Hedging

Hedging is the balance that supports any type of investment. It is a trade that is made with the purpose of reducing the risk of adverse price movements in another asset.

Hedging is analogous to insurance policy which seeks to limit risk exposures in financial assets. A common form of hedging includes derivatives or a contract whose value is measured by an underlying asset.

Forex Hedging in Nepal

Hedging is an emerging concept in Nepalese financial market. Recently, the Nepal Government has introduced a regulation on hedging “Hedging Regulation, 2079 (2022 AD)” to manage and regulate the forex hedging in Nepal.

According to the Regulation, Hedging is an arrangement to lock the exchange rate of foreign currency [US Dollar, Japanese Yen, Euro, Pound Sterling, and Chinese Yuan], by undergoing a hedging agreement at the time of loan investment, in order to mitigate the foreign exchange risk during the repatriation of the investment. The foreign exchange rate is locked at the same rate at which the foreign currency is deposited in the Bank for investment. Hedging facility will be available only on principal and interest of foreign loan investment.

A project intending to obtain hedging facility shall submit an application to Institution that provides Hedging Facility (IHF) [a commercial bank or infrastructural development bank, fully or partially owned by the Government of Nepal and licensed to provide hedging facility]in the prescribed form along with therequired documents.

IHF will determine the hedging fees on the basis of foreign exchange rate risk, inflation risk, project equity and loan amount, loan repayment period, prevailing inter-currency interest rate, risk management and transfer, and the nature of the project. The IHF coordinates with the ministry, banks, approving authority, concerned stakeholders, projects and investors of the projects, as needed.

Hedging fees shall be borne by the project and the approving authority, as decided in the tri-party agreement between Project, IHF and the approving authority. Nepal government may bear some part of hedging fees (5 to 20%) in case of the projects recognized by the Nepal government as project of national priority or national pride that are to be implemented on PPP model in accordance with the Public Private Partnership and Investment Act, 2075 (2018 AD). The investor of the project may also bear the fees.

Tenure of Hedging

1. 12 years in case of hydroelectricity project of 200MW or more, construction project of more than 10km long metro or mono rails and infrastructure projects related to health, agriculture, education, tourism, information technology, industrial infrastructure and urban development that costs more than NPR 2 billion.
2. 7 years in case of other eligible projects.

In case of other projects which will be declared eligible by Nepal Government in future, the tenure shall be as decided by the Nepal Government.

Tenure of hedging facility can be further extended for a period of Five (5) years for one time upon request.

           BIRD’S VIEW TO HEDGING FACILITY UNDER HEDGING REGULATION

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