Read the detailed instrument sheet by clicking on the link below.
Overview
Hedging instruments (forwards, swaps, options) mitigate foreign exchange (FX) risk—the depreciation of local currency against hard-currency debt. They stabilize debt service, support long-term planning, and reduce refinancing risk.
Risks addressed
Market risk
Applications
All locally earning projects with hard-currency debt exposure. Priority sectors are clean energy, transport, resilient infrastructure, and agriculture. Risk is highest in non-exporting sectors (tariffs, subsidies, public services).
Type of instruments and providers
Commercial banks and financial institutions: forwards, swaps, non-deliverable forwards (NDFs) (main OTC hedges in EMDEs)
Concessional/Public:
- MDBs and DFIs (WB, IFC, EBRD, IDB, AfDB, ADB)—back-to-back funding to extend local-currency loans.
- TCX—long-term hedges in 90+ frontier currencies.
- Eco Invest Brasil (Gov. Brazil and IDB)—FX facility (USD 3.4bn credit + emergency line).
- Delta Platform (AIIB, EBRD, Frontclear)—pooled local-currency liquidity for DFIs.
Technical assistance:
- TCX—hedging and capacity building.
- MDBs and DFIs—structuring, pilots, regulatory advice.
- Donors (FCDO, USAID/DFC, KfW, SECO, EU)—fund pilots, subsidies.
- IMF—capacity building.
Debt sustainability
- Direct: Does not reduce debt stock, but prevents FX-driven increases in debt service.
- Indirect: Protects fiscal space, reduces refinancing needs, and lowers sovereign risk.
Internal capacity requirements
| Minimum | Advanced | Pathway |
| Track FX liabilities, assess depreciation risk, and integrate into budgeting. | Treasury/risk teams skilled in derivatives pricing, collateral, and multi-year contracts. | Technical advisors, training, pilots with MDBs/DFIs (e.g., TCX, Eco Invest Brasil). |
Regulatory capacity requirements
| Minimum | Advanced | Pathway |
| Legal authority for hedging contracts; ability to contract with offshore providers. | Multi-year derivatives allowed, clear accounting/disclosure, domestic market frameworks. | Clarify legal authority, coordinate with central banks, regulatory reform, MDB pilots. |
Pathways to adoption based on financial market readiness
- Shallow: Thin liquidity and short tenors require offshore and NDFs; build readiness through donor pilots, capital market reforms.
- Emerging: Growing bond markets, but shallow swap/derivative activity requires local banks to conduct structured pilots, participate in blended finance platforms.
- Mature: Deep FX markets may make use of a full suite of instruments, integrate FX hedging into national PPP units, SOEs, or development banks.
Pricing considerations
- Premiums are high in EMDEs (6–7% of principal).
- Costs driven by volatility, tenor, and liquidity.
- Donor support (subsidies, tail-risk cover, liquidity buffers) reduces costs.
Average time to deploy
- Short-term forwards: a few days.
- Structured/blended solutions: 1–6 months.
