Currency Hedging to Protect Your Import Export Business: Derivatives

Currency Hedging to Protect Your Import Export Business: Derivatives

Currency Hedging
is one of the best options to protect your export import business cause of foreign exchange derivatives. In a simple word when you did export shipment and you are waiting for your $ Doller payment. Suppose your invoice value is USD 50,000 and you have given 30 or 60 days credit. Meanwhile in your waiting period if USD is weakened against the rupee than you will be received fewer rupees after the conversation. In this case Importer in the profit but as an exporter exchange rate is unfavorable for you. Because of this foreign exchange rate big exporter & importer are facing risk. 

On the other side if USD strong against your buyer currency than the cost will be more for him and he can close the sales contract and maybe he won't take delivery of your goods. 

As per the above example, you can see currency fluctuations is the main part of your profit and loss. that is why biggest companies are using currency hedging to protect their business from the risk of the exchange rate of currency value. the small businessman also takes benefits of it. 

There are so many ways to hedge currency

  1. Foreign Bank Account - If you are the importer than open an account in your importing country and after the shipment when you think exchange rate in your favor deposit USD in your overseas country bank, The foreign bank will convert in local currency and after that, you can pay to the seller.  
  2. Currency Forward Contract - Most of the bank offer currency forward contract, you can lock the import purchase & export sale at the time of current exchange rate. After that, you can do the transaction as per agreed exchange rate 
  3. Futures Contract - Just like a Forward contract in Futures contract you are committed to buy currency at an agreed rate of the current exchange rate. you should buy future currency contract from the reputed exchanges
  4. Currency Options - Banks offer currency options, which give you an opportunity to buy or sell a set amount of currency at a set price, on or before a chosen date. Options come with a “strike price,” the price at which the currency can be bought or sold, and an expiration date, after which your opportunity to purchase at the agreed-upon price ends. In essence, futures and options allow you to bet on where currency prices will go. You lock in at a rate you’re hoping will be at least as good as the actual rate when the contract or option comes up.

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May 10, 2018 at 7:27 PM ×

It is good article plz to update it regularly

Congrats bro Rohit kanjibhai makwana you got PERTAMAX...! hehehehe...