[et_pb_section fb_built=”1″ _builder_version=”4.4.6″ custom_margin=”-111px|||||” custom_padding=”||0px|||”][et_pb_row column_structure=”1_2,1_2″ _builder_version=”4.5.3″ background_color=”rgba(0,0,0,0.03)” min_height=”103px” custom_margin=”15px||5px||false|false” custom_margin_tablet=”” custom_margin_phone=”” custom_margin_last_edited=”on|tablet” custom_padding=”10px|10px|10px|10px|false|false” box_shadow_style=”preset1″ box_shadow_vertical=”0px” box_shadow_blur=”5px” box_shadow_color=”#ff4c00″][et_pb_column type=”1_2″ _builder_version=”4.4.6″][et_pb_text _builder_version=”4.7.0″ text_font=”Open Sans||||||||” text_font_size=”18px” text_line_height=”1.8em” header_font=”Open Sans|700|||||||” header_text_color=”#000000″ header_font_size=”19px” header_line_height=”1.3em” header_2_font=”|700|||||||” header_2_font_size=”30px” header_2_line_height=”1.5em” custom_margin=”||10px||false|false” custom_padding=”||||false|false” header_font_size_tablet=”36px” header_font_size_phone=”32px” header_font_size_last_edited=”on|tablet” locked=”off”]
If USDINR forward premium is higher than interest differential, does that signify INR depreciation?
[/et_pb_text][et_pb_text _builder_version=”4.9.7″ _module_preset=”default” text_font=”Open Sans||||||||” text_text_color=”#0c71c3″ text_font_size=”16px” text_line_height=”1.8em” ol_line_height=”2em” header_font=”Open Sans||||||||” header_line_height=”1.8em” header_2_font=”Open Sans||||||||” header_2_text_color=”#000000″ header_2_font_size=”32px” header_2_line_height=”1.5em” custom_margin=”||1px|||” custom_padding=”0px||0px|||” hover_enabled=”0″ text_font_size_tablet=”” text_font_size_phone=”” text_font_size_last_edited=”on|tablet” text_line_height_tablet=”” text_line_height_phone=”1.8em” text_line_height_last_edited=”on|phone” header_2_font_size_tablet=”28px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” sticky_enabled=”0″]
Forex Hedging |
[/et_pb_text][et_pb_text _builder_version=”4.9.7″ _module_preset=”default” text_font=”Open Sans||||||||” text_text_color=”#0c71c3″ text_font_size=”16px” text_line_height=”1.8em” ol_line_height=”2em” header_font=”Open Sans||||||||” header_line_height=”1.8em” header_2_font=”Open Sans||||||||” header_2_text_color=”#000000″ header_2_font_size=”32px” header_2_line_height=”1.5em” custom_margin=”||1px|||” custom_padding=”0px||0px|||” hover_enabled=”0″ text_font_size_tablet=”” text_font_size_phone=”” text_font_size_last_edited=”on|tablet” text_line_height_tablet=”” text_line_height_phone=”1.8em” text_line_height_last_edited=”on|phone” header_2_font_size_tablet=”28px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” sticky_enabled=”0″]
Updated on: 1st November 2021
[/et_pb_text][/et_pb_column][et_pb_column type=”1_2″ _builder_version=”4.4.6″][et_pb_image src=”https://lightpink-wombat-703347.hostingersite.com/wp-content/uploads/2020/11/QuantArt-Intro-Blog-Image-17.png” alt=”Best Hedging Strategy For Importers, import port” title_text=”If USDINR forward premium is higher than interest differential, does that signify INR depreciation” align=”center” _builder_version=”4.6.6″ _module_preset=”default” custom_padding=”||||false|false”][/et_pb_image][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”3.22″ custom_padding=”4px||4px|||”][et_pb_row _builder_version=”4.4.6″ custom_margin=”||-1px|||” custom_padding=”2px||12px|||” locked=”off”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.6.6″ text_font=”Open Sans||||||||” text_text_color=”#000000″ text_font_size=”18px” text_line_height=”1.8em” ol_line_height=”2em” header_font=”Open Sans||||||||” header_line_height=”1.8em” header_2_font=”Open Sans||||||||” header_2_text_color=”#000000″ header_2_font_size=”32px” header_2_line_height=”1.5em” text_line_height_tablet=”” text_line_height_phone=”1.5em” text_line_height_last_edited=”on|phone” header_2_font_size_tablet=”28px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet”]
