Small Exporters – Hedging Dollar Receivables through Currency Futures

Though Indian Rupee depreciated over a period of time against USD ($), on careful consideration, It DOES NOT (depreciate) to the extent of what gets priced in the futures contract. Since last 2 decades (Jan 2000), Indian Rupee (INR) has depreciated against $ to the tune 2.6% annually till November 2020. Ever since INR was freed from $ peg in 1994-95, INR depreciation has happened where $ spikes drastically and then cools off over longer time span. This gives incentive for exporters to hedge respective $ receivables.

Value for exporters comes from:

  • Fact that INR depreciated 2.6%, less than the forward premium of ~ 4% – 5% pa (interest rate differential between India and U.S)
  • Forward USD selling against INR is a positive carry game
  • Cost wise – hedging through futures is economical compared to bank (Commission & Margin cost of funding)

Assume that a Pvt. Ltd entity has approx. $ 1 million receivable every month and it followed the strategy of hedging USD receivables through one month Futures. By simply hedging through 1 month futures, entity would’ve made cumulative gain of about Rs.14 per USD for the period Sept 08 to Nov 20 (As per $ futures data availability on investing.com). This amounts to generating higher revenue to the extent ~ 2% – 3% pa that adds to entity’s top and bottom line.

Following is the cumulative gains / losses chart for hedging $ receivable by 1 month futures for above specified time frame (Sept 08 – Nov 20).

Please note that the above should not be construed as an advice from us. Our company is in the business of distribution of suitable Financial Products to investors describing product specifications, material facts and the associated risk factors. We are acting as a Distributor for these products and facilitating transactions.

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