The rupee crossed historic The volatility in rupee movements is only set to increase on account of a host of external and domestic forces. The importance of currency risk management — adopting new hedging methods and moving beyond forward contracts — has increased in this scenario. Bungling on currency risk management can adversely affect profits, sales, cost, revenue and competitiveness of companies involved in international business.

Indian companies mainly use forward contract derivatives from their banks to hedge currency exchange risk. Exchange-traded currency futures and options are yet to become popular, in spite of the fact that these were introduced by RBI and SEBI to provide a transparent hedging system, specially to small and medium scale units.

Indian companies went in for over-the-counter derivatives, duly encouraged by banks, only to have their fingers burnt when the rupee rates moved against them. Such structures were developed for speculation rather than for hedging, and now have been banned by RBI. Another area where currency risk has been mismanaged is foreign currency loans. Companies have taken huge cheap dollar loans, which have turned expensive with steep depreciation of the rupee.

Unhedged liabilities in foreign currencies and past hedging strategies by export companies will force companies to report marked-to-market losses, which will affect their share values. Companies need to develop a new approach to protect market share and profit margins in international business. Indian companies now have to shift to a portfolio of forex derivatives, instead of depending heavily on forward contracts.

The proportion of hedging with vanilla put and call options can be increased. Option derivatives can correct wrong hedging decisions at low cost.

Options ensure minimum rupee funds income for exporters and maximum rupee costs for importers, with an opportunity to derive benefits from favourable rate movements. Small and medium companies do use exchange-traded futures and options derivatives for hedging currency risk. Foreign currency exposures must be divided into monthly, quarterly, half-yearly and yearly basis.

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Short-term exposures up to, say, one month may be fully covered with forward contract derivatives, and after that the strategy of partial hedging may be used to deal with volatility in the dollar-rupee rate. The concept of stop loss, to follow market trends for hedging, should now be used seriously. Option and futures exchange traded derivatives, which have transparency and offsetting characteristics, may be used when rupee volatility against the dollar increases.

Such flexibilities are not available in the case of hedging by forward contracts. Futures can also be used to correct the forward contract hedge at low cost and effort. Importers may remain hedged using forward derivatives contract d3 forex short trading system 100 pips daily medium-term committed exposures.

Call options may be used for uncommitted import exposures to benefit from corrections in rates. Hedging with forex derivatives may create situations for marked-to-market losses. Indian corporates should give serious attention to operational hedging techniques, specially for very long term exposures in foreign currencies. Companies must now develop their brands and plan to develop manufacturing capacities close to their main foreign markets.

Volatility in the external value of rupee requires an innovative approach towards currency exposures. Global and local macro economic factors, and risk avoidance by forex dealers, have how to hedge foreign exchange risk in india a huge demand for the dollar.

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The global factors that have led to a strong dollar worldwide are: But present trend of the declining rupee can be converted into big opportunity, particularly by expanding exports in new international markets. Currency risk management will play a crucial role in translating this potential into reality. The rupee will not appreciate in any significant way, unless our current account achieves surplus position. The rupee-dollar exchange rate is a critical factor in exports, imports, international loans, foreign remittances, tourism and overseas education.

The depreciating rupee poses major challenges for importers and those servicing unhedged foreign currency loans. Future business decisions will be influenced by the external value of the rupee against major currencies, how to hedge foreign exchange risk in india the dollar.

Contrary to what is generally believed, even dollar depreciation can hurt exporters because foreign buyers, especially in Europe and the US, exert pressure on Indian exporters to cut prices. What's more, export-oriented large companies may have hedged their short, medium and long-term exposures at, say, to a dollar, when the rupee was below The author has not looked into the cost of hedging - long term.

Exchange traded products suffer from standardisation, absence of tenors and hence are not necessarily good risk management tool for products. Moreover, traded volumes in exchanges are small compared to OTC market and hence liquidity is a problem. More needs to be done by RBI for encouraging exchange traded products.

The fundamental problems facing Indian economy supplemented by global risk aversion are factors leading to INR fall. None can predict the extent of fall and avoidance of loss through hedging is simply not practical due to the hedging cost involved.

Net importers will be forced to build it into their costs, which will again lead to inflation. The synthetic and garment sectors of the textile industry were dealt a blow on Sunday, when the GST Council decided not to discuss a revision of rates. The industry had requested a cut in Catalyst Multimedia Today's Paper Topics ePaper WealthCheck.

Editorial Columns Letters Books Blogs. Without proper currency hedging, businesses may always be at the receiving end. Indian businesses have not managed currency risk well enough.

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