Forward premium is a function of the difference between two countries’ interest rates and normally has nothing to do with the spot rate outlook. For example, if the Indian interest rate is 4.00% and the US interest rate is 0.25%, then the forward premium will be approximately 3.75%. Approximate because day count convention and same currency adjustments are to be done. If the forward premium is any different than 3.75%, then there will be arbitrage. And arbitrages do not exist in the market for long. Let’s take an example –
[/et_pb_text][et_pb_text _builder_version=”4.6.6″ text_font=”Open Sans||||||||” text_text_color=”#000000″ text_font_size=”18px” text_line_height=”1.8em” ol_line_height=”2em” header_font=”Open Sans||||||||” header_line_height=”1.8em” header_2_font=”Open Sans||||||||” header_2_text_color=”#000000″ header_2_font_size=”32px” header_2_line_height=”1.5em” text_line_height_tablet=”” text_line_height_phone=”1.5em” text_line_height_last_edited=”on|phone” header_2_font_size_tablet=”28px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet”]
If the forward premium is any different than 3.75%, then there will be arbitrage. And arbitrages do not exist in the market for long. Let’s take an example –
[/et_pb_text][et_pb_text _builder_version=”4.6.6″ text_font=”Open Sans||||||||” text_text_color=”#000000″ text_font_size=”18px” text_line_height=”1.8em” ol_line_height=”2em” header_font=”Open Sans||||||||” header_line_height=”1.8em” header_2_font=”Open Sans||||||||” header_2_text_color=”#000000″ header_2_font_size=”32px” header_2_line_height=”1.5em” text_line_height_tablet=”” text_line_height_phone=”1.5em” text_line_height_last_edited=”on|phone” header_2_font_size_tablet=”28px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet”]
[table id=29 /]
[/et_pb_text][et_pb_button button_url=”https://wa.me/message/S5W24FMCZUKQN1″ url_new_window=”on” button_text=”Connect With QuantArt on Whatsapp” button_alignment=”center” button_text_tablet=”Connect with QuantArt on Whatsapp” button_text_phone=”Connect with QuantArt on Whatsapp” button_text_last_edited=”on|phone” _builder_version=”4.9.7″ _module_preset=”default” custom_button=”on” button_text_size=”27px” button_text_color=”#FFFFFF” button_bg_color=”#29c421″ button_border_width=”6px” button_border_color=”#7CDA24″ button_icon=”%%222%%” background_layout=”dark” hover_enabled=”0″ button_icon_tablet=”” button_icon_phone=”” button_icon_last_edited=”on|desktop” button_text_shadow_style=”preset2″ box_shadow_style=”preset1″ box_shadow_blur=”19px” box_shadow_spread=”-1px” locked=”off” button_text__hover_enabled=”on|desktop” sticky_enabled=”0″ button_text_size_last_edited=”on|phone” button_text_size_phone=”19px”][/et_pb_button][et_pb_text _builder_version=”4.6.6″ text_font=”Open Sans||||||||” text_text_color=”#000000″ text_font_size=”18px” text_line_height=”1.8em” ol_line_height=”2em” header_font=”Open Sans||||||||” header_line_height=”1.8em” header_2_font=”Open Sans||||||||” header_2_text_color=”#000000″ header_2_font_size=”32px” header_2_line_height=”1.5em” text_line_height_tablet=”” text_line_height_phone=”1.5em” text_line_height_last_edited=”on|phone” header_2_font_size_tablet=”28px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet”]
From the table, it is clear that an anomaly in forward premiums cannot exist and it should follow the interest rate differential. However, some anomaly exists for USDINR forward premium since there is no full capital account convertibility in India. Arbitrage theory requires the free movement of capital to take advantage of the arbitrage. However, regulations in India do not permit such unlimited flows but allow large enough flows. Hence USDINR forward broadly represents interest rate differential but not exactly as you will see for EURUSD or USDJPY.
So forward premiums are interest rate differential and have not much to do with spot outlook. However for USDINR, the gap between interest rate differential and forward premiums signifying the interests of counterparties. For example, if the interest rate differential is 3.75% but the forward premium is 3.65% that is a scenario when either exporters are selling heavily or significant FII inflows are coming in. However if the same forward premium changes to 3.85%, that signifies a change in interest and possibly that importers or FIIs are hedging more.
