Contract Specifications for Pound Sterling-INR
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| Hedging scenarios | ||||||||||||||||||||||||||||||||||||||||
| Hedging against Indian Rupee appreciation | ||||||||||||||||||||||||||||||||||||||||
Suppose an Indian IT exporter receives
an export order worth, say,  100,000
from a British trading firm with the delivery date being in 3 months time.
At the time when contract is placed, the British pound sterling (GBP)
is worth say Rs.74.05 in the spot market, while on MSEI a futures contract
for an expiry date that matches with order payment date is trading, say,
at Rs.74. This puts the value of the order, when placed, at Rs.7,405,000.
However, if the domestic exchange rate appreciates significantly (to Rs.73.20)
when the order is paid for (which is one month after the delivery date),
the firm would receive only Rs.7,320,000 rather than Rs.7,405,000.To insure against such losses, the firm can, at the time it receives the order, can enter into 100 British pound sterling futures contract of 1000
each to sell at Rs.74 a British pound sterling, which involves contracting
to sell a foreign currency on expiry date at the agreed exchange rate.
Suppose on payment date the exchange rate is, say, Rs.73.20, the exporter
would receives only Rs.7,320,000 on selling the British pound sterling
in the spot market, but gains Rs. 80,000 (i.e. 74 - 73.20 * 100,000) in
the futures market. Thus, overall the firm receives Rs.7,400,000 and protects
itself from the sharp appreciation of domestic currency against British
pound sterling. In the short term, firms can make gains or losses from hedging. But the basic purpose of hedging is to protect against excessive losses and to benefit from knowing exactly how much it was going to get from its export deal to avoid the uncertainty associated with future exchange rate movements. |
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| Hedging against Indian Rupee depreciation | ||||||||||||||||||||||||||||||||||||||||
| An organic chemicals dealer in India
placed an import order worth, say, 100,000
with a Britain manufacturer. The current spot rate of British pound sterling
is, say, Rs.74.05 and at this rate the value of the order is Rs.7,405,000.
The importer is worried about sharp depreciation of Indian Rupee against
British pound sterling in coming months when the payment is due and brought
100 British pound sterling futures contract (100,000
each) on MSEI, say, at Rs.74 a GBP. Suppose, at expiry date, Rupee depreciated
to Rs.75 the importer would have to pay Rs.7,500,000, but he would gain
Rs.100,000 (i.e. Rs.75 - 74 * 100 * 1000) from the futures market and
the resultant outflow would be only Rs.7,400,000. In the short term, firms can make gains or losses from hedging. But the basic purpose of hedging is to protect against excessive losses and to benefit from knowing exactly how much it was going to pay for the import order to avoid the uncertainty associated with future exchange rate movements. |