Moneycontrol
Jan 12, 2011 03:53 PM IST | Source: Moneycontrol.com

Hedging scenarios

This article has been sourced from MCX-SX. You can visit their website http://www.mcx-sx.com/ for futher information.


This article has been sourced from MCX-SX. You can visit their website http://www.mcx-sx.com/ for futher information.


Hedging scenarios


Exchange-traded currency futures are used to hedge against the risk of rate volatilities in the foreign exchange markets. Here, we give two examples to illustrate the concept and mechanism of hedging:
 
Example 1:


Suppose an edible oil importer wants to import edible oil worth USD 100,000 and places his import order on July 15, 2008, with the delivery date being 4 months ahead. At the time when the contract is placed, in the spot market, one USD was worth say INR 44.50. But, suppose the Indian Rupee depreciates to INR 44.75 per USD when the payment is due in October 2008, the value of the payment for the importer goes up to INR 4,475,000 rather than INR 4,450,000. The hedging strategy for the importer, thus, would be:











 




Current Spot Rate (15th July '08)
Buy 100 USD - INR Oct '08 Contracts on 15th July
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