Experts in forex management from HSBC Eastern India, analysing the risk and problems faced by exporters in the wake of rupee appreciation, said here that the best strategy for corporates would be “combined hedging”.

They also stressed on the formulation of a clear-cut policy on risks and hedging with appropriate levels of controls and authority. Once a strategy is zeroed in, it is necessary to choose the available instruments in the prevailing context of regulatory framework, and then execute the strategy. They also advocated periodic review of performance. The key market parameters that need to be studied, according to them, are spot exchange rate, forward premium differential, long-term forward premium and currency volatility.

At a presentation on instruments available to Indian corporates to hedge risk/optimise return on export receivables, at an interactive session on ‘Foreign exchange risk management” organised by FIEO, eastern region, Mr Samir Lodha, HSBC Senior Manager, Corporate Treasury Sales, Treasury and Capital Markets, said such combined hedging, while providing interest savings on rupee debt, also allows a natural hedge against exports, when the rupee loan is converted into US dollars.

Outlining the criteria for such hedging, he said the RBI now allows corporates to hedge their exports-imports under the two categories — specific underlying and past performance. Capital account exposures (loans, bonds – both inflows and outflows) can be hedged on the basis of providing “specific underlying” only.

Corporates, under this, can book forward contract for lesser than 15 months, but the maximum tenor and quantum should be less than or equal to the export order underlying. This can be done with a specific export order for a quantum of say $20 million, due within 15 months, and the company can book a forward contract for the said loan amount in dollar and a maximum tenor of 15 months.

Touching on the types of forward contracts, he dwelt at length on subjects such as forward premium, interest rate parity theory and forward premium, forward contracts booking – cancellation – rollover—early delivery, settlements, long term forward contracts and peculiarities of the Indian forward market.

Pointing out that the rupee volatility was here to stay, the experts said the crucial factor would be sustained capital flows for the next 2-3 years, which should be far larger than the widening trade deficit.

Introducing HSBC’s global trade services, Mr Bhriguraj Singh, Senior V-P and Head, Trade Services, HSBC India, touched on structured trade solutions including forfaiting (discounting international trade receivables up to 100 percent) and transferable credits.

Mr. Divya Aggarwal

Money Management Consultants Ltd

Senior Copy Editor, Money Management Consultants Ltd
New Delhi, India

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