FX Hedging Facility Lab Instrument Analysis

The report introduces the FX Hedging Facility, a customizable currency hedging product designed to mobilize foreign investment for renewable energy in India. By splitting currency risk into a user-absorbed range (0-4.5% annual depreciation) and a donor-subsidized tail risk range (4.5% to P99.7), the facility aims to reduce hedging costs by approximately 30% compared to commercial cross-currency swaps. The instrument eliminates counterparty credit and liquidity risk premiums through upfront donor payments and offers an upside benefit if currency depreciation is lower than expected. Analysis suggests a leverage factor of approximately 9, with a greater than 50% probability that the donor subsidy will be fully recovered.

• The FX Hedging Facility can reduce the total cost of currency hedging for the user by approximately 30% compared to an unsubsidized commercial cross-currency swap.
• The instrument is designed to mobilize a minimum of $9 to $10 of foreign debt investment for every $1 of donor grant, with a probability exceeding 50% that the entire subsidy will be recovered by the end of the tenure.
• The facility reduces costs by targeting only extreme currency depreciation (the 'tail risk') and eliminating the counterparty credit risk and liquidity risk premiums typically found in commercial swaps, which are estimated at approximately 50 bps and 30 bps respectively.
• The mechanism splits currency risk: the user absorbs depreciation from 0% to 4.5% per annum, while a donor-funded FX tail risk guarantee covers depreciation from 4.5% up to the P99.7 level.
• The facility is rated as moderately actionable (scoring 2 on a 3-point scale), with implementation feasibility hindered by a lack of precedent and the need for an independent Advisory Body, but supported by the availability of mimicking products like bull call spreads.

APA

Farooquee, A., Trivedi, S., & Shrimali, D. G. (2016). FX Hedging Facility Lab Instrument Analysis. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2016/12/FX-Hedging-Facility_full-report.pdf

Chicago

Farooquee, Arsalan, Saurabh Trivedi, and Dr. Gireesh Shrimali. FX Hedging Facility Lab Instrument Analysis. Climate Policy Initiative, 2016. https://www.climatepolicyinitiative.org/wp-content/uploads/2016/12/FX-Hedging-Facility_full-report.pdf.

Wikipedia

{{cite report |last1=Farooquee |first1=Arsalan |last2=Trivedi |first2=Saurabh |last3=Shrimali |first3=Dr. Gireesh |title=FX Hedging Facility Lab Instrument Analysis |publisher=Climate Policy Initiative |date=October 2016 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2016/12/FX-Hedging-Facility_full-report.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{farooquee2016hedging, author = {Farooquee, Arsalan and Trivedi, Saurabh and Shrimali, Dr. Gireesh}, title = {{FX Hedging Facility Lab Instrument Analysis}}, institution = {Climate Policy Initiative}, year = {2016}, month = oct, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2016/12/FX-Hedging-Facility_full-report.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }