Hedging with Currency Futures

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Hedging
What is a hedge

“A position established in one market in an attempt

to offset exposure to the price risk of an equal but
opposite obligation in another market”

Why hedge
Costs & Revenues in different currencies
Time differences in costs and revenues
Evaluating impact on net returns (profits)

Risk management is important

Not doing anything is also taking a RISK

Understanding your risk profile and appetite to

take risks, determines your risk management
policy

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 Scenario 1
Indian Co. sold a Raw Material to USA based Co. for 10,00,000 USD with an
expected remittance in Eight month.

When you enter into sell transaction of 10,00,000 USD/INR, Meaning you Sold
10,00,000 USD by buying 4,79,80,000 INR.

Sold 1000 contracts of February 2011 maturity on NSE

On 27 February 2011, the contract will expire and the payment trade needs to be
executed

Sold USD 10,00,000 to a bank at RBI fixing rate on 27 February 2011.Banks may
charge some spread over fixing rate

Ensuring RBI fixing rate on Payment and Contract fixing, will help to crystallize the
rate contracted on the exchange

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 If USD will be 49.00
Today    

Sell 1000 Contracts Feb,2011 47.98

Expected Remittance = 1000*1000*47.98 4,79,80,000

On 27 Feb ,2011  

RBI fixing rate 49.00

Sold USD 10,00,000 to the bank = 10,00,000*49.00 4,90,00,000

Loss on Feb,11 Contract = 1000*1000*(49.00 -47.98) 10,20,000

Total INR Receipt = 4,90,00,000 - 10,20,000 4,79,80,000

The above computation ignores margin and mark to market costs

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 If USD will be 46.00
Today    

Sell 1000 Contracts Feb,2011 47.98

Expected Remittance = 1000*1000*47.98 4,79,80,000

On 27 Feb ,2011  

RBI fixing rate 46.00

Sold USD 10,00,000 to the bank = 10,00,000*46.00 4,60,00,000

Profit on Feb,11 Contract = 1000*1000*(47.98 -46.00) 19,80,000

Total INR Receipt = 4,60,00,000 + 19,80,000 4,79,80,000

The above computation ignores margin and mark to market costs

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 Hedge Cost with Currency Future
Margin Approx. 5 % of Contract Value – 23,99,000 INR
Scenario 1
Scenario 2
Currency Futures Charges (Brokerage - 2
(Brokerage - 1 Paisa)
Paisa)
19,200 Apprx. 9,600 Apprx.
Brokerage (9596 for (4798 for
Buy + 9596 for Sell) Buy + 4798 for Sell)

SEBI TAX ( 20/Cr. ) 200 200

STAMP DUTY
(200/Cr.
2000 2000
Not standardized, may vary
from 0- 200)
Service Tax
(10.3% on 1980 990
Brokerage)
Clearing Fees

Total Cost 23,380 12,970

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 Scenario 2
Indian Co. Purchase a Machine from Germany for 1,00,000 Euro with an expected
delivery in Two month.

When you enter into buy transaction of 1,00,000 Euro/INR, Meaning you Bought
1,00,000 Euro by selling 57,18,000 INR.

Buy 100 contracts of August 2011 maturity on NSE

On 27 August 2011, the contract will expire and the payment trade needs to be
executed

Buy Euro1,00,000 to a bank at RBI fixing rate on 27 August 2011.Banks may charge
some spread over fixing rate

Ensuring RBI fixing rate on Payment and Contract fixing, will help to crystallize the
rate contracted on the exchange

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 If Euro will be 60.00
Today    

Buy 100 Contracts Aug,2010 57.18

Expected Payment = 1000*100*57.18 57,18,000

On 27 Aug ,2010  

RBI fixing rate 60.00

Buy Euro 1,00,000 from the bank = 1,00,000*60.00 60,00,000

Profit on Aug, 10 Contract = 1000*100*(60.00 -57.18) 2,82,000

Total INR Payment = 60,00,000 – 2,82,000 57,18,000

The above computation ignores margin and mark to market costs

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 If Euro will be 54.00
Today    

Buy 100 Contracts Aug,2010 57.18

Expected Payment = 1000*100*57.18 57,18,000

On 27 Aug ,2010  

RBI fixing rate 54.00

Buy Euro 1,00,000 from the bank = 1,00,000*54.00 54,00,000

Loss on Aug,10 Contract = 1000*100*(57.18 -54.00) 3,18,000

Total INR Payment = 54,00,000 + 3,18,000 57,18,000

The above computation ignores margin and mark to market costs

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 Hedge Cost with Currency Future
Margin Approx. 5 % of Contract Value – 2,85,900 INR
Scenario 1
Scenario 2
Currency Futures Charges (Brokerage - 2
(Brokerage - 1 Paisa)
Paisa)
2,300 Apprx. 1,150 Apprx.
Brokerage (1,143.6 for (571.8 for
Buy + 1,143.6 for Sell) Buy + 571.8 for Sell)

SEBI TAX ( 20/Cr. ) 20 20

STAMP DUTY
(200/Cr.
200 200
Not standardized, may vary
from 0- 200)
Service Tax
(10.3% on 236.9 118.45
Brokerage)
Clearing Fees

Total Cost 2760 1490

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Thank
Thank You
You

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