Delhi based metal exporter- Forex Advisory Service

Delhi based metal exporter- Forex Advisory Service

05 Jun 2020 10:57 AM
 

Case:

A Delhi based metal importer had import payments of 3-4 million dollars scheduled every month. The client was getting extremely worried about the weakening rupee. The rupee has already depreciated 7.5% in 1.5 months. With growing uncertainties in the market due to COVID-19, he wanted to be sure of not incurring any more losses.

Myforexeye value addition:

To hedge the currency risk, we advised the client to buy vanilla call options. By buying a call option the client has the right, and not the obligation, to buy the underlying currency. The client had an upcoming payment of USD 3,500,000. He bought a vanilla call option for a call premium of 69.70 paise per dollar with a strike price of Rs.74.75. The option had a maturity of 1 month.

In this way, the client was protected from adverse currency movement- an increase in the USD/INR rate. Also, he had upside potential- if rupee appreciated. The maximum loss he had to bear was of the premium paid- INR2.4 million (0.697*3,500,000). But looking at the uncertain circumstances, it was not a big cost. The monthly change in the pair is more than 60 paise. Thus the importer is hedged from rupee depreciation by gaining protection from the downside.

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