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Hedging Slides
Hedging Slides
CURRENCY FUTURES
& OPTIONS
HEDGING
USD 100k
Is he carrying any risk regards to
currency fluctuation?
Yes
Yes
Without
Hedging
LIBOR
0.75%
0.75%
0.75 %
Bank Spread
0.90%
0.90%
0.90%
1.00%
1.00%
1.00%
2.65%
2.65%
2.65%
365
325
6.70%
5.96%
9.35%
8.61%
2.65%
0.73%
400,000
Cash Market
Gains/Losses
in Cash Market
(BANK
REMMITANCE)
Future Market
Gains / Losses
in Currency
Futures
Mitigation of
Risk
65
BANK RATE
IMPACT ON MCXSX
ACCOUNT
Rs. 61 / USD
Rs. 65 / USD.
NET Realization
= Bank Rate + Exchange Gain/Loss
Realization at Bank = Rs61
Gain on MCXSX
= Rs 2
Net RATE
= 61 + 2 = Rs 63
Realization at Bank = Rs 65
Loss on MCXSX
= Rs 2
Net RATE
= 65 - 2 = Rs 63
65
BANK RATE
IMPACT ON MCXSX
ACCOUNT
Rs. 61 / USD
Rs. 65 / USD.
NET Realization
= Bank Rate + Exchange Gain/Loss
Realization at Bank = Rs 61
Gain on MCXSX
= Rs 1.50
Net RATE
= 61 + 1.50 = Rs 62.50
Realization at Bank = Rs 65
Loss on MCXSX
= Rs 0.50
Net RATE
= 65 0.50 = Rs 64.50
So if rupee moves either ways, corporate gets a rate 62.50 (63 - 0.50)
65
BANK RATE
IMPACT ON MCXSX
ACCOUNT
Rs. 61 / USD
Rs. 65 / USD.
NET Payment
= Bank Rate + Exchange Gain/Loss
Pymnt at Bank
Loss on MCXSX
Net RATE
= Rs 63
= Rs 2
= 63 + 2 = Rs 65
Pymnt at Bank
Gain on MCXSX
Net RATE
= Rs 67
= Rs 2
= 67 - 2 = Rs 65
65
BANK RATE
IMPACT ON MCXSX
ACCOUNT
Rs. 61 / USD
Rs. 65 / USD.
NET Payment
= Bank Rate + Exchange Gain/Loss
Payment at Bank
Loss on MCXSX
Net RATE
= Rs 61
= Rs 0.50
= 61+ 0.50 = Rs 61.50
Payment at Bank
Gain on MCXSX
Net RATE
= Rs 65
= Rs 1.50
= 65 1.50 = Rs 63.50
So if rupee moves either ways, corporate gets a rate 63.50 (63 + 0.50)
Transaction: Importer executes an import order on 1stJan2014 & has inflows of $1, 00,000
to be made on 28/03/14.
Spot Rate of USDINR as on 01/01/14 is Rs.63.00/Importer Risk: Rupee may appreciate & import proceeds of USD 1, 00,000 will be converted
at a rate higher than 63.00
HEDGING
SCENARIO 1
SCENARIO 2
SCENARIO 3
BANK SPOT
RATE
ON 01/01/14
63
63
63
OPTIONS
PREMIUM
COST
BUY CALL
BANK SPOT
RATE
ON 28/02/14
60
63
66
GAIN/ LOSS
ON 28/02/14
63-60-1=2
63-63-1=(1)
63-66+2=(1)
REMARKS: IN CASE OF UPSIDE THE MAXIMUM LOSS IS RESTRICTED TO Re.1, BUT THE
PROFIT SIDE IS UNLIMITED IF SPOT RATE REDUCES
Strategy : SELL in Bank & BUY in Futures same maturity and square off
on maturity simultaneously in both platforms.
Net Gain = 62.08 -62.00
Less Cost Of Transaction
Arbitrage opportunity
= 08 Paise
= 02 Paise
= 06 Paise / USD