[/et_pb_text][/et_pb_column][/et_pb_row][et_pb_row _builder_version=”4.9.7″ _module_preset=”default”][et_pb_column _builder_version=”4.9.7″ _module_preset=”default” type=”4_4″][et_pb_button button_url=”https://wa.me/message/S5W24FMCZUKQN1″ url_new_window=”on” button_text=”Connect With QuantArt on Whatsapp” button_alignment=”center” button_text_tablet=”Connect with QuantArt on Whatsapp” button_text_phone=”Connect with QuantArt on Whatsapp” button_text_last_edited=”on|phone” _builder_version=”4.9.7″ _module_preset=”default” custom_button=”on” button_text_size=”27px” button_text_color=”#FFFFFF” button_bg_color=”#29c421″ button_border_width=”6px” button_border_color=”#7CDA24″ button_icon=”%%222%%” background_layout=”dark” hover_enabled=”0″ button_icon_tablet=”” button_icon_phone=”” button_icon_last_edited=”on|desktop” button_text_shadow_style=”preset2″ box_shadow_style=”preset1″ box_shadow_blur=”19px” box_shadow_spread=”-1px” locked=”off” button_text__hover_enabled=”on|desktop” sticky_enabled=”0″ button_text_size_last_edited=”on|phone” button_text_size_phone=”19px”][/et_pb_button][et_pb_text _builder_version=”4.9.7″ text_font=”Open Sans||||||||” text_text_color=”#000000″ text_font_size=”18px” text_line_height=”1.8em” ol_line_height=”2em” header_font=”Open Sans||||||||” header_line_height=”1.8em” header_2_font=”Open Sans||||||||” header_2_text_color=”#000000″ header_2_font_size=”32px” header_2_line_height=”1.5em” hover_enabled=”0″ text_line_height_tablet=”” text_line_height_phone=”1.5em” text_line_height_last_edited=”on|phone” header_2_font_size_tablet=”28px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” sticky_enabled=”0″]
Read Also:
How to calculate USD INR Forward Premium & Challenges
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section fb_built=”1″ _builder_version=”4.8.1″ _module_preset=”default”][et_pb_row column_structure=”1_2,1_2″ disabled_on=”off|off|off” module_id=”Regform” _builder_version=”4.9.2″ background_color=”#FFFFFF” background_enable_image=”off” background_blend=”overlay” width=”auto” custom_margin=”||||false|false” custom_padding=”46px|5%|15px|5%|false|false” box_shadow_style=”preset2″ locked=”off”][et_pb_column type=”1_2″ module_id=”getstarted” _builder_version=”4.9.2″ background_enable_color=”off” custom_padding_tablet=”” custom_padding_phone=”|1px||1px|false|false” custom_padding_last_edited=”on|phone”][et_pb_text _builder_version=”4.9.2″ _module_preset=”default” text_font=”Roboto Condensed|700|||||||” text_text_color=”#000000″ text_font_size=”20px” text_line_height=”1.3em” header_font=”Roboto Condensed|700|||||||” header_font_size=”49px” header_4_font=”Roboto Condensed|700|||||||” header_4_text_color=”#000000″ header_4_font_size=”50px” header_4_letter_spacing=”1px” text_orientation=”center” custom_margin=”59px|||||” custom_margin_tablet=”” custom_margin_phone=”0px||0px||false|false” custom_margin_last_edited=”on|phone” custom_padding=”|1%||1%|false|false” header_font_size_tablet=”” header_font_size_phone=”35px” header_font_size_last_edited=”on|desktop”]
Explore and Become our Client.
