CALCULATION OF COSTING RATE AND
PROTECTING IT WITH BSE CURRENCY FUTURES
( IMPORTERS POINT OF VIEW)
Date : 04 January 2021
Business in international markets is different from handling domestic business transactions at various levels. A company that intends to buy from a foreign supplier must ensure that the transaction is viable, profitable and he will be able to provide goods /services at a price and quality that are competitive. A ‘landed cost’ is the term used when referring to the final cost of products plus all associated shipping and logistic costs required to get the goods delivered to a final location. In global trade process there can be many additional charges, fees and currency conversions that buyers must be aware of so that the landed cost of the products can be calculated. Some of the import costs include
- Cost of the products
- Currency conversion costs
- International freight & logistics charges
- Import charges, port charges, customs clearance fees
- Import duties , taxes and local delivery.
When an Indian Importer asks for quotation from seller, he gets quotation in dollar term. He assumes a conversion rate which is normally more than the current rate. The process begins when he starts to place the order as per payment terms.
- Advance Payment in dollar : In this case the importer makes advance payment , so there is less risk involved in currency fluctuation.
- Payment on submission of shipping documents by supplier : In this case Importer makes payment at the time of shipment, when goods are loaded in the ship from exporter’s port , so there is less risk involved .
- Payment on arrival : Payment made by importer at the time of arrival, in this case risk involved is very less.
- Goods on credit : In this case Importer gives credit period of say 60-90 days, currency fluctuation is very volatile that is why huge risk is involved.
In the first three cases there is no currency risk involved as the importer arrives at costing as soon as he makes payment. He adds his profit and sells locally. However in the fourth case there is currency fluctuation during the period between local sale in rupee term and import payment in dollar. There is risk if dollar rupee goes up then importer has to give more rupees against dollar.
M/s Bharat Steels gets a contract to supply steel in India. He has to import it from Japan. The cost of steel is $ 600 per ton. The current rate is 73.00 which is spot rate and future rate for 50 days is 73.45. He keeps a cushion of 30 paise for currency fluctuation and assumes 73.75 as his Landed cost. Landed cost in Rupee comes as Rs. 44,250 per ton so he quotes 46,000 per ton locally. He gets 90 days credit period from the seller and considering shipment time of 30-40 days, his currency risk is for 50 days.
He buys 1 Month BSE Currency Future Contract Expiry 27 January 2021 at 73.29.
He will Roll over to BSE Weekly Future Contract Expiry 05 February 2021 and premium will be approximately 5 to 6 paise. In this way his hedging rate is 73.35 against a costing of 73.75 (40 paise).
Cash Flows( When position is hedged)
|Rate||Bank||BANK VS COSTING||Exchange||EXCHANGE VS Bank||Net Profit/Loss|
|When Position is not hedged using BSE Currency future||The risk starts when Dollar Rupee moves up. It begins affecting profits above 73.45 and transaction goes into loss when it crosses 73.75|
From the above two charts, it is clear that when the Importer hedges his position through BSE Currency future at 73.29, Profit margin is protected, irrespective of dollar rupee moving from 71 to 74. In case of unhedged position, profits are affected above 73.45 and losses start above 73.75 .
In current global scenario adverse currency fluctuation can impact the business profitability, so it is better to safeguard the costing in market by managing risk efficiently.