Appropriate Hedging – A Game Changer
Case Study of Hedging leading to Profitability | 05 min Read
Uploaded on: 16th July 2021
Today, We bring you a case study that shows some of the right steps which can be taken to achieve consistent savings. This case study is of a company based in North India and how the company achieved Forex Savings consistently, quarter-on-quarter for 10 quarters.
The client was from the Automotive sector. Their company stands tall as one of the foremost auto components manufacturers in India. It’s a design-capable supplier with Engineering & Sales and customers in the USA, Europe & India. They are supported by State-of-the-Art manufacturing facilities located in India and the USA. They have the capability to make all Manufacturing Processes including Tool fabrication under one roof.
The Situation –The company had exposures both in USD and EUR. The currency markets were significantly volatile during this period. USDINR moved to a low of 68.42 and a high of 76.88 and similarly EUR/INR had moved to a low of 76.19 and a high of 90.71. Considering the company’s operations, they needed to Hedge to protect their exposures and get stability.
The company engaged in the hedging Fx risk by booking forward contracts. The readiness for options was there but the same was not used.
1. Irregular and sporadic hedging – hedgings were not well-timed
2. Not being able to negotiate the best rates from the banks
3.The company did not have a structure to map gain/ loss for Hedges
4. No well defined and structured MIS in place to report gain/loss and to bring in improvements
5. Inappropriate use of contracts
We brought discipline in Hedging and provided necessary solutions to all the challenges that they were facing, with appropriate hedging strategies & important decision makings.
The company didn’t hedge all the time and there was a time either to hedge or to wait. Timing depended on the global financial market dynamics and also on local flow data. We did the hedging during strong conviction and not during moderate conviction. Everyday monitoring was done, and a decision was taken in the morning to hedge or wait.
How did we hedge? Hedges were done in small lots and never in large lots. Sometimes double lots were also hedged.
We checked all the interbank forward premium, spot rates. The company had to negotiate hard with the banks to get the right rate. We provided the necessary support for negotiation.
For every payment and receipt, the required decision was taken on whether to utilize the contracts or to use the prevailing cash or spot market rate for conversion. There were times to utilize the contracts and there were times to hold on. The rate of utilization is also important and requires negotiation.
We also helped the company develop a robust MIS system with MTM tracking on a daily basis. With this system, Month wise exposures and hedges along with Gain/Loss against benchmark was generated on a real-time basis.
Trust on Expertise. The company hired and trusted QuantArt as a specialist in the field and as part of their team. They listened to our advice without bringing in their own views and opinions. In the words of the CFO,
“We have our own skill sets and we focus on that and we hire experts of a particular field and use their expertise for their area. The best way to take advantage of expertise is to respect and not tinker with it.”
The company achieved around 135 paisa per USD(/EUR) of forex savings during the last ten quarters. 135 paisa per USD or per EUR translates to 1.35 crores of savings per 10 Million of foreign currency exposure which crystalised. Every quarter saw savings and in none of the quarters, any loss was there.