One of the biggest risk factors involved in operating an Export business is that while the Purchase or Sales is in progress, the value of currency may change relative to the value of the U.S. dollar (assuming Export is with USA). This means that Export business is open to risk in terms of adverse movement in INR against US$. People who are already doing exports are exposed to foreign currency risk.
Foreign Exchange Risk Management involves:
- Protecting profit margins over sales made.
- Mitigating the negative impact of fluctuating rates on sales and procurements.
- Enhancing cash flow control.
- Simplifying domestic and foreign pricing.
So, when Exporters gets first order then the first thing he has to keep in mind is pricing or costing of products. That includes raw material, manufacturing, packaging and transportation cost.
Let us assume an exporter has textile business and gets order to make shirts. Assuming cost of shirt comes to around 72 Rs per piece and he decides to export the shirt at rate of Rs. 73 per piece keeping profit of 1 Rs.
Suppose he gets order of 10000 shirts so Total Costing is Rs. 7,30,000. He assumes the rate of 1 Dollar as 73 Rupees then he will quote a price of 1 dollar per shirt which comes to 10,000 dollar.
We assume his manufacturing is in month of November and he is expecting remittance in month of December.
HEDGING PROCESS WHILE DOING CURRENCY FUTURES
Sell 10 lots (1 lot is $ 1,000) of USD/INR Future Contract Expiry 29 Dec at 73.75. By doing this exercise, the Exporter has locked the Dollar Rupee Conversion Price at 73.75 and gained 75 paise extra (Rs. 7,500)
|Rate when Export is Realised||BSE EXCHANGE||BANK||EXCHANGE||BANK|
|71||73.75-71 = 2.75 PROFIT||71.00 – 73.00 = 2.00 Loss||0||71.00 – 73.00 = 2.00 Loss|
|72||73.75-72 = 1.75 PROFIT||72.00 – 73.00 = 1.00 Loss||0||72.00 – 73.00 = 1.00 Loss|
|73||73-73.75 = 0.75 PROFIT||73.00 – 73.00 = No Loss||0||73.00 – 73.00 = No Loss|
|74||74-73.75 = 0.25 LOSS.||74.00-73.00 = 1.00 Profit||0||74.00-73.00 = 1.00 Profit|
As we can see in case of Hedging the additional profit of 75 Paise is protected irrespective of adverse movement of currency but in case where the Exporter has not hedged on BSE Currency Future, he incurs a loss if Dollar Rupee goes below 73. In case of unhedged position, the profit of the company is wiped out at 72.00 and company goes into loss if the Dollar falls below 72.00.
We therefore advise all Exporters to use BSE currency platform to Manage the Currency Risk and Protect the profits against adverse movement of the currency.
+91 84528 08533