Exporter Option Strategies
Written by QuantArt Market
Forex Hedging |
Updated on : 22nd October 2021
Exporter hedging strategies as they pertain to USDINR risk management should aim at a better rate of return than a typical forward hedge. USDINR has historically been a high forward premium pair and hedging exports has been beneficial than no-hedge strategy during most periods. In certain periods (years) the depreciation in the Rupee tends to overshoot the forward premium and render a full hedge less beneficial.
In this backdrop, exporter hedging strategies and those using options should take into account the following key aspects:
- Forwards tend to perform the best in most scenarios due to a forward premium benefit and hence should be the go-to strategy. Any optimization with respect to a target rate can be achieved by dynamically varying the hedge ratio appropriately.
- Options are useful primarily in specific periods of volatility and uncertainty, when there is a possibility of a forward underperforming a no-hedge strategy.
- Options are useful in scenarios where there is a sharp Rupee depreciation already, but when there is uncertainty about the next move. A put option can help in this regard
- Option structures such as Put spreads etc. are not attractive as exporter hedging strategies on cost-benefit analysis
- Range forwards tend to be useful in some cases when the potential depreciation in the Rupee could exceed the forward premium.
In all, exporter hedging strategies using options tend to be useful in specific scenarios where forwards could result in potential opportunity loss.
Some of the costs associated with different hedging strategies are listed below.
Please find below the pricing.
Spot Reference:- 72.50
| Month | Apr-21 | |
|---|---|---|
| Sl. No. | Strategy name | Cost |
| 1 | Forward | -0.49 |
| 2 | Plain Put strike at 72.5 | 0.23 |
| 3 | Plain Put strike at 72 | 0.10 |
| 4 | Plain Put strike at 71.5 | 0.04 |
| 5 | Plain Put strike at 71 | 0.01 |
| 6 | Plain Put strike at 73 | 0.48 |
| 7 | Range Forward (Buy Put at 72.5/Sell Call at 74.5) | 0.13 |
| 8 | Range Forward (Buy Put at 72.5/Sell Call at 73.5) | -0.05 |
| 9 | Range Forward (Buy Put at 73/Sell Call at 74) | 0.30 |
| 10 | Range Forward (Buy Put at 72/Sell Call at 74.5) | -0.01 |
| 11 | Range Forward (Buy Put at 72/Sell Call at 74) | -0.08 |
| 12 | Range Forward (Buy Put at 72/Sell Call at 73.75) | -0.13 |
| 13 | Put Spread (Buy Put at 72.5/Sell Put at 71.5) | 0.20 |
| 14 | Put Spread (Buy Put at 71.5/Sell Put at 70.5) | 0.04 |
| Month | May-21 | |
|---|---|---|
| Sl. No. | Strategy name | Cost |
| 1 | Forward | -0.75 |
| 2 | Plain Put strike at 72.5 | 0.35 |
| 3 | Plain Put strike at 72 | 0.20 |
| 4 | Plain Put strike at 71.5 | 0.11 |
| 5 | Plain Put strike at 71 | 0.06 |
| 6 | Plain Put strike at 73 | 0.58 |
| 7 | Range Forward (Buy Put at 72.5/Sell Call at 74.5) | 0.03 |
| 8 | Range Forward (Buy Put at 72.5/Sell Call at 74) | -0.08 |
