InvestorQ : Is it necessary to hedge my forex risk? What happens if I leave it unhedged?
Katherine Gonsalves made post

Is it necessary to hedge my forex risk? What happens if I leave it unhedged?

Answer
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Rutuja Nigam answered.
2 years ago


Hedging through forwards or through futures involves a cost and that cost is a price you pay for the protection that it offers. In case of forwards you pay the bank a fee and in case of futures there is a margin lock in cost involved. In case of options you have a premium that you need to pay. Either ways, there is a cost to hedging. Many importers and foreign currency borrowers tend to keep their exposures un-hedged. This is more so when the rupee has been showing strength; especially like the phase we have seen since January 2017. During such times, exposures are deliberately left open to save on the hedging costs. While this may appear to be a good strategy in times when the rupee has been strong, this is not advisable from a long-term business perspective. We have seen in the past that the INR tends to show bouts of extreme volatility as we saw in 2008 and again in 2013. In such situations, the currency losses in an un-hedged position can go literally out of control, endangering the very solvency of the business. Un-hedged positions are best avoided as the cost of hedging is worthwhile from the longevity of your business. As an exporter or importer you need to cover your currency risk as in certain conditions the losses can be large enough to wipe out your capital. This is more so for small and mid-sized companies in the global trade business. You don’t hedge to make money but you essentially hedge to reduce your risk in the core business of yours.