Hedge against forex market volatility

“My decision to wait has turned good for me as I can now get close to R 48 against a dollar as compared to less than R 45 five months back. I am now thinking to transfer my money into my Indian bank account,” said Misra.

It seems to be a good time for Indians working abroad to repatriate their fund to the country.

Amidst cheer for some — NRIs,exporters,recipients of remittances,there is gloom for others who have to spend abroad — importers,foreign students,travellers etc.

A Delhi based couple whose daughter is studying at Yale University said that they are anticipating a surge in outflow in relation to the fee payment that they have to make in November because of the depreciation in the rupee. While their daughter will travel to India in December,they said that they now have to book tickets for her over the next few days.

“At these rates,the booking will pinch more as all bookings require dollar payments. Other than the general inflationary pressures,we are now facing this additional pressure on account of currency depreciation,” said the couple who did not wish to be identified.

According to US Consulate data,more than 100,000 Indian students are studying in US and thus the depreciation in rupee is hurting many households.

The rupee outlook

Amidst and appreciating dollar,rupee has been losing its sheen and a weak FII investment is not helping the cause. In August alone the new outflow by FIIs stood at R10,833 (highest in a month since October 2008) and over the last 6-8 weeks the rupee has fallen by 8 per cent. Market players are of the view that given the current volatility in the markets,there is a possibility of further depreciation in rupee.

“While the markets are very volatile,I think there may be a further depreciation in rupee going forward,” said Jamal Mecklai CEO,Mecklai Financial Services.

However in the medium term,the rupee is likely to appreciate as foreign investments will strengthen and follow growth in India.

“The depreciation is a result of the uncertainty all around a result of the current external environment. However in the medium term,money should flow into India following growth and thus rupee should appreciate,” said Brinda Jagirdar,GM and head of economic research at State Bank of India.

How to safeguard yourself?

Experts say that individuals must look to safeguard themselves by hedging against any volatility risk in the currency market. Hedging is not a tool to make quick money,but to lock yourself at the current market rate and thus to safeguard against any unfavourable movement in the market.

“Generally college spend,travel expenditures and planned medical expenses (abroad) are known in advance and a 10 per cent volatility in a quick time which is rare has happened this time and involves big money outflows. Individuals must look to hedge themselves against such moves when the amount of money involved is big and there is volatility in the market,” said Surya Bhatia,a Delhi based financial planner adding that the cost of hedging is not very high.

The protection that hedging can offer especially in times when the depreciation hits 8-10 per cent is huge and it is not only corporates but households can also utilise the benefits. (See box)

Market players say that while there are three kind of customers – corporates,household clients and traders and speculators – who participate in currency trading,the household category is small but growing.

“Many people who have to remit money every month or quarter for education,medical needs or those who travel are increasingly coming to hedge themselves. Infact the segment of people who have witnessed a loss due to depreciation in currency is witnessing a growth,” said Ashok Mittal,CEO,Emkay Commotrade.

A senior official with a currency exchange said that the benefits of hedging are mostly being roped in by the small traders who first witnessed the benefits of the same in business and then they utilise it to benefit on the personal front too.

sandeep.singh@expressindia.com

Protect yourself through hedging in the currency futures market

* You decide in September to go to the US for medical treatment in December. The cost of treatment is $50,000 and you want to safeguard against currency volatility. If the rupee is expected to depreciate in December,here is how you can hedge yourself against that risk.

* In September,if $1 costs Rs 44,then the cost of treatment will be Rs 22,00,000.

Here is how you can hedge:

* When you buy a futures contract for $50,000,that matures in December at the rate of $1 = Rs 44.5,you sell Rs 22,25,000.

* In December,if $1 costs Rs 47,then $50,000 will cost Rs 23,50,000. You have made a profit of Rs 1,25,000. When you make the payment of $50,000,it will cost you the figure quoted above. Your net cost however,will still remain Rs 22,25,000. (Rs 23,50,000 less Rs 1,25,000 you made on the hedging trade.)

* On the other hand,were the rupee to appreciate,even then the net cost will be the same,for the loss on the hedge will get added to the figure.