No complex products to hedge freight risks: RBI

The Reserve Bank of India today asked banks to hedge the freight risk of domestic oil refining companies and shipping companies via plain vanilla trades.

The maximum tenure for such hedging will be one year, the RBI said.

The central bank had allowed banks to hedge the freight risks of domestic oil refining companies and shipping companies.

The central bank today also specified the underlying exposure for such hedges. In case of oil refining companies the freight hedging will be on the basis of underlying contracts i.e. import or exports orders of crude oil.

Banks will also be allowed to hedge oil companies’ freight risk on anticipated imports of crude oil “on the basis of their past performance up to 50% of the volume of actual imports of crude oil during the previous year or 50% of the average volume of imports during the previous three financial years, whichever is higher.”

In case of shipping companies, “the hedging will be on the basis of owned or controlled ships of the shipping company which have no committed employment. The quantum of hedge will be determined by the number and capacity of these ships,” RBI said.