Managing risk at turbulent times - Forex Advisory Service

Managing risk at turbulent times - Forex Advisory Service

07 Sep 2019 03:03 PM
 

Case:

A large importer based in Delhi. The client had started a relationship with Myforexeye 6 months back. The client was getting extremely worried about persistent rupee weakness. Their import payment of USD 1 million was due for September 2019.

Myforexeye Value Addition:

We had advised the client multiple times at USDINR spot of around 69.00 and sub-69 levels in the month of July to do a mix of import forwards and vanilla call options for the import payments of USD 2.7 million and USD 2 million due for  Aug 2019 and Sep 2019 respectively. At that time, the 1-month options volatility was at 15-month low and the options premiums are directly proportional to the options volatility.

The client booked import forwards for USD 1.95 million for their payments due in August at USDINR spot of 69.53 and 69.38 as per our recommendation on which the client earned a profit of INR 36.19 lacs but did not hedge his exposure for the month of September. We had again advised the client to do vanilla call options when the rupee had started depreciating and had breached the 70-mark in August but the company’s Management was not convinced with doing options. We advised the same to the client when the rupee fell below the 71-mark due to uncertainty in the market.

In the last week of August, USDINR made attempts above the 72-mark but managed to close below it for the month. However, it again went above 72.00 this week and we advised the client strictly to do vanilla call option for the import payment of USD 1 million due for next week. We did not recommend the client to do import forward as we believed a higher probability of rupee appreciation as compared to rupee weakness.

The client did an ATMS (At The Money Spot) Vanilla Call Option for USD 1 million at a strike price of 71.8150 by paying an upfront option premium of 31 paise on USD 1 million so that the worst-case rate comes to 72.1250. The client, in this case, is now protected from any further fall in the rupee and open to taking benefits in case of rupee appreciation.

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