Exporter's Over-Hedged USD Futures Proposal
A Karachi-based textile exporter expects USD 2.4 million in 90 days and wants to protect a budget rate of PKR 278/USD. A relationship manager at a PMEX member proposes exchange-traded USD/PKR futures with notional USD 24 million-ten times the receivable-arguing margin is only 8%, 'the exchange guarantees settlement,' and no board approval is needed because futures are 'off-balance-sheet.' Annual revenue is PKR 1.8 billion and EBITDA margin is 6%; a 2% adverse USD/PKR move on the proposed notional would lose about PKR 133 million. The client has no written derivatives policy, no prior futures experience, a board limit of PKR 700 million notional and PKR 75 million initial collateral for hedging, and the RM pressures the treasurer to sign same day before 'the window closes.' The compliance officer learns of the proposal before execution.
1. Should the member permit the proposed USD 24 million position? Identify the suitability, disclosure and control failures.
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No. The proposal is speculation, not hedging. The receivable is USD 2.4 million, so a USD 24 million position over-hedges by USD 21.6 million and creates a new directional risk. At PKR 278/USD, the notional is PKR 6.672 billion, far above the board's PKR 700 million notional limit. Initial margin at 8% is USD 1.92 million, or about PKR 533.8 million, far above the PKR 75 million collateral limit. A 2% move against the position would lose about PKR 133 million, exceeding annual EBITDA of about PKR 108 million. The RM's statements are misleading: exchange clearing reduces counterparty risk but does not guarantee the client's mark-to-market outcome, and 'off-balance-sheet' does not remove economic exposure or approval requirements. The client has no policy or experience and is being rushed. Compliance should block execution until suitability is documented, risk disclosures are given, and senior approval is obtained. Same-day pressure is itself a conduct red flag.
2. Design a compliant hedge for the USD 2.4 million receivable and show the key numbers against the board limits.
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Hedge only the actual exposure, or a documented portion of it, with a tenor matching the 90-day receivable. A full hedge of USD 2.4 million is PKR 667.2 million at PKR 278/USD, within the PKR 700 million notional limit. Initial margin at 8% would be USD 192,000, about PKR 53.4 million, within the PKR 75 million collateral limit. Use exchange-traded USD/PKR futures only if the contract size, expiry and settlement currency match the exposure; otherwise use an approved forward or a combination, and disclose basis and roll risk. Establish a written policy covering permitted instruments, maximum notional, maximum loss, collateral, delegation, confirmation and daily mark-to-market monitoring. Obtain board or delegated approval, deliver risk disclosure, test the hedge against a 2% adverse move on USD 2.4 million-about PKR 13.3 million, within EBITDA-and document the hedge rationale. Do not allow the RM to execute before these controls are complete.
3. The treasurer insists on the 10x structure. What should compliance and the RM do?
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Compliance should refuse the 10x structure as an unauthorized speculative exposure and document the refusal. The RM must not execute, must not use misleading assurances about exchange guarantees, and must not pressure the client to sign before controls are complete. If the client genuinely wants a speculative position, it must be treated as a new, separately approved activity: the client should confirm in writing that it understands the position is not a hedge, receive full risk disclosure, and obtain internal approval under a policy that permits speculation, with appropriate limits and margin. The member should assess affordability and concentration, and should not rely on the hedge limit. If the client refuses to provide a policy or approval, no trade should be accepted. Escalate the RM's conduct to compliance management and record the rationale for the decision, because the original proposal failed suitability and limit controls.