Option and option structures commonly used by Indian corporates for hedging import and export exposures
Options for Imports:
Buy USD Call Option – An USD Call option provides right to buy USD at maturity at a given rate but do not impose a restriction. Such call option protects from INR depreciation while allows favourable rate if INR appreciates. For example a call option with strike 76.00 means if on expiry USDINR > 76.00 then buy at 76.00 however if USDINR <76.00 (let’s assume at 73.00) then buy at 73.00
Buy USD Call spread Option – A call spread option is a combination of “buy USD call” and “Sell USD call” at a higher rate. Call spread option protects from INR depreciation up to a range and allows favourable rate if INR appreciates. For example let’s assume ABC LTD buys a Call at 76.00 and sells call at 79.00. If on expiry USDINR =72.00 then ABC LTD buys at 72.00. If USDINR is in between 76.00 & 79.00 then ABC LTD buys at 76.00 and If USDINR is at 80.00 then ABC LTD buys at 77.00. Rs 3 better than market rate. Protection to ABC LTD here is till 79.00 and depreciation beyond 79.00 will be to the account of ABC LTD.
Range forward for Imports –A range forward is where worst case is protected, best case is limited and within a range one is exposed to market. For example in an importer’s range forward is taken with range of 74.00 & 77.00, that means if on expiry USDINR is below 74.00 then ABC LTD buys at 74.00, if USDINR between 74.00 and 77.00 then ABC LTD buys at market rate, if USDINR > 77.00 then ABC LTD buys at 77.00. Structure is Buy call strike @ 77 and sell put strike @ 74 here.
Seagull for importers – Seagull provides protection from adverse movement up to a range and allows gaining from favourable movement up to a range. For example an importer seagull involving “buy USD call” at 76.00, “Sell USD call” at 80.00 and “Sell USD Put” at 73.00 will mean that ABC LTD Is protected at 76.00 till 80.00 and beyond 80.00 can buy at INR 4.00 lower than market rate. ABC LTD can also buy at market rate till 73.00 and below 73.00 is obligated to buy at 73.00.
Options for Exports:
Buy USD Put Option – An USD Put option provides right to sell USD at maturity at a given rate but do not impose a restriction. Such put option protects from INR appreciation while allows favourable rate if INR depreciates. For example a put option with strike 77.00 means if on expiry USDINR < 77.00 then sell at 77.00 however if USDINR >77.00 (let’s assume at 79.00) then sell at 79.00
Buy Put spread – Put spread is similar to call spread mentioned above but used to hedge exports. For example a Put spread of Buy Put 77.00 and Sell Put 74.00 means that if spot at maturity > 77.00 then ABC LTD sells at market rate, If spot is between 74.00 and 77.00 then ABC LTD sells at 77.00 and If spot < 74.00 then ABC LTD sells at market rate + 3.00
Range forward for Exports –A range forward is where worst case is protected, best case is limited and within a range one is exposed to market. For example in an exporter’s range forward is taken with range of 75.00 & 78.00, that means if on expiry USDINR is below 75.00 then ABC LTD sells at 75.00, if USDINR is in between 75.00 and 78.00 then ABC LTD sells at market rate, if USDINR > 78.00 then ABC LTD sells at 78.00. Structure is Buy put strike @ 75 and sell call strike @ 78 here.
Seagull for exporters – Seagull provides protection from adverse movement up to a range and allows gaining from favourable movement up to a range. For example an exporter seagull involving “buy USD put” at 76.00, “Sell USD put” at 73.00 and “Sell USD call” at 78.00 will mean that ABC LTD’s export Is protected at 76.00 till 73.00 and beyond 73.00 can sell at INR 3.00 more than market rate. ABC LTD can also sell at market rate till 78.00 and above 78.00 is obligated to sell at 78.00.
Few importers option for July end with price given below –
Spot ref: 76.50
BP: Buy Put, SP: Sell Put, BC: Buy Call, SC : Sell Call
| Sl No. | Strategy Name | Cost |
|---|---|---|
| 1 | Forward | 0.87 |
| 2 | Plain Call (BC 76.5) | 1.76 |
| 3 | Plain Call (BC 77.5) | 1.29 |
| 4 | Call Spread (BC 76.5 SC 78.5) | 0.86 |
| 5 | Call Spread (BC 77 SC 80) | 0.96 |
| 6 | Seagull (SP 75 BC 76.5 SC 79) | 0.63 |
| 7 | Seagull (SP 74.5 BC 76.5 SC 79) | 0.74 |
| 8 | Seagull (SP 75 BC 76.5 SC 80) | 0.83 |
| 9 | Capped Forward (76.5 to 80.0 ) | 0.34 |
| 10 | Range Forward (SP 75.5 BC 77.5) | 0.78 |
| 11 | Range Forward (SP 76 BC 78) | 0.43 |
Few exporters option for July end with price given below –
Spot ref: 76.50
| Sl No. | Strategy Name | Cost |
|---|---|---|
| 1 | Forward | 0.82 |
| 2 | Plain Put (76.5) | 0.92 |
| 3 | Plain Put (76) | 0.72 |
| 4 | Plain Put (75.5) | 0.55 |
| 5 | Plain Put (77) | 1.17 |
| 6 | Plain Put (77.5) | 1.45 |
| 7 | Range Forward (SC 79 BP 76.5) | 0.19 |
| 8 | Range Forward (SC 80 BP 76) | 0.18 |
| 9 | Range Forward (SC 78.5 BP 77) | 0.29 |
| 10 | Range Forward (SC 81.5 BP 75.5) | 0.22 |
| 11 | Put Spread (BP 76 SP 73) | 0.61 |
| 12 | Put Spread (BP 76.5 SP 74) | 0.71 |
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