| 9 | Range Forward (Buy Put at 73/Sell Call at 74) | 0.14 |
| 10 | Range Forward (Buy Put at 72/Sell Call at 75) | -0.03 |
| 11 | Range Forward (Buy Put at 71.5/Sell Call at 75.5) | -0.05 |
| 12 | Range Forward (Buy Put at 71/Sell Call at 76.25) | -0.03 |
| 13 | Put Spread (Buy Put at 72.5/Sell Put at 71.5) | 0.25 |
| 14 | Put Spread (Buy Put at 71.5/Sell Put at 70.5) | 0.08 |
| Month | Jun-21 | |
|---|---|---|
| Sl. No. | Strategy name | Cost |
| 1 | Forward | -1.10 |
| 2 | Plain Put strike at 72.5 | 0.39 |
| 3 | Plain Put strike at 72 | 0.25 |
| 4 | Plain Put strike at 71.5 | 0.16 |
| 5 | Plain Put strike at 71 | 0.09 |
| 6 | Plain Put strike at 73 | 0.59 |
| 7 | Range Forward (Buy Put at 72.75/Sell Call at 74.5) | -0.09 |
| 8 | Range Forward (Buy Put at 72.5/Sell Call at 74.75) | -0.12 |
| 9 | Range Forward (Buy Put at 72.5/Sell Call at 73.75) | 0.00 |
| 10 | Range Forward (Buy Put at 72.1/Sell Call at 75.6) | -0.06 |
| 11 | Range Forward (Buy Put at 72.25/Sell Call at 75.2) | -0.09 |
| 12 | Range Forward (Buy Put at 71.85/Sell Call at 75.75) | -0.09 |
| 13 | Put Spread (Buy Put at 72.5/Sell Put at 71.5) | 0.24 |
| 14 | Put Spread (Buy Put at 71.5/Sell Put at 70.5) | 0.10 |
| Month | Jul-21 | |
|---|---|---|
| Sl. No. | Strategy name | Cost |
| 1 | Forward | -1.43 |
| 2 | Plain Put strike at 72.5 | 0.42 |
| 3 | Plain Put strike at 72 | 0.30 |
| 4 | Plain Put strike at 71.5 | 0.20 |
| 5 | Plain Put strike at 71 | 0.13 |
| 6 | Plain Put strike at 73 | 0.61 |
| 7 | Range Forward (Buy Put at 72.5/Sell Call at 76.5) | 0.04 |
| 8 | Range Forward (Buy Put at 73/Sell Call at 75) | -0.08 |
| 9 | Range Forward (Buy Put at 73/Sell Call at 75.4) | 0.02 |
| 10 | Range Forward (Buy Put at 72.45/Sell Call at 75.95) | -0.07 |
| 11 | Range Forward (Buy Put at 71.95/Sell Call at 76.7) | -0.07 |
| 12 | Range Forward (Buy Put at 73.45/Sell Call at 74.45) | -0.03 |
| 13 | Seagull (Buy Put at 73.5/Sell Put at 72/Sell Call at 75) | -0.13 |
| 14 | Seagull (Buy Put at 73.25/Sell Put at 71.75/Sell Call at 75.25) | -0.14 |
| Month | Aug-21 | |
|---|---|---|
| Sl. No. | Strategy name | Cost |
| 1 | Forward | -1.74 |
| 2 | Plain Put strike at 72.5 | 0.45 |
| 3 | Plain Put strike at 72 | 0.33 |
| 4 | Plain Put strike at 71.5 | 0.23 |
| 5 | Plain Put strike at 71 | 0.16 |
| 6 | Plain Put strike at 73 | 0.63 |
| 7 | Range Forward (Buy Put at 73.25/Sell Call at 76.25) | 0.11 |
| 8 | Range Forward (Buy Put at 72.5/Sell Call at 77.5) | 0.05 |
| 9 | Range Forward (Buy Put at 72.25/Sell Call at 76.75) | -0.14 |
| 10 | Range Forward (Buy Put at 73.25/Sell Call at 75.25) | -0.13 |
| 11 | Range Forward (Buy Put at 73/Sell Call at 76) | -0.05 |
| 12 | Seagull (Buy Put at 74/Sell Put at 72.5/Sell Call at 75.5) | -0.14 |
| 13 | Seagull (Buy Put at 73.5/Sell Put at 72/Sell Call at 76.5) | -0.04 |
| 14 | Seagull (Buy Put at 73/Sell Put at 71.5/Sell Call at 77) | -0.07 |
| Month | Sep-21 | |
|---|---|---|
| Sl. No. | Strategy name | Cost |
| 1 | Forward | -2.06 |
