Option Strategies For Part-Hedging Of Forex Payables And Receivables

  • Market Overview

We expect to see significant two-way movements in the rupee fluctuating in a broad range between 75.00 to 77.00 with a downward bias upto the end of this month. The importers and exporters are advised to lock-in the exposures at a favorable exchange rate within the above-said range.

For importers, we recommend buying of vanilla calls upto 30 percent of the firm gross import payables for maturities upto 3-4 months at the middle of the ATMs and ATMF strike rate targeting spot levels close to the lower end of the above range to reduce the front ended option premium cost to the extent possible. On the other hand, the exporters are recommended to buy puts upto 40 percent of their firm gross export receivables at the ATMS strike rate for maturities upto 3-4 months at the weaker side of the spot rupee exchange rate.

The suggested option structures as above would help the importers and exporters to minimize their exchange rate losses which may arise due to huge volatilities expected in the domestic currency market.

Booking (NASDAQ: BKNG ) of forwarding exchange contracts for the balance portion of the firm gross forex payables may be undertaken in tranches upto 6-month maturities. By way of booking forward exchange contracts against the gross export receivables targeted at the weaker side of the spot exchange rate to derive the added benefit of forwarding dollar premia at above 4.25 percent per annum.

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