HEDGING WITH

CURRENCY FUTURES
& OPTIONS

HEDGING

Exporter - Future Receivable of

USD 100k
Is he carrying any risk regards to
currency fluctuation?

Importer - Future Payable of

USD 100k
Is he carrying any risk regards to
currency fluctuation?

Yes

Yes

He will hedge his risk by selling USD in

futures market or buying a PUT
Option.

He will hedge his risk by buying USD in

futures market or buying a CALL
Option.

Same applies to EURO, POUND & YEN

BC Hedging Comparison of Banks and MCX-SX

Buyers Credit Hedging

Without
Hedging

Hedging with Hedging on

Banks
Exchange

LIBOR

0.75%

0.75%

0.75 %

Bank Spread

0.90%

0.90%

0.90%

LOU/ Limit Charges

1.00%

1.00%

1.00%

Total Interest Cost

2.65%

2.65%

2.65%

365

325

6.70%

5.96%

9.35%

8.61%

Premia in Paise for 1 Year

Hedging Cost 1 Year in %
Total Cost for BC for 1 Year
Saving in % Terms
Saving on 1 Mio USD in Rs

2.65%

0.73%
400,000

Hedging using Currency futures

Cash Market
Gains/Losses
in Cash Market
(BANK
REMMITANCE)

Future Market

Gains / Losses
in Currency
Futures

Mitigation of
Risk

Payoff of Hedge using MCX FutEXPORTS.

Transaction: Exporter executes an export order on 1st JAN& has inflows of $1, 00,000 to be received
on 28th FEB
Spot Rate of USDINR as on 1st JAN is Rs. 62.50
FEB Future Rate = 63.00
Exporters Risk: Rupee Feb appreciate & export proceeds of USD 1, 00,000 will be converted at a rate
lower than 64.50
RATE On
Maturity
(FEB END)
61

65

BANK RATE

IMPACT ON MCXSX
ACCOUNT

Rs. 61 / USD

Sold FEB month Futures @ 63

Buy back @ 61
GAIN = 2 Rs / USD

Rs. 65 / USD.

Sold FEB month Futures @ 63

Buy back @ 65
LOSS = 2 Rs / USD

NET Realization
= Bank Rate + Exchange Gain/Loss
Realization at Bank = Rs61
Gain on MCXSX
= Rs 2
Net RATE
= 61 + 2 = Rs 63
Realization at Bank = Rs 65
Loss on MCXSX
= Rs 2
Net RATE
= 65 - 2 = Rs 63

So if rupee moves either ways, corporate is hedged at a Fixed Rate

Payoff of Hedge using MCX-SX EXPORTS.

Transaction: Exporter executes an export order on 1st JAN& has inflows of $1, 00,000 to be received
on 28th FEB
Spot Rate of USDINR as on 1st JAN is Rs. 62.50
FEB Future Rate = 63.00
Exporters Risk: Rupee Feb appreciate & export proceeds of USD 1, 00,000 will be converted at a rate
lower than 62.50
RATE On
Maturity
(FEB END)
61

65

BANK RATE

IMPACT ON MCXSX
ACCOUNT

Rs. 61 / USD

Bot FEB End month Options @ 63

Premium Paid = Rs 0.50
GAIN = 2 0.50 = 1.50 Rs / USD

Rs. 65 / USD.

Bot FEB End month Options @ 63

Premium Paid = Rs 0.50
LOSS = 0.50 Rs / USD

NET Realization
= Bank Rate + Exchange Gain/Loss
Realization at Bank = Rs 61
Gain on MCXSX
= Rs 1.50
Net RATE
= 61 + 1.50 = Rs 62.50
Realization at Bank = Rs 65
Loss on MCXSX
= Rs 0.50
Net RATE
= 65 0.50 = Rs 64.50

So if rupee moves either ways, corporate gets a rate 62.50 (63 - 0.50)

Payoff of Hedge using MCX-SX Fu IMPORTS.

