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Hedging against Indian Rupee appreciation
To insure against such losses, the firm can, at the time it receives the order, can enter into 100 Euro futures contract of 1000 each to sell at Rs.64 a Euro, 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.63.20, the exporter would receives only Rs.6,320,000 on selling the Euro in the spot market, but gains Rs. 80,000 (i.e. 64 - 63.20 * 100 * 1000) in the futures market. Thus, overall the firm receives Rs.6,400,000 and protects itself from the sharp appreciation of domestic currency against Euro.
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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