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Indian
Exporter
Foreign
Buyer
Order/LC For TShirts
Shipment after 1
year.
Exporter
Bank
A
Borrow
Bank
X
$ 0.95
Bank
A
Sel
l
$ 0.95
Rs
37.05
4
Receive Maturity
Proceeds
3
Deposit/Le
nd
Rs 37.05
Rs 39.25
Bank
Z
Bank
Y
Bank
X
6
Repay $
1.00 Loan
+ Int
3
Lend/Deposi
t
Rs 37.05
Exporter
5
Bank
A
RS 37.05
Bank
Y
Bank
Z
Receive
maturity
Proceeds
incldg Int
Rs 39.25
Spot Exchange rate 1 $
=
Rs 39.00
3 Months later
Spot $/INR = Rs 35.00
(say)
After the Exporter booking a Forward Contract at 1$ = Rs 39.20
(value 1 year Fwd)
Foreign Buyer cancels the order placed with the Exporter
Exporter
Request to cancel
Forward Contract
Bank
A
Exporter
Bank
X
3
Prepay $
loan + Int =
$ 0.96 =(Rs
0.50 ) Break
deposit
Rs
33.60
Spot Exch
Rate
Bank
Spot:
Z
Exch Rate 1$=Rs
35.00
1$=
1
Rs.35.00
Gain on Cancellation of Fwd Contract: Rs 37.59Rs 33.60 = Rs 3.99
Less Interest on $ loan converted into Rs
= Rs 0.50
Less Bank As operating Expenses + margin
Rs 0.50
Amount payable to Exporter
Rs
2.99
3 Months later
Spot $/INR = Rs 45.00
(say)
After the Exporter booking a Forward
Contract at 1$ = Rs 39.20 (value 1 year
Fwd)
Foreign Buyer cancels the order placed with
the Exporter
Exporter
Request to cancel
Forward Contract
Bank
A
Exporter
Bank
X
3
Prepay $ loan
+ Int =
$ 0.96 =(Rs
0.50 )
Break
deposit
Bank
A
1
Rs+ Int
( 37.59 )
Buy
$ 0.96
Bank
Y
Rs
43.20
Spot Exch
Rate
Bank
Spot:
Z
Exch Rate 1$=Rs
45.00
1$=
1
Rs.35.00
Loss on Cancellation of Fwd Contract: Rs 37.59Rs 43.20 = Rs (5.61)
Add Interest on $ loan converted into Rs
= Rs
(0.50)
Add Bank As operating Expenses + margin
Rs
( 0.50)
IN SUMMARY
A Forward Contract booked by an Exporter seeks to protect his
profitability from his business operations (Export of T-Shirts in
the present examples)
As long as the Forward Contract is not cancelled, and the
contracted export takes place, the Exporter does not make any
gains/losses on account of the fluctuations in the foreign currency
versus INR (if exports invoiced in foreign currency
If a Forward Contract(Exports) is cancelled, there could be a
gain for the Exporter , if the foreign currency (vs INR) price
depreciates as on date of cancellation as compared to the spot
rate on date of booking the contract.
If a Forward Contract(Exports) is cancelled, there could a loss to
the Exporter ,
if the foreign currency (vs INR) price appreciates as on date of
cancellation as compared to the spot rate on date of booking the
contract.
Max
Max Gains to
5.3.07 26.07.07
44.68
40.87
3.81
17.8.07 10.10.07
41.34
39.24
2.10
17.3.08 - 17.4.08
40.74
39.79
0.95
6.86
39.29 40.74
39.78 42.99
Max
Max Loss to
1.10
1.45
3.21
5.76
Forward
Contract
1$ = Rs 39.00
1 $ = Rs 49.00
+ Rs 10.00
1 $ = Rs 29.00
- (Rs 10.00)
Fx P/L for
hedged
exporter1 4
Nil
Nil
1. No upfront fees
2. Fx risk due to currency fluctuation
completely eliminated
3. Profit on cancellation if spot USD/INR
lower than Rs 39.00 on date of cancellation
Options
A better hedging tool
PUT OPTION : Gives the buyer (exporter) the
RIGHT but not the OBLIGATION to deliver (SELL)
the underlying (USD/INR) on a specified future
date at a specified exchange rate fixed now (1 $
= Rs39.00 say ) .
CALL OPTION : Gives the buyer (importer) the
RIGHT but not the OBLIGATION to take delivery
(BUY) underlying (USD/INR) at a specified
exchange rate fixed now (1 $ = Rs 39.00 say )
OPTION PREMIUM
The buyer of the option pays an upfront fee (premium) to
the seller of the Option
Forward contract
Put option
Put Option
Zero-Cost Structures
Zero-Cost Structures
Zero-Cost Structures
Zero-Cost Structures