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RETAIL RESEARCH
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Immediate Supports
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66.76
66.76
66.59-66.56
66.86-66.98
66.23-66.08
68.08-68.21
74.59
74.22
74.13-73.94
74.68-74.90
73.59-73.50
75.65-76.62
RETAIL RESEARCH
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RETAIL RESEARCH
Indian Rupee Currency market moves against major world currencies
JPY/INR JPY/INR has bounced after a sharp fall. Further GBP/INR GBP/INR has corrected from highs.
upsides are likely.
Further downsides are likely.
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Strategy for Currency Hedgers
With our expectation of further downsides for the USDINR, it is more important for exporters to hedge their receipts for
the next 1-3 weeks.
Importers can choose to go light on hedging their payments if they are willing to take the risk. This is because the
strengthening of the Rupee favorably affects an importer as their payments for imported goods go down when the
Rupee appreciates.
A primer on Currency Hedging
Hedging in the Currency Futures market is an effective tool to mitigate currency volatility risks. Currency Futures are
Exchange Traded Derivatives which can benefit the exporters and importers through hedging their Currency risk and
minimizing loss due to Currency volatility.
Exchange rate fluctuations impact different segments in various ways. When the domestic Currency appreciates, it is
the importers who benefit from it and when the Indian Rupee depreciates, it is the exporters who benefit from it.
However, the level of impact varies from sector to sector and the ability to withstand this impact is also different from
sector to sector. For example, a company dealing in IT and IT-related services usually has a higher margin than an
individual dealing in the handicraft or textile sector. Hence, IT companies have greater capacity to withstand the impact
of Rupee appreciation or depreciation.
We can classify this impact as follows:
Impact on exporters: Strengthening of the Rupee is a nightmare for exporters, while the weakening of the Rupee
boosts their profit margins.
Impact on importers: Strengthening of the Rupee favorably affects an importer as their payments for imported goods
go down when the Rupee appreciates.
Forex Risk Management
As Currency fluctuations can adversely impact importers/exporters, it is very important for them to protect their
exposure in an efficient and effective manner. Every exporter/importer may follow the following steps to manage their
exposure:
Determine risk exposure:
The following will help to determine their risk exposure:
Percentage of sales or purchases (especially receivables and payables) that is done in foreign currencies.
Is the environment such that the importer/exporter is not in a position to pass on the Currency losses by
increasing the prices?
Can the importer/exporter enter into price variance clauses with the other party based on exchange rate
fluctuations?
Does the importer/exporter have a tight cash flow? Can adverse Currency fluctuation cause problems for the firm?
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At what point will a change in exchange rates affect the profitability significantly?
Which Currencies is the firm exposed to and in which Currencies does it have payment obligations?
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Illustration 1
A crude oil importer wants to import oil worth USD 1,00,000 and places his import order on 15 July 2013, with the
delivery date being four months later. At the time of placing the contract one US Dollar is worth 65.50 Indian Rupees in
the Spot market. Lets assume the Indian Rupee depreciates to INR67.50 per USD by the time the payment is due in
October 2013, then the value of the payment for the importer goes up to INR 67,50,000 rather than the original INR
65,50,000. The hedging strategy for the importer at the time of placing the order would be:
Now
Current Spot rate (15 July 2013) 65.5000 - One USD - INR contract size USD 1,000
Buy 100 USD - INR October 2013 contracts on 15 July 2013 (1,000 * 65.7000) * 100 (assuming the October 2013
contract is trading at 65.70 on 15 July 2013)
Later
Sell 100 USD - INR October 2013 contracts in October 2013 at 67.50
Profit/loss (Futures market)= 1000 * (67.50 65.70) * 100 = 1,80,000
Purchases in Spot market at 67.50
Total cost of hedged transaction (67.50 * 100,000) 1,80,000 = INR 65,70,000. (transaction costs not considered)
Had he not participated in the Futures market he would have to pay Rs.67,50,000 for the import.
Illustration 2
A jeweller who is exporting gold jewellery worth USD 50,000 in July 2013 wants protection against possible Indian
Rupee appreciation in December 2013, i.e. when he receives his payment. He wants to lock in the exchange rate for the
above transaction.
His strategy would now be:
Sell 50 USD - INR December 2013 contracts (on 15 July 2013) 65.90 - One USD - INR contract size USD 1,000
Later
Buy 50 USD - INR December 2013 contracts in December 2013 at 65.10
Sell USD 50,000 in Spot market at 65.10 in December 2013 (assuming that the Indian Rupee appreciated to 65.10 per
USD by the end of December 2013).
Profit/loss from Futures (December 2013 contract) 50 * 1000 *(65.90-65.10)
= 0.80 *50 * 1000 = Rs 40,000
The net receipt in INR for the hedged transaction would be: (50,000 *65.10) + 40,000 = INR 32,95,000.
Had he not participated in the Futures market, he would have got only INR 32,55,000.
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