India Inc targets double treat from rising rupee
Exporters and importers, who bought options to hedge currency risks, are now booking profits on these options whose value has soared due to rising volatility.
By Preeti R Iyer, TNN |
Have the cake and eat it too is what corporates are aiming for. Exporters and importers, who bought options to hedge currency risks, are now booking profits on these options whose value has soared because of the rising volatility.
At the same time, exporters are hedging risks by selling dollars in the forward market and making a killing because of the high forward premia.
Although options are essentially a risk management tool, corporates, which have chosen to hedge using this tool, are making windfall gains.
As against the secular appreciation seen since the beginning of this year, recent weeks have seen wild fluctuations in the value of the rupee. The rupee has swung by over 50 paise as over fears of additional fallout of the subprime crisis.
Although renewed FII interest on Monday pushed the Sensex by over 100 points to 15,422 points, there are expectations that the government would take measures to curb the rise of the rupee. These expectations are pushing up the premia on forward contracts. Traders now foresee the rupee trading at 42 levels against the dollar.
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On one hand, market participants are cancelling option contracts, which they entered into with an intention to buy dollars in order to gain from the rise in the option premia, and on the other, they are selling dollars in the forward market, thus availing of the rise in the premia on forward contracts.According to Hinduja Group CFO (group) Prabal Banerjee, corporates are opting for cancellation of option contracts to make limited gains out of the rising premia in anticipation of garnering larger returns in the forward market. The main risk involved in this procedure, said treasury officials, is that any corporate must be able to complete the entire transaction in both segments within a span of time when the premia on forward contracts remain high.
In case there is a reversal in the trend and the forward premia begin to ebb, then the corporate loses out on both fronts. While the corporate exits from the option, on one hand, he also would lose out of the fall in value of the forwards he has built into his receivables.
A senior treasury manager from BNP Paribas explained, “Exporters, who wish to avoid exposure to currency-related risks, would prefer to sell dollars in the forward market, and simultaneously refrain from exercising the option contract.”
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For example, if an exporter bought an option to sell dollars at 40.20 levels, he would see a fall in the value of his option if the rupee weakens below this level. But for an importer who has entered into an option to buy dollars at this level, the premium on the option would rise and give him an opportunity to book profits by exiting the option.There are three main ways for corporates to manage their currency risks. One is to hedge by entering into forward contracts, where the exporter decides to sell dollars to a bank or an authorised dealer on a pre-decided date at a fixed price, price prevailing in the spot market plus the premium.
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Here, the exporter receives the rupee value of the dollar and also the value of the premium. The second alternative is to buy an option. The exporter reserves an option of selling the foreign currency in the forward market, but pays a premium as he sells dollars at a strike price determined by him. The other mechanism is to book and cancel contracts and adopt a more proactive approach by maintaining stop-loss triggers, as it involves exiting and re-entering into contracts.
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