Knowledge Centre

  • Knowledge is power
  • Information is liberating
  • Education is the premise of progress, in every society
Currency Hedging | December 05, 2021

How is currency hedging effective for exporters?

International financial transactions have a high possibility of incurring foreign exchange profit and loss because of currency fluctuation. It becomes imperative for the trader engaged in the cross-country deals to mitigate and manage such currency risk.

Since the currencies fluctuate when compared to each other, the cash flow resulting from the foreign trades gets highly affected. There comes the role of currency hedging, which is an effective way to minimize the loss and protect against high volatility.

Currency hedging is done by entering into a financial contract to protect international trade gains against the unexpected change in the currency rate. Taking a cue from the term “hedging” which means mitigating the risks and securing the profits from anticipated risks.

The currency hedging similarly mitigates the risk by fixing an exchange price at a pre-defined level to cap the upward and downward currency movements.

What is an example of Currency Hedging?

To understand the currency hedging, here is a straight example. Let's say there are two companies in India; ABC and XYZ. ABC company in India is dealing with the XYZ company in Belgium to import perfumes. ABC Company orders the perfume worth Rs. 50 lakhs. Currently, the rate of USD is $73 and ABC company wishes to fix this rate to avoid any losses in the future.

They enter into a future contract of tenure 6 months from the date of imports. On the completion of the tenure, the rate of USD is $74. Here the importer is able to protect themselves from the rise in exchange rates by hedging the position. Otherwise, the currency movement would have taken a good bite out of their profits.

Why is Currency Hedging important?

  1. Currency Hedging helps in locking the current value of a particular deal as the international deal depends on the foreign currency movement (mostly USD). By knowing the value to be received in the future for a particular transaction becomes pivotal for the business in many ways.
  2. Drawing an analogy with taking insurance, currency hedging helps in mitigating and making the business open to risk in terms of adverse movements in the currency.
  3. An importer is feared by the foreign currency strengthening while an exporter is feared by foreign currency weakening. Currency Hedging protects against both fluctuations and helps businesses strive.
  4. When the money to be earned is fixed, the bottom lines of the businesses are also saved in an improved manner.
  5. Minimize faulty losses due to the uncontrollable financial markets by hedging the inter-country transactions.

How to hedge the currency risk?

While there are a few ways to hedge the currency risk, the main four methods that can help businesses to manage the unanticipated exchange rate volatility are the following:

Futures Contract

These are the financial contracts that enable the two parties to pre-define the exchange rate at which payment will be made. In India, the provision to buy a future contract is via exchanges like NSE or MCX. Apart from utilizing this for the purpose of hedging, traders also speculate with the currency futures contracts. There is a secondary market that aids in such transactions.

Forward Contract

These are similar to the futures contract except for the fact that they are traded via over-the-counter and not through exchanges. There is also a