Exporter Gets A Better Forward Rate By Selecting A Better Hedging Tool

Exporter Gets A Better Forward Rate By Selecting A Better Hedging Tool

05 Mar 2021 03:06 PM
 

CASE

Myforexeye met an exporter when the USDINR spot was at 72.40.The forward premium for April was 70 paise.

He had a benchmark rate of 73 and was getting a net rate of 73.10, which was above his benchmark rate. Client was willing to book the forward as it was above his benchmark rate but Myforexeye suggested to wait for a better opportunity.

SOLUTION

We recommended the client to wait for a better opportunity because Myforexeye was inclined towards rupee weakening. The client was nervous because the rupee was below his benchmark and not booking forwards on time could land him in trouble.

We suggested that instead of taking a forward contract, he should book a range forward. Range forward contracts are constructed to provide settlement for funds within a range of prices. They require two derivative positions which creates a range for settlement at a future time. We did a buy put sell call option that would give us a minimum rate of 73.10 and a maximum rate of 73.60.

VALUE ADDITION

Selecting the best hedging tool is very important depending on the market situation. If the client had chosen to book a simple forward contract, he would have gotten a maximum of 73.10 but now he will get a minimum of 73.10 and a maximum of 73.60