i got an order to export shoes to usa. i wanted to receive rs. 55,000 for the shoes

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I am an exporter from India and I recently lost money due to no fault of mine. It was just bad luck!

Do you want to know what happened?

I got an order to exportshoes to USA. I wanted toreceive Rs. 55,000 for theshoes.

At that time, theexchange rate was $1 = Rs. 55.

So, I charged my US client $1,000, so that I would get Rs. 55,000.

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I delivered the order 2months later and myclient happily gave me$1,000.

But now theexchange rate hadchanged to $1 = Rs. 50.

So, I have got onlyRs. 50,000 for the shoes.

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Why didn’t you protect yourselfwith currency derivatives?

Currency derivatives?What is that?

And how can I protect myself?

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You cannot eliminatecurrency risk while tradingwith another country. Butyou can surely MANAGEthe risk.

You can takesteps to protect yourselffrom unforeseen lossesdue to changes in theforeign exchange rate.

Currency derivativeshelp you to do this.

It may sound complex,but it is very simple.

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I have got an orderfrom USA again.The exchange rateis $1 = Rs. 60. Howcan I protect myself ?

The current rate is calledthe spot rate. Now come,let me take you to acurrency trader, who willhelp you hedge your risk.

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Tell the currency trader that you want to sign a forward contract. This is asimple agreement – you agree to give $1,000 at the end of 2 months andthe currency trader agrees to give you Rs. 60,000. Even if the exchangerate changes after 2 months, you will still receive Rs. 60,000.

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But what happens if theexchange rate fluctuates ? Well, there can be three

scenarios after 2 months when your contract matures.

Scenario 1: the exchange rate remains the same @ $1 = Rs. 60.

Scenario 2: the exchange rate falls and becomes $1 = Rs. 58.

Scenario 3: the exchangerate rises and becomes $1 = Rs. 62.

Let us see what happens in all these cases.

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Scenario 1: When the contract matures after 2 months, theexchange rate remains the same @ $1 = Rs. 60

You give your $1,000 to the currency trader. The currency trader gives you Rs. 60,000.

Neither makes a profit or a loss from this transaction.

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Scenario 2: When the contract matures after 2 months, the exchange rate falls to $1 = Rs. 58. You give your $1,000 to the currency trader. The currency trader gives you Rs. 60,000.

If you had NOT hedged your risk, you would have got only Rs. 58 for every dollar.

You would have suffered a LOSS of Rs. 2,000.

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Scenario 3: When the contract matures after 2 months, the exchange rate rises to $1 = Rs. 62. You give $1,000 to the currency trader. The currency trader gives you Rs. 60,000.

If you had not hedged your risk, you would have got Rs. 62 for every dollar. You would have gained Rs. 2,000 more in total.

But for a business or an entrepreneur, CERTAINTY is the most important thing. It is better to safeguard yourself against risks by hedging. Choose “certainty” and know exactly how much you will receive!

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The important thing to remember is that you getRs. 60,000 at the end of 2 months. You are happybecause that is what you had expected to getfrom the sale of the shoes.

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But what if I get paid from another client inEuros?

You can enter intoforward contracts onvarious currency pairs.The most common onesare:

- US dollar - British pound- Euro - Japanese yen

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The advantages of a forward contract are:

You can hedge the risk that arises from currency fluctuations. Thus, your earnings will not be volatile, even if there are large fluctuations in the currency pair.

You can customize the contract according to yourneeds.

You can choose a maturity date according to yourrequirements.

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Thank you. I understand how currency derivatives work. But why are they called “derivatives”?

That’s a good question. They are called derivatives because they “derive” their value from the underlying assets (the currency that is being exchanged).

For instance, milk has calcium and protein. When we make curd from it, the curd still gives us calcium and protein… because the “underlying asset” is still milk.

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Currency derivatives are POWERFUL tools used in business today. And they are safe. But choose the broker carefully.

Always choose a broker who is:

1. SEBI regulated

2. Offers the lowest brokerage

3. Is established and experienced 4. Has a presence in many countries

5. Gives you good customer support

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