USDINR Hedge Strategies using Options
Forex Hedging
Published on: 29th January 2021
If you have USD payables, you are possibly concerned about the volatile market where both side movements can happen.
It is important to remain hedged. While forward hedge can lock your rate, options can allow you to benefit when USD softens against INR.
The hedge instruments which you can use are as follows –
- Forwards – locks at a rate.
- Plain call – right to buy at the strike but no obligation if INR appreciates below the strike.
- Call spread – no obligation, right to buy at buy call strike, and protection ends at sell call level. Above sell call level, the benefit of spread will be on your account.
- Seagull – right to buy at buy call strike and protection ends at sell call level. Above the sell call level, the benefit of spread will be on your account, obligation below the lower leg (sell put level).
- Capped forward – right to buy at buy call strike and protection ends at sell call level. Above sell call level, the benefit of spread will be on your account, obligation below the lower leg (sell put/buy call level)
- Range forward – right to buy at buy call strike, the benefit of appreciation till the sell put strike. Obligation to buy at sell put level if the spot goes below sell put level.
Here, we present current indicative prices of some option structures which can provide you protection and at the same time some benefits if USD depreciates against INR.
Maturity: March 2021 end.
Spot reference: 73.00
| Sl No | Strategy Name | Cost |
|---|---|---|
| 1 | Forward | 0.58 |
| 2 | Plain Call strike at 73.00 | 0.89 |
| 3 | Plain Call strike at 74.00 | 0.41 |
| 4 | Call Spread (Buy Call at 73.00/ Sell Call at 74.50) | 0.65 |
| 5 | Call Spread (Buy Call at 73.50/ Sell Call at 75.00) | 0.45 |
| 6 | Seagull (Buy Call at 73.00/Sell Call at 74.50/Sell Put at 72.50) | 0.48 |
| 7 | Seagull (Buy Call at 73.50/Sell Call at 74.50/Sell Put at 72.50 | 01.9 |
| 8 | Capped Forward (73.50 to 76) | 0.03 |
| 9 | Range Forward (Buy Call at 73.50/Sell Put at 73.00) | 0.31 |
| 10 | Range Forward (Buy Call at 74.25/Sell Put at 72.50) | 0.16 |