Transaction: Importer executes an import order on 1st JAN& has outflows of $1, 00,000 to be paid
on 28th FEB
Spot Rate of USDINR as on 1st JAN is Rs. 62.50
FEB Future Rate = 63.00
Importers Risk: Rupee Feb depreciate & import proceeds of USD 1, 00,000 will be converted at a rate
higher than 62.50
RATE On
Maturity
(FEB END)
61

65

BANK RATE

IMPACT ON MCXSX
ACCOUNT

Rs. 61 / USD

Bot FEB month Futures @ 65

Sell back @ 63
Loss = 2 Rs / USD

Rs. 65 / USD.

Bot FEB month Futures @ 65

Sell back @ 67
GAIN = 2 Rs / USD

NET Payment
= Bank Rate + Exchange Gain/Loss
Pymnt at Bank
Loss on MCXSX
Net RATE

= Rs 63
= Rs 2
= 63 + 2 = Rs 65

Pymnt at Bank
Gain on MCXSX
Net RATE

= Rs 67
= Rs 2
= 67 - 2 = Rs 65

So if rupee moves either ways, corporate is hedged at a Fixed Rate

Payoff of Hedge using MCX-SX IMPORTS.

Transaction: Importer executes an import order on 1st JAN& has outflow of $1,00,000 to be made
on 28th FEB
Spot Rate of USDINR as on 1st JAN is Rs. 62.50
FEB Future Rate = 63.00
Importers Risk: Rupee Feb depreciate & import payment of USD 1,00,000 will be made at a rate
higher than 62.50
RATE On
Maturity
(FEB END)
61

65

BANK RATE

IMPACT ON MCXSX
ACCOUNT

Rs. 61 / USD

Bot FEB End Call Options @ 63

Premium Paid = Rs 0.50
LOSS = 0.50 Rs / USD

Rs. 65 / USD.

Bot FEB End Call Options @ 63

Premium Paid = Rs 0.50
GAIN = 2 -0.50= 1.50 Rs / USD

NET Payment
= Bank Rate + Exchange Gain/Loss
Payment at Bank
Loss on MCXSX
Net RATE

= Rs 61
= Rs 0.50
= 61+ 0.50 = Rs 61.50

Payment at Bank
Gain on MCXSX
Net RATE

= Rs 65
= Rs 1.50
= 65 1.50 = Rs 63.50

So if rupee moves either ways, corporate gets a rate 63.50 (63 + 0.50)

Transaction: Importer executes an import order on 1stJan2014 & has inflows of $1, 00,000
to be made on 28/03/14.
Spot Rate of USDINR as on 01/01/14 is Rs.63.00/Importer Risk: Rupee may appreciate & import proceeds of USD 1, 00,000 will be converted
at a rate higher than 63.00

HEDGING

SCENARIO 1

SCENARIO 2

SCENARIO 3

BANK SPOT
RATE

ON 01/01/14

63

63

63

OPTIONS
PREMIUM
COST

BUY CALL

BANK SPOT
RATE

ON 28/02/14

60

63

66

GAIN/ LOSS

ON 28/02/14

63-60-1=2

63-63-1=(1)

63-66+2=(1)

REMARKS: IN CASE OF UPSIDE THE MAXIMUM LOSS IS RESTRICTED TO Re.1, BUT THE
PROFIT SIDE IS UNLIMITED IF SPOT RATE REDUCES

ARBITRAGE OPPORTUNIT EXAMPLE

Arbitrage means Buying & Selling, same Quantity, simultaneously at the
same time in 2 different Markets for Risk Less Profits.
Illustration: Between Bank Forwards and MCX-SX Futures.
MCXSX Futures
Bank Fwds

= 62.00 (1 month Futures Contract)

= 62.08 (1 month forward contract)

Strategy : SELL in Bank & BUY in Futures same maturity and square off
on maturity simultaneously in both platforms.
Net Gain = 62.08 -62.00
Less Cost Of Transaction
Arbitrage opportunity

= 08 Paise
= 02 Paise
= 06 Paise / USD

Arbitrage will be realized at the expiry of the contract.