InvestorQ : How to handle the forex risk, if I am an importer of goods from the US?
Niraj Mehta made post

How to handle the forex risk, if I am an importer of goods from the US?

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Mary Joseph answered.
2 years ago

The situation, in the case of the importer will be the converse of that of the exporter. An importer or a foreign currency borrower will have a dollar payable at a future date. Therefore, they need to ensure that the INR does not depreciate too much as it will mean that they will require more rupees to get the equivalent amount of dollars. The importer or the foreign currency borrower can hedge their risk by buying the USD-INR futures. Effectively, they are long on the USD and short on the INR and will benefit if the dollar appreciates versus the rupee. This movement will compensate the businessman for the loss that they may incur. When the rupee depreciates, the dollar will appreciate and therefore the value of the USD-INR futures will go up. Any loss on his dollar payable due to weaker INR will be compensated by the long futures on the USD-INR. Even in case of an importer or foreign currency borrower, the hedging can also be done through options by buying a call option on the USD-INR pair. Remember one very important thing here. The job of hedging is only to cover the risk and not to make money. Lot of hedgers have the temptation to get into trades which should be best avoided. The currency derivatives (both futures and options) also offer a good method of hedging future dollar risk. While the OTC forward market still holds sway, the currency derivatives market is fast catching on as the preferred choice for managing currency risk.