Currency Hedging Illustrations

Illustrations

Illustration 1
A vegetable oil importer wants to import oil worth USD100,000 and places his import order on 15 July 2009, with the delivery date being four months later. At the time of placing the contract one US Dollar is worth 44.50 Indian Rupees in the Spot market. Let’s assume the Indian Rupee depreciates to INR44.75 per USD by the time the payment is due in October 2009, then the value of the payment for the importer goes up to INR4,475,000, rather than the original INR4,450,000. The hedging strategy for the importer, thus, would be:
Current Spot rate (15 July 2009)44.5000
Buy 100 USD - INR October 2009 contracts on 15 July 2009(1,000 * 44.5500) * 100 (assuming the October 2009 contract is trading at 44.5500 on 15 July 2009)
Sell 100 USD - INR October 2009 contracts in October 2009, profit/loss (Futures market)44.7500
1000 * (44.75 – 44.55) * 100 = 20,000
Purchases in Spot market at 44.75 total cost of hedged transaction44.75 * 100,000
100,000 * 44.75 – 20,000 = INR4,455,000

Illustration 2
A jeweller who is exporting gold jewellery worth USD50,000 wants protection against possible Indian Rupee appreciation in December 2009, ie when he receives his payment. He wants to lock in the exchange rate for the above transaction. His strategy would be:
One USD - INR contract sizeUSD1,000
Sell 50 USD - INR December 2009 contracts
(on 15 July 2009)
44.6500
Buy 50 USD - INR December 2009 contracts in December 200944.3500
Sell USD50,000 in Spot market at 44.35 in December 2009 (assuming that the Indian Rupee depreciated initially , but later appreciated to 44.35 per USD by the end of December 2009, as foreseen by the exporter)
Profit/loss from Futures (December 2009 contract)50 * 1000 *(44.65 – 44.35)
= 0.30 *50 * 1000
= Rs 15,000

The net receipt in INR for the hedged transaction would be: 50,000 *44.35 + 15,000 = 2,217,500 + 15,000 = INR2,232,500. Had he not participated in the Futures market, he would have got only INR2,217,500 However, he kept his sales unexposed to Forex rate risk.