There are several practical difficulties, though. First, a central authority mandating how an entrepreneur should manage the risk smacks of a regression to the command and control economy. Second, do we have a market that can support hedging by all foreign currency borrowers? Third, hedging is essentially transfer or parcelling of risk. Where are we transferring the risk in this case?
To the banks’ books? Faulty mechanism design can create perverse incentives and lead to inefficient outcomes. A saner approach would perhaps be to create an atmosphere and incentives for recognition of risk and to make available a wide range of hedging instruments. j. While on the subject of borrowing, let me mention an important and encouraging development.