Exporter Hedge: Futures vs Forward and a Speculative Request
An IT-services exporter has a firm USD 6 million receivable due in 90 days. The bank's 3-month USD/INR forward quote is 83.85/83.92. The near-month USD/INR futures on the exchange trade at 83.78, and the next-month at 83.86; the annualised premium implied by the futures curve is about 2.4%. The exporter's board policy permits hedging up to 100% of confirmed exposure but prohibits naked speculative positions. The treasurer wants to sell USD 10 million of futures-USD 6 million against the receivable and USD 4 million as a 'view' because he expects the rupee to depreciate to 85. The exchange contract size is USD 1,000, and the initial margin is 4% with a maintenance margin of 3%. The exporter has no other USD exposure. The bank requires underlying documents for the forward but offers a fixed rate; the futures broker requires daily mark-to-market and may charge a 1% penalty for early rollover.
1. Quantify the hedge and compare the forward and futures routes for the confirmed USD 6 million.
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Futures contracts needed = USD 6,000,000 / USD 1,000 = 6,000 contracts. At 83.78, notional value = ₹50.268 crore. The forward route at the bank's bid of 83.85 gives ₹50.31 crore. The forward is better by 6,000,000 × (83.85 - 83.78) = ₹4.2 lakh, before any futures rollover cost.
Initial futures margin at 4% = ₹2.01 crore; maintenance at 3% = ₹1.51 crore. That margin must be funded and marked to market daily. The forward locks the rate with no daily margin but requires underlying documents and carries bank credit exposure. Futures are standardized and liquid but the near-month contract expires before 90 days, so the exporter must roll. Using the 2.4% annualised premium, a two-month roll cost is roughly 6,000,000 × 83.78 × 0.024 × 60/365 ≈ ₹1.98 lakh. On these numbers, the forward is cheaper and simpler for a documented 90-day receivable; futures are suitable only if the exporter wants exchange liquidity and can manage margin and roll risk.
2. How should you handle the treasurer's request to sell an extra USD 4 million of futures?
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The extra USD 4 million is a naked speculative position. It is not backed by any confirmed exposure and exceeds the board policy's 100% hedge limit. As dealer, you should not execute it under the hedging mandate, even if the treasurer believes the rupee will depreciate. Explain that the USD 6 million hedge is permitted, but the additional USD 4 million would create an open currency position with unlimited mark-to-market risk and would breach policy. Offer to escalate to the board or a separately approved trading mandate with written risk limits and disclosure. If the treasurer insists, decline the order and document the refusal. Do not combine the speculative quantity with the hedge order in a way that obscures the exposure.
3. What are the main risks if the exporter uses futures for the full USD 6 million?
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The main risk is daily mark-to-market: if the rupee appreciates and USD/INR falls, the short futures position gains, but if USD/INR rises, futures lose and the exporter must post variation margin even though the underlying receivable has gained. That creates liquidity risk. There is also basis risk between the futures price and the actual conversion rate, and rollover risk because the 90-day exposure spans more than one contract month. The 1% early-rollover penalty and the 2.4% implied premium affect the all-in hedge cost. Contract rounding is not an issue here because USD 6 million divides evenly by USD 1,000. Operational risk includes missing margin calls, incorrect contract-month mapping, and over-hedging if the receivable is delayed or cancelled. The exporter should monitor the hedge ratio and adjust if the underlying exposure changes.