Forex Markets

Option based hedge strategies for Importers

 

  1. Plain Call Option – An USD Call option provides the right to buy USD at maturity at a given rate but does not impose a restriction. Such a call option protects from INR depreciation while allows a favorable rate if INR appreciates. For example, a call option with strike 70.00 means if on expiry USDINR > 70.00 then corporate will buy at 70.00 however if USDINR <70.00 (let’s assume at 69.00) then corporate will buy at 69.00. Only the premium needs to be paid upfront. 
  1. Call spread Option – A call spread option is a combination of “buy USD call” and “Sell USD call” at a higher rate. Call spread option protects from INR depreciation up to a range and allows a favorable rate if INR appreciates. For example, let’s assume corporate buys Call at 71.00 and sells call at 74.00. If on expiry USDINR =70.00 then CORPORATE buys at70.00. If USDINR between 71.00 & 74.00 then CORPORATE buys at 71.00 and If USDINR is at 76.00 then CORPORATE buys at 73.00. Rs 3 better than the market rate. Protection to CORPORATE here is till 74.00 and depreciation beyond 74.00 will be to the account of CORPORATE. 
  1. Range forward option –A range forward is where worst case is protected, the best case is limited and within a range one is exposed to the market. For example, in an importer’s range forward is taken with the range of 71.00 & 74.00, that means if on expiry USDINR is below 71.00 then CORPORATE buys at 71.00, if USDINR between 71.00 and 74.00 then CORPORATE buys at market rate, if USDINR > 74.00 then CORPORATE buys at 74.00.
  1. Seagull for importers – Seagull provides protection from adverse movement up to a range and allows gaining from favorable movement up to a range. For example, an importer seagull involving “buy USD call” at 71.00, “Sell USD call” at 73.00 and “Sell USD Put” at 69.00 will mean that CORPORATE Is protected at 71.00 till 73.00 and beyond 73.00 can buy at INR 2.00 lower than the market rate. CORPORATE can also buy at market rate till 69.00 and below 69.00 is obligated to buy at 69.00.

 

By QuantArt 

Related posts

What has changed after new RBI ECB framework?

admin

Understanding ECB

admin

Importers Dilemma – to hedge or not

admin

This website uses cookies. Accept Privacy & Cookie policy to continue browsing Accept Read More

Privacy & Cookies