How to Manage Currency Risk of Exports and Imports on BSE Currency Futures
In an international context, an important area of risk management is currency risk. This risk represents the possibility that a domestic investor’s holding of foreign currency will change in purchasing power when converted back to the home currency. Currency risk also arises when a firm has assets or liabilities expressed in a foreign currency.
Currency Futures – A must for Risk Management
With the current Covid 19 Situations Banks are operating only from 9:00 AM to 3:30 PM while currency markets are open till 5:00 PM. Any currency fluctuation after Banking hours poses Risk to the Exporter / Importer.
No Requirement of underline
Banks require underline documents like orders, bills to allow booking of Forward Contracts. Also Forward Contract limit is normally given to the companies who are having credit facilities with the Bank. With the current guidelines on anticipated exposure, Forward contract must be booked only if 100% surety of underline transaction happening like in case of Export, the Export proceeds must come otherwise if forward contract is cancelled then the Profit will not be passed but loss will be recovered.
Hedging of Small Amount is also Possible
Companies can hedge their currency risk for an amount as small as 1000 Dollars. Such small amount hedging is not normally entertained by Banks
Future contract rates are transparent and is same irrespective of amount while in Banks, Rates are different for customers depending on the amount and relationship. Currency futures are therefore used by lot of companies for price discovery of forward rates.
First 3 Months of Future Contracts are liquid enough to Hedge bigger amounts also. Impact cost of transaction is very minimal
Since May this year, BSE has overtaken the NSE in volumes because of lower transaction charges: For trades on the BSE, the bourse charges Rs 20 per 1 crore, compared with over Rs 100 per 1 crore on NSE.
Weekly Future Contracts
In the current scenario when the market dynamics are changing every day, it is very difficult for companies to predict their Export receivables or import payables for a longer time. Companies are now managing their Risks on a Weekly basis looking at the uncertainty.
In such a scenario it is always better to Manage the risk using Weekly Futures than booking a monthly future contract.