Objective: To find out effectiveness of a particular strategy to hedge exports. The strategy comprises of using plain forward contracts for 12 month on rolling basis. The data was studied for last 18 years- starting April 2000.
Methodology: We computed 12 month forward rate by adding 12 month forward premia to RBI reference rate for each date. The resultant forward rate was compared against the RBI reference rate on the maturity date of forward. The difference in the two is shown below in the graph.
In the graph below, X axis shows year in which forward was booked and Y axis shows the difference in 12 month forward rate and RBI reference rate on maturity date of forward. For example, result of FY18 shows performance of contracts booked in FY18 and matured now in FY19. Since FY19 is still under progress, and FY18 contracts are yet to mature, we have taken performance of contracts booked during in FY18 from April-17 to July -17 and matured during April-18 to July-18
Observations from analysis:
- Out of 18 years, the 12 month rolling export hedging strategy resulted in savings in 12 years and loss in 6 years. In the graph below, red bar indicate losses and green bar indicate savings
- After accounting for all the losses and savings over last 18 years, on an average, the strategy has saved about Rs 1.05/ USD
- The reasons for sharp losses and sharp savings were a combination of sharp changes in both spot and forward premiums
- The savings were seen in stretch of four consecutive years (FY02 to FY05 and now FY14 to FY17) while losses were seen in stretch of two consecutive years (FY08 & FY09; FY11 & FY12)
Observations from corporate’s approach towards hedging
- Our experience says that many exporters quit hedging if they experience loss in initial few transactions.
- The ideal way to assess the effectiveness of any strategy is to run it for a fairly long time & then objectively assess it
- Most small & mid size corporate lack expertise and organisation bandwidth to monitor the hedge and take mid course correction and this is one of the main reason for sharp losses. Hedges once taken, needs to be monitored and corrective action needs to be taken in the form of early utilization; cancellation; changes in hedging volume etc.
Going ahead:
We would suggest to adopt a hedging strategy which suits business needs. In some cases, one has to consider a long term hedging for USDINR (even more than 12 months) while in other case short term hedging could make more sense. In some cases, one has to hedge from order to order and in another case, one can hedge on expectation basis etc. All depends on business needs.
From market’s point of view, INR is currently trading at 68.80 (near to all time high of 69.12) and forward premiums have also come up. Yet there are many headwinds which point to danger of further weakening in INR. One may consider starting export hedging for part of the exports and gradually add to the hedging portfolio.
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*Disclaimer: Best efforts have been made to present the analysis and data as correctly as possible. However, it is prone to errors and therefore clients are expected to do their own analysis, independent of what is shared above, before taking decisions. This is neither a solicitation nor a recommendation to Buy/Sell any currency. No representation is being made that any suggestion being made above will necessarily result into profits and principals/employees/