| 2 | Plain Put strike at 72.5 | 0.47 |
| 3 | Plain Put strike at 72 | 0.35 |
| 4 | Plain Put strike at 71.5 | 0.26 |
| 5 | Plain Put strike at 71 | 0.18 |
| 6 | Plain Put strike at 73 | 0.64 |
| 7 | Range Forward (Buy Put at 72.5/Sell Call at 77.5) | -0.10 |
| 8 | Range Forward (Buy Put at 75/Sell Call at 76) | 0.73 |
| 9 | Range Forward (Buy Put at 72/Sell Call at 78) | -0.14 |
| 10 | Range Forward (Buy Put at 73/Sell Call at 77) | -0.02 |
| 11 | Range Forward (Buy Put at 73.5/Sell Call at 76) | -0.04 |
| 12 | Seagull (Buy Put at 74.5/Sell Put at 73/Sell Call at 76.5) | -0.06 |
| 13 | Seagull (Buy Put at 74/Sell Put at 72.5/Sell Call at 77) | -0.04 |
| 14 | Seagull (Buy Put at 73.5/Sell Put at 72/Sell Call at 77.5) | -0.06 |
Exporter 24 Month Forward Premium and Zero Cost Range Forward
| Spot Date | Jan-21 | GBP | EUR | USD | Zero Cost Pricing | ||||
|---|---|---|---|---|---|---|---|---|---|
| Spot Ref | 99.81 | 90.25 | 73.1 | Spot Ref | |||||
| Sl. No | Tenor | Fwd Pips Bid | Fwd Rate Bid | Fwd Pips Bid | Fwd Rate Bid | Fwd Pips Bid | Fwd Rate Bid | Buy Put | Sell Call |
| 1 | 29-01-2021 | 0.23 | 100.0 | 0.24 | 90.49 | 0.16 | 73.4 | 73.1 | 73.40 |
| 2 | 26-02-2021 | 0.53 | 100.3 | 0.55 | 90.80 | 0.37 | 73.6 | 73.1 | 73.85 |
| 3 | 31-03-2021 | 0.92 | 100.7 | 0.95 | 91.20 | 0.64 | 73.9 | 73.1 | 74.43 |
| 4 | 30-04-2021 | 1.31 | 101.1 | 1.35 | 91.60 | 0.92 | 74.2 | 73.1 | 75.03 |
| 5 | 28-05-2021 | 1.68 | 101.5 | 1.73 | 91.98 | 1.18 | 74.4 | 73.1 | 75.63 |
| 6 | 30-06-2021 | 2.16 | 102.0 | 2.21 | 92.46 | 1.52 | 74.8 | 73.1 | 76.39 |
| 7 | 30-07-2021 | 2.56 | 102.4 | 2.62 | 92.87 | 1.80 | 75.1 | 73.1 | 77.05 |
| 8 | 31-08-2021 | 2.98 | 102.8 | 3.05 | 93.30 | 2.10 | 75.3 | 73.1 | 77.73 |
| 9 | 30-09-2021 | 3.38 | 103.2 | 3.46 | 93.71 | 2.38 | 75.6 | 73.1 | 78.38 |
| 10 | 29-10-2021 | 3.76 | 103.6 | 3.85 | 94.10 | 2.64 | 75.9 | 73.1 | 78.99 |
| 11 | 30-11-2021 | 4.19 | 104.0 | 4.29 | 94.54 | 2.93 | 76.2 | 73.1 | 79.65 |
| 12 | 31-12-2021 | 4.61 | 104.4 | 4.71 | 94.96 | 3.22 | 76.5 | 73.1 | 80.27 |
| 13 | 31-01-2022 | 5.02 | 104.8 | 5.14 | 95.39 | 3.51 | 76.8 | 73.1 | 80.86 |
| 14 | 28-02-2022 | 5.36 | 105.2 | 5.53 | 95.78 | 3.77 | 77.0 | 73.1 | 81.44 |
| 15 | 31-03-2022 | 5.825 | 105.6 | 5.96 | 96.21 | 4.07 | 77.3 | 73.1 | 82.09 |
| 16 | 29-04-2022 | 6.225 | 106.0 | 6.37 | 96.62 | 4.34 | 77.6 | 73.1 | 82.70 |
| 17 | 31-05-2022 | 6.67 | 106.5 | 6.83 | 97.08 | 4.65 | 77.9 | 73.1 | 83.38 |
| 18 | 30-06-2022 | 7.0925 | 106.9 | 7.25 | 97.50 | 4.94 | 78.2 | 73.1 | 84.01 |
| 19 | 29-07-2022 | 7.5 | 107.3 | 7.67 | 97.92 | 5.23 | 78.5 | 73.1 | 84.63 |
| 20 | 31-08-2022 | 7.965 | 107.8 | 8.15 | 98.40 | 5.55 | 78.8 | 73.1 | 85.34 |
| 21 | 30-09-2022 | 8.3925 | 108.2 | 8.60 | 98.85 | 5.85 | 79.1 | 73.1 | 85.97 |
| 22 | 30-10-2022 | 8.835 | 108.6 | 9.05 | 99.30 | 6.16 | 79.4 | 73.1 | 86.63 |
| 23 | 30-11-2022 | 9.2675 | 109.1 | 9.50 | 99.75 | 6.46 | 79.7 | 73.1 | 87.29 |
| 24 | 30-12-2022 | 9.7025 | 109.5 | 9.95 | 100.20 | 6.77 | 80.0 | 73.1 | 87.97 |