Write to Us:
Call us:
[/et_pb_text][/et_pb_column][et_pb_column type=”1_2″ _builder_version=”4.8.1″ _module_preset=”default” custom_padding=”||||false|false” custom_padding_tablet=”” custom_padding_phone=”|1px||1px|false|false” custom_padding_last_edited=”on|phone”][et_pb_contact_form use_spam_service=”on” recaptcha_list=”QuantArt Hedgenius Form-0″ email=”[email protected]” custom_message=”Home Page||et_pb_line_break_holder||Name: %%Name%%||et_pb_line_break_holder||Company name: %%Company%%||et_pb_line_break_holder||Phone Number: %%Phone_Number%%||et_pb_line_break_holder||Email: %%Email_Id%%||et_pb_line_break_holder||Please mention topics of Interest (optional) :%%Topic_of_Interest%%||et_pb_line_break_holder||” use_redirect=”on” redirect_url=”https://lightpink-wombat-703347.hostingersite.com/thank-you-blog-submission/” success_message=”.” submit_button_text=”Sign up” disabled_on=”off|off|off” _builder_version=”4.9.2″ form_field_text_color=”#a8a8a8″ title_font=”|600|||||||” title_text_align=”center” title_font_size=”29px” title_line_height=”1.3em” form_field_font_size=”14px” background_enable_color=”off” custom_button=”on” button_text_color=”#ffffff” button_bg_color=”#e88137″ button_bg_color_gradient_start=”#b57624″ button_border_width=”0px” button_border_color=”#2879bd” button_border_radius=”6px” button_font=”Open Sans|600|||||||” button_use_icon=”off” button_custom_margin_tablet=”” button_custom_margin_phone=”18px||||false|false” button_custom_margin_last_edited=”on|phone” button_custom_padding=”||||false|false” width=”100%” max_width=”100%” custom_margin=”||||false|false” custom_padding=”||||false|false” title_font_size_tablet=”” title_font_size_phone=”20px” title_font_size_last_edited=”on|phone” form_field_font_size_tablet=”” form_field_font_size_phone=”14px” form_field_font_size_last_edited=”on|phone” box_shadow_style_button=”preset2″ form_field_text_color__hover_enabled=”on|hover” form_field_text_color__hover=”#a8a8a8″][et_pb_contact_field field_id=”Name” field_title=”Name” fullwidth_field=”on” _builder_version=”4.9.2″ form_field_background_color=”#e3e3e8″ form_field_text_color=”#000000″ form_field_font=”Open Sans||||||||” form_field_font_size=”18px” text_orientation=”center” border_radii=”on|7px|7px|7px|7px” border_style_all=”none” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”off” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”off” button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”off” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”off” button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”off” button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off”][/et_pb_contact_field][et_pb_contact_field field_id=”Company” field_title=”Company Name” fullwidth_field=”on” _builder_version=”4.9.2″ form_field_background_color=”#e3e3e8″ form_field_text_color=”#000000″ form_field_font=”Open Sans||||||||” form_field_font_size=”18px” text_orientation=”center” border_radii=”on|7px|7px|7px|7px” border_style_all=”none” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”off” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”off” button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”off” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”off” button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”off” button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off”][/et_pb_contact_field][et_pb_contact_field field_id=”Phone_Number” field_title=”Phone Number ” fullwidth_field=”on” _builder_version=”4.9.2″ form_field_background_color=”#e3e3e8″ form_field_text_color=”#000000″ form_field_font=”Open Sans||||||||” form_field_font_size=”18px” text_orientation=”center” border_radii=”on|7px|7px|7px|7px” border_style_all=”none” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”off” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”off” button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”off” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”off” button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”off” button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off”][/et_pb_contact_field][et_pb_contact_field field_id=”Email_Id” field_title=”Official Email” field_type=”email” fullwidth_field=”on” _builder_version=”4.9.2″ form_field_background_color=”#e3e3e8″ form_field_text_color=”#000000″ form_field_font=”Open Sans||||||||” form_field_font_size=”18px” text_orientation=”center” border_radii=”on|7px|7px|7px|7px” border_style_all=”none” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”off” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”off” button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”off” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”off” button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”off” button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off”][/et_pb_contact_field][et_pb_contact_field field_id=”Topic_of_Interest” field_title=”Your Requirement” field_type=”text” required_mark=”off” fullwidth_field=”on” _builder_version=”4.9.2″ form_field_background_color=”#e3e3e8″ form_field_text_color=”#000000″ form_field_font=”Open Sans||||||||” form_field_font_size=”18px” text_orientation=”center” border_radii=”on|7px|7px|7px|7px” border_style_all=”none” button_text_size__hover_enabled=”off” button_one_text_size__hover_enabled=”off” button_two_text_size__hover_enabled=”off” button_text_color__hover_enabled=”off” button_one_text_color__hover_enabled=”off” button_two_text_color__hover_enabled=”off” button_border_width__hover_enabled=”off” button_one_border_width__hover_enabled=”off” button_two_border_width__hover_enabled=”off” button_border_color__hover_enabled=”off” button_one_border_color__hover_enabled=”off” button_two_border_color__hover_enabled=”off” button_border_radius__hover_enabled=”off” button_one_border_radius__hover_enabled=”off” button_two_border_radius__hover_enabled=”off” button_letter_spacing__hover_enabled=”off” button_one_letter_spacing__hover_enabled=”off” button_two_letter_spacing__hover_enabled=”off” button_bg_color__hover_enabled=”off” button_one_bg_color__hover_enabled=”off” button_two_bg_color__hover_enabled=”off”][/et_pb_contact_field][/et_pb_contact_form][/et_pb_column][/et_pb_row][/et_pb_section]