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An SME gets an order of $500000 when the spot was 46.00 and he is expecting a payment of the same in 3 months. In order to avoid currency risk, the MD of the company immediately books 100% of the position in the forwards market with premium of 50 paise netting him 46.50.
Due to unforeseen circumstances the payment is expected to be delayed by at least a month and the rupee quote went from 46.00 to 52.00 levels. Because of the same the corporate had to book a loss of 5.50 rupees per dollar.
Why covering 100% on a transaction is not always a wise thing to do?
Source: India Forex