The Hindu Business Line : Long-term forwards gaining favour with cos

Hedging product
Companies having long-term receivables such as those in IT sector and exporters stand to gain.
Firms with high ECBs prefer to go in for these contracts as they can peg their currency costs upfront.
The fee-based deals also bring in more volumes for banks and hence more income.

Priya Nair
Shobha Kannan

Mumbai, Nov. 12 While the rupee has been on a rising spree, more corporates are going in for long term cover. There has been an increase in demand for long-term dollar-rupee forward contracts in the last few months, say bankers.

The forward contracts for three and five years are becoming popular, as against the more common six months to one-year. Companies go in for these products in order to hedge against currency risks.

There has been a demand for such products for over a year now; but the trend has picked up in the last six months because of the unidirectional movement of rupee. “While the rupee gained 12 per cent between September 2006 and 2007, it has gained more than nine per cent in the last six months,” said an official in charge of risk management with a public sector bank.

Bankers said typically all companies having long-term receivables such as those in the IT sector and exporters go in for such contracts. “Exporters who have a definite supply contract and are ensured of cash flow for two to three years would gain from such a contract,” said a treasury head of a public sector bank.

Companies having high amount of external commercial borrowings prefer to go in for such long-term contracts as they can peg their currency costs upfront, said a senior official of a private bank. Though such contracts are not meant to offer high returns, but they give an opportunity to minimise losses arising out of currency fluctuations.

This being a derivative product, each bank structures it differently. One way of structuring it is through options. Presuming, an exporter has monthly exports worth $4-5 million, then he can buy a contract to sell US dollar (put option) at Rs 39. If the price of the dollar falls to Rs 42, he can ignore the contract and not sell, as it is an option.

Conversely, if the dollar price goes up then he can buy the dollar, say at Rs 35, because he paid premium to buy the contract in the first place. “As it is an option contract, there is need to honour the contract only if it is profitable, or else you can cancel the contract and get out,” explained an official.

This kind of product also brings in more volumes for banks and hence they are able to make profits. “The exporter has the opportunity for entering and exiting several times,” pointed out another official.

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