Currency Hedge Strategy

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6/18/12

Hedging

6/18/12

EXAMPLE

An Importer having monthly transaction of 50 Cr. can avoid the risk of loss due to fluctuations in the Forex Market. Simple solution is

Hedging.

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We can elaborate this by the below illustration:

1 USD / INR lot = 1000 USD i.e 55 X 1000 = Rs. 55000/-

To hedge 50 Cr. Transaction of the importer we need to take a position of 10,000 lots.
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Now, if we see the volatility in the Forex market , the range varies from 1% to 5% on monthly basis. So, lets take USD movement in a month is 5% , then the calculation goes as under: 55,00,00,000 X 5 % = 2,75,00,000.

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MARGIN

The Span Margin required for 1 USD / INR Lot is Rs. 2100.

So, for 10,000 USD / INR Lot span margin required =Rs. 2,10,00,000 + mark to market margin required as per volatility.
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BROKERAGE

1 USD/INR Lot = Rs. 10/- 1st side Rs. 10/- 2nd side

Therefore, brokerage for 10,000 USD / INR lot is as under: 10,000 Lots X Rs.10 = Rs.1,00,000 1st side 10,000 Lots X Rs.10 = Rs.1,00,000 6/18/12 2nd side

CONCLUSION

If Importer imports goods @ 55 USD/INR , he can take a hedge position(long or short) in the Forex market to avoid the risk due to the fluctuation. For e.g. if the importer imports raw material @ 55 USD/ INR and he needs to export the finished goods after 3 to 6 months and if he predicts rupee to appreciate from

55 to 53 USD/INR he can take a short position at 55 USD/INR in the Forex market to avoid the risk of loss which he will bear while exporting @ 53 USD/INR.
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Same way he can take a long position if he predicts