate for any movement in the value of the currency being used in the investment. The Forex hedging will protect the investor against currency exchange rate fluctuations.

With the effective implementation of the Regulation, foreign investors that are approved for the hedging facility will be protected against potential losses incurred by foreign exchange fluctuations, and feel that their investment is secured. Since the objective of hedging currencies is to minimize losses, it can also allow foreign investors to survive in economic downturns. The investors will be protected against price volatility and currency exchange rate fluctuations.

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