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Saturday, Feb 28, 2004

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More exporters take options route to hedge

C. Shivkumar

Bangalore , Feb. 27

FACED with the rupee's appreciation against the dollar, exporters are increasingly beginning to take to options as a hedging tool.

Banking sources said initially, only large corporates, such as Reliance and Larsen & Toubro, took to these kinds of sophisticated hedging tools when the Reserve Bank of India allowed options last July. However, smaller exporters have also begun to use these tools .

According to the sources, new interest for options now includes garment exporters from Tirupur and New Delhi, wheat exporters from the Northern region and spices and coffee exporters from the South.

Exporters have started chasing hedging tools since most of their exports are invoiced in dollars. The rush for option contracts was particularly so because the dollar has broken the Rs 45.30 threshold.

Exporters were keen to lock into the current exchange rates since the expectation is that the exchange rate could breach Rs 45.20 as well in the coming days.

Traditionally, exporters have left their position open without taking forward covers. This was possible in a regime where the rupee depreciated against the dollar. However, over the last two years, the rupee has been appreciating. During this period, it has appreciated by close to 8 per cent, which, in turn, has resulted in exporters incurring losses.

To hedge against these losses, exporters had initially taken forward covers. Mr Ramesh P. Rajah, President of the Coffee Exporters Association, said, "We began hedging our receipts after we took a knock last year."

But with the rush of exporters into the forward cover markets, premiums have dropped to rock-bottom levels. At present, forward premiums up to 12 months are barely 0.2 per cent.

Two years ago, forward premiums for up to six months were 5 per cent. As a result, he said, "some of the bigger exporters are buying options as a hedging tool."

The sources said at least six large banks were offering such contracts in view of their expertise in hedging tools. Among the banks offering such tools is a Bangalore-based private sector bank.

Further, the sources said, with smaller exporters taking to these hedges, contract sizes have shrunk though volumes have increased. The contract sizes range from $500,000 to about $10 millionThe outstanding volume of these contracts in the markets was currently estimated to be $500 million. In July 2003, it was barely $150 million.

But the market is expected to grow further. ABN AMRO's Executive Vice-President and Country Head, Mr Romesh Sobti, said, "Going by export volumes, this size is not enough and will grow." ABN AMRO is also a large player in the derivatives market.

In this hedging mechanism, most exporters buy a dollar put option. Purchase of the put option gives exporters a right to sell dollars though it is not an obligation.

A put option allows the holder to sell dollars at a prefixed exchange rate. These contracts are taken for up to 45 days. Consequently, if it dollar were to appreciate from the current level, exporters still havethe option of receiving the dollars at the current exchange rate.

However, according to the sources, such put options were high cost (Put Option pricing could be as high as 3 per cent depending on the expected currency volatility).

Consequently, most of the exporters resorted to selling call options as well. A call option allowed the holder a right to buy dollars though it did not impose any obligation to purchase at a predetermined price.

These kinds of contracts, referred to as ratio options by bankers, alloweexporters to neutralise the costs of hedging.

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