Insuring Currency pays off !!!

Interesting news on de-risking currency volatility....

Last year, since there was a prediction that the rupee would strengthen and go down below 39 to the dollar, a number of companies were badly hit by hedging the rupee at a fixed price. Biocon, for instance, covered the rupee at about 41.5. That became disastrous for the company. For, contrary to expectations, the rupee weakened, climbing up to 48 and 49. So, Biocon decided to insure the rupee this year, instead of hedging at a fixed price. “The insurance mechanism assures that we will get the value of the rupee at the given point of time, even if it goes below the level at which we insured it. And the beauty of this mechanism is that if the rupee weakens, we will get full benefit of it,” Shaw says. The mechanism allows for insuring the rupee by protecting the downside and getting the full benefit of the upside. This comes at a price. Banks charge more premium for insuring the currency. “Most companies want to pay a minimum premium and cover the rupee at a certain level. However, the moment you do forward cover, it is like taking a punt. So, it is worth paying a little more and protecting the volatility. It is a good way of de-risking,” she says, adding, that companies are now beginning to see the advantages of insuring the currency. Shaw says with this new strategy, the company is doing away with the MTM losses in the current financial year. For the first quarter ending June 30, its net jumped almost four times to Rs 54 crore, and for the second quarter ending September 30, the net was up more than three times to Rs 74 crore, compared with the corresponding quarters of the previous year.