How exporters can fix their Fx problem
Written by QuantArt Market
Forex Hedging |
Updated on 27th October 2020
Target 76.00, 78.00, and 80.00 for your Export conversion.
With the US Fed’s rate cut and balance sheet expansion, the dollar index has been falling down for a while. Now at present US election-related uncertainties and the second wave of Covid Virus have started impacting the market. Now the Indian rupee is at a level of 73.75 after appreciating to 73 levels tracking the dollar index and is aided by RBI’s soft policy for inflation management. This rupee appreciation from 76 to 73 has distorted the budgeted rate which exporters thought they will get during 2020 – 2021 and also during this difficult time of corona. Hedging at this level can provide some premium but not sufficient. Also, the dilemma is whether it is a good time to hedge or not, as the US election is due in a weeks’ time.
The solution to this problem can be found in budget rate targeting. Instead of wondering about future movements of Fx or collating divergent views, an exporter is better off making these targets and endeavor to achieve them using dynamic hedging strategies and algorithmic timing. Here are the realistic numbers –
| Period | Nov20-Mar21 | Apr21-Sep21 | Oct 21-Mar22 |
|---|---|---|---|
| 12M Plan | 75.50 | 78.00 | |
| 18M Plan | 76.00 | 78.00 | 80.00 |
To achieve these numbers, one needs to use dynamic hedging. Dynamic hedging as against static hedging strategies, require monitoring of markets and course correction. Dynamic hedging does not recommend the same hedge ratio at 65.00 at 70.00 or at 75. Depending on the market dynamics, hedge ratio changes within a band.
Algorithmic timing is very important. It brings discipline in a world where everyone around you will have a view. No one’s view is always correct and hence algorithmic timing is important which is non emotional and not married to an outlook.
For example, QuantArt’s hedge algorithm has a strong performance track record and captures the signals on a timely basis.
Now using this budget rate targeting strategies, exporters can solve their problems and target a reasonable rate irrespective of market movements.