Agro Industry - Hedging Through Options is often beneficial in Volatile times.

• Leading Agro Company is an exporter.
• They were expecting an inflow of USD 5.00 million in May 2021
• These receivables were not hedged and USDINR was trading at 74.25.

Challenge and Observation

• They wanted to protect the downside risk but also wanted to participate in any upside USDINR movement.
• The company considered various factors such as rising coronavirus cases, lockdowns across different states in India, rising inflation, surging US bond yields as key risk events.
• They engaged in multiple discussions but could not take a clear decision.

Observation:

• IFA Global being their Treasury Consultants analyzed their export costing and benchmark which was closer to spot rates. Accordingly, the company was advised to hedge these exports using the options strategy called Risk Reversal. (Buy USDINR Put  , Sell USDINR Call )
• This was advised because the ROI (Cost: Reward) of this strategy was more than 1:3 and it would help the board to take a clear decision and get out of a wait and watch mode.

Process

• The company was advised to implement this strategy when the spot was trading near 74.25 levels.
• The price of the Option was discovered by banks and exchange platforms.
• The same was checked at one of the best world’s FX market terminals.
• We suggested the company buy an ATM Put option (May expiry) with a strike price of 74.50 and selling one OTM Call option (May expiry) with a strike price of 76.00. 

Outcome

• The company is now able to participate in any upside move in USDINR up to 76 levels and gain up to Rs 75,00,000 on a USD 5 million contract over and above the benchmark price.
• 50% of the Option was canceled and forward was booked when Rupee hit 75.25 levels. Hence booking part profits. The strategy paid off because the Rupee depreciated. The rest of the options is still held till expiry and if the rupee weakens to 76.50 he will be extremely better placed to participate in the rupee weakness.

Which IFA Global Services did the Agro Exporter had subscribed to :

Exchange-traded futures and options (link of our services)

Treasury Outsourcing Services.

Banking Negotiation Desk.