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I am an exporter from India
and I recently lost money
due to no fault of mine. It
was just bad luck!
I got an order to export
shoes to USA. I wanted to
receive Rs. 55,000 for the
shoes.
Do you want to know what
happened?
At that time, the
exchange rate was
$1 = Rs. 55.
So, I charged my US client
$1,000, so that
I would get Rs. 55,000.
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But now the
exchange rate had
changed to $1 = Rs. 50.
I delivered the order 2
months later and my
client happily gave me
$1,000.
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: +91-120-4333103/4533770
So, I have got only
Rs. 50,000 for the shoes.
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Why didn’t you protect yourself
with currency derivatives?
Currency derivatives?
What is that?
And how can I
protect myself?
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: +91-120-4333103/4533770
: support@nordfx.in
You cannot eliminate
currency risk while trading
with another country. But
you can surely MANAGE
the risk.
You can take
steps to protect yourself
from unforeseen losses
due to changes in the
foreign exchange rate.
Currency derivatives
help you to do this.
It may sound complex,
but it is very simple.
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I have got an order
from USA again.
The exchange rate
is $1 = Rs. 60. How
can I protect myself ?
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: +91-120-4333103/4533770
The current rate is called
the spot rate. Now come,
let me take you to a
currency trader, who will
help you hedge your risk.
: support@nordfx.in
Tell the currency trader that you want to sign a forward contract. This is a
simple agreement – you agree to give $1,000 at the end of 2 months and
the currency trader agrees to give you Rs. 60,000. Even if the exchange
rate changes after 2 months, you will still receive Rs. 60,000.
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: +91-120-4333103/4533770
: support@nordfx.in
But what happens if the
exchange rate fluctuates ?
Well, there can be three
scenarios after 2 months when
your contract matures.
Scenario 1: the exchange rate
remains the same @ $1 = Rs.
60.
Scenario 2: the exchange rate
falls and becomes $1 = Rs. 58.
Scenario 3: the exchange
rate rises and becomes $1 = Rs.
62.
Let us see what happens in all
these cases.
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Scenario 1: When the contract matures after 2 months, the
exchange rate remains the same @ $1 = Rs. 60
You give your $1,000 to the currency trader. The
currency trader gives you Rs. 60,000.
Neither makes a profit or a loss from this
transaction.
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: +91-120-4333103/4533770
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Scenario 2: When the contract matures after 2 months, the
exchange rate falls to $1 = Rs. 58. You give your $1,000 to the
currency trader. The currency trader gives you Rs. 60,000.
If you had NOT hedged your risk, you would
have got only Rs. 58 for every dollar.
You would have suffered a LOSS of Rs. 2,000.
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: +91-120-4333103/4533770
: support@nordfx.in
Scenario 3: When the contract matures after 2 months, the
exchange rate rises to $1 = Rs. 62. You give $1,000 to the
currency trader. The currency trader gives you Rs. 60,000.
If you had not hedged your risk, you would have got Rs. 62
for every dollar. You would have gained Rs. 2,000 more in
total.
But for a business or an entrepreneur, CERTAINTY is the
most important thing. It is better to safeguard yourself
against risks by hedging. Choose “certainty” and know
exactly how much you will receive!
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: +91-120-4333103/4533770
: support@nordfx.in
The important thing to remember is that you get
Rs. 60,000 at the end of 2 months. You are happy
because that is what you had expected to get
from the sale of the shoes.
: www.nordfx.in
: +91-120-4333103/4533770
: support@nordfx.in
But what if I get paid
from another client in
Euros?
You can enter into
forward contracts on
various currency pairs.
The most common ones
are:
- US dollar
- British pound
- Euro
- Japanese yen
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: +91-120-4333103/4533770
: support@nordfx.in
The advantages of a forward contract are:
You can hedge the risk that arises from currency
fluctuations. Thus, your earnings will not be volatile,
even if there are large fluctuations in the currency pair.
You can customize the contract according to your
needs.
You can choose a maturity date according to your
requirements.
: www.nordfx.in
: +91-120-4333103/4533770
: support@nordfx.in
Thank you. I understand
how currency derivatives work.
But why are they called
“derivatives”?
That’s a good question. They are called
derivatives because they “derive” their
value from the underlying assets (the
currency that is being exchanged).
For instance, milk has calcium and
protein. When we make curd from it,
the curd still gives us calcium and
protein… because the “underlying
asset” is still milk.
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: +91-120-4333103/4533770
: support@nordfx.in
Currency derivatives are
POWERFUL tools used in
business today. And they
are safe. But choose the
broker carefully.
Always choose a broker who is:
1. SEBI regulated
2. Offers the lowest brokerage
3. Is established and experienced
4. Has a presence in many
countries
5. Gives you good customer
support
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