HOW EXPORTERS CAN MANAGE CURRENCY RISK
A simple guide to Exporters
Rajat Prasad
Last Update 2 jaar geleden
One of the biggest risk factors involved in operating an Export business is that while the Purchase or Sales is in progress, the value of currency may change relative to the value of the U.S. dollar (assuming Export is with USA). This means that Export business is open to risk in terms of adverse movement in INR against US$. People who are already doing exports are exposed to foreign currency risk.
Foreign Exchange Risk Management involves:
· Protecting profit margins over sales made.
· Mitigating the negative impact of fluctuating rates on sales and procurements.
· Enhancing cash flow control.
· Simplifying domestic and foreign pricing.
So, when Exporters gets first order then the first thing he has to keep in mind is pricing or costing of products. That includes raw material, manufacturing, packaging and transportation cost.
CASE STUDY:
Let us assume an exporter has a textile business and gets orders to make shirts. Assuming the cost of one shirt comes to around 82.50 Rs. and he decides to export the shirt at a rate of Rs. 83 per piece keeping a profit margin of Rs. 0.50 (Fifty Paisa)
Suppose he gets an order of 10,000 shirts so the total costing is Rs. 8,30,000. He assumes the rate of 1 Dollar as 83 Rupees then he will quote a price of 1 dollar per shirt which comes to 10,000 dollars.
We assume his manufacturing is in the month of November and he is expecting remittance in the month of December.
Let us see what happens if he does not take any action and the value of dollar rupee changes in December
| If the Rate goes up | ||
| 1 USD = 82.50 8,25,000 (- 5,000) | 1 USD = 81.00 8,10,000 (- 20,000) | |
| (Cost to Cost) | (Deal in Loss) |
To avoid the loss in case of adverse movement, the Exporter decides to Mitigate the risk and he approaches a Bank for a Solution.
The Bank advises him that he can book a Export Forward Contract to protect his export receivables in December where he will be able to lock a rate today itself
He agrees to book a Export Forward Contract and gets a Rate of 83.10 for his Export receivables. So he gets additional 10 paisa profit by using a very simple strategy which is protecting the future receivable by booking a forward contract with his Bank.
Managing Risk via Currency Future Contract
Exporters can also Manage the Risk by using Currency Futures. In Currency future contracts available on NSE & BSE, 1 lot is equal to USD1,000 so the exporter can Sell 10 lots (1 lot is $ 1,000) of USD/INR Future Contract Expiry 29 Dec at 83.10.
When he actually receives his Export money, he should take a cash rate with Bank and cancel the Future contract.
Future contract is advisable to those Exporters who do not have a Forward Limit with the Bank and the Bank is not ready to entertain Exporters for booking of small amounts.