The Hindu Business Line : Cross-currency hedging backfires on small, medium export units

New Delhi, March 18 Small and medium sized export units have taken a hit on their balance sheets as their currency hedging strategy went awry due to the weakening of the US dollar against several currencies including euro, Swiss franc and Japanese yen in the current fiscal.

Many of the SMEs had opted for cross-currency covers in currencies that have actually appreciated against the US dollar, thereby resulting in losses.

“Our estimate is that SMEs have taken nearly a $ 1 billion hit cumulatively on account of the hedging strategy falling through this year. SMEs, with a view to hedging against currency risk, opted for cross-currency covers. Unfortunately, the currencies that they opted for also appreciated against the US dollar, resulting in enormous losses to SMEs”, Mr Ajai Sahai, Director General of Federation of India Export Organisations (FIEO), told Business Line.

FIEO, an export promotion body, is likely to approach the Finance Ministry for the setting up of a regulatory body to vet the various foreign currency risk management products that are on offer in the market.

The relentless rise in the rupee against the US dollar since early 2007 had prompted the exporting community to go in for cross-currency covers in a big way to protect their export realisations.

The current US sub-prime mortgage crisis has also exacerbated the situation and led to further weakness of the US dollar against currencies such as the Japanese yen, euro and Swiss franc.

Sources in the exporting community pointed out that mid-sized export units were affected as many did not have huge imports, which could have itself been a good hedge.

Already, a number of companies have approached courts against banks for what they allege as “mis-selling” of forex derivative contracts by banks.

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