Garment Exporter Manages To Recover 50% Losses Booked In Forward Contract

Garment Exporter Manages To Recover 50% Losses Booked In Forward Contract

25 Feb 2021 06:10 PM
 

CASE

Our existing client, a garment exporter had hedged his receivables and sold EURINR forward @85.60 for Dec 2020 but part of their order got cancelled. They were able to cancel the balance contract only on maturity @89.90, booking a loss of INR 4.3 per Euro.

SOLUTION

The Euro was trading at its multiyear peak, with the view that there would be correction in at least 2 months’ time, the view could’ve been executed by rolling over the forward contract. The contract would’ve been booked as anticipated exposure, but unlike earlier the gains on cancellation would’ve not been credited due to amended RBI regulation. https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10485

Myforexeye advised them to short EURINR futures in the stock exchange for end February 2021 @ 90.1375. At the end of 2 months client exited the position with a gain of INR 2.14 on 150 lots (1 lot = $1,000).

VALUE ADDITION

Futures provided the client with the flexibility to leverage the benefit of daily MTM settlement through partially exiting the short position @ 88.22, though aware that better buying opportunities would be in sight. Further positions were exited with a net buying rate of 87.85 and 87.90, giving a profit of INR 2.1803 per Euro.

This strategy helped in recovering about 50% of the losses booked in the forward contract in December through the futures contract within 2 months.