Question

    Under the revised RBI instructions on hedging foreign

    exchange risk, users are allowed to hedge using exchange-traded foreign exchange derivatives. However, these hedging contracts must meet certain criteria. Which of the following is NOT a condition required for hedging with foreign exchange derivatives involving INR?
    A The user must not hedge beyond the contracted exposure without prior approval from the RBI. Correct Answer Incorrect Answer
    B The notional amount of the derivative must not exceed the value and tenor of the exposure. Correct Answer Incorrect Answer
    C The user must ensure that no other derivative contract is used to hedge the same exposure. Correct Answer Incorrect Answer
    D Users may hedge without underlying exposure up to a single limit of USD 100 million. Correct Answer Incorrect Answer
    E The hedge must be liquidated within 30 days of the exposure ceasing to exist, regardless of the market conditions. Correct Answer Incorrect Answer

    Solution

    The "Risk Management and Inter-Bank Dealings – Hedging of Foreign Exchange Risk" circular states that users are required to adjust their hedge if the exposure ceases to exist, but there is no specific requirement for liquidation within 30 days regardless of market conditions. Instead, adjustments depend on the nature and timing of the exposure change.

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