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  4. Visual representation of the currency risk-sharing facility

Visual representation of the currency risk-sharing facility

The following figure is a visual representation of the currency risk‑sharing facility. A full description of the diagram is provided below.

Flow diagram showing how currency risk is shared among the borrower, Uganda Development Bank, the hedge provider, and a guarantee provider

 

Overview
The diagram sets out the flow of funds and risk-sharing responsibilities among four actors: the borrower, Uganda Development Bank (UDB), the hedge provider (e.g. TCX), and a guarantee provider (e.g. a development finance institution or donor).

Main loan flow

  • UDB disburses a local currency loan to the borrower.
  • The loan may be disbursed in local currency, or in foreign currency with repayments indexed to local currency (i.e. synthetic local currency loans).
  • The borrower makes loan repayments to UDB.

Hedged section

  • UDB hedges currency risk for a majority section of the loan principal.
  • UDB pays the local currency rate on the hedged section of the loan principal.
  • The hedge provider provides the foreign currency rate on the hedged section of the loan principal.

Unhedged section

  • A minority section of the loan principal remains unhedged.
  • UDB is exposed to currency fluctuations on this portion.

Guarantee mechanism

  • UDB pays a premium to the guarantee provider.
  • The guarantee provider pays UDB if depreciation exceeds a certain threshold, covering excess losses on the unhedged section of the loan.
  • UDB pays the guarantee provider if appreciation exceeds a certain threshold.