Use options to hedge risk

The Federation of Indian Export Organisations has expressed concern about the steep fall in the value of the rupee against the dollar. It has asked traders to use derivatives to hedge the currency risk and suggested that exporters use the “option” derivative, “which may involve little extra premium to get best of forward rate or spot rate, whichever is higher on the date of remittance”. The rupee has weakened by over 7% in the month of June and since April 30, it depreciated by nearly 13%. A falling rupee is also bad news for companies that had raised capital through foreign currency convertible bonds, if the stock price is quoting at a steep discount to the conversion price. What this means is that the bond holders will ask for their money back, along with interest, instead of converting the loans into equities. It is a double whammy for the FCCB issuing companies because the weak rupee means not only will the companies have to repay the loans, but there will be an added cost because of the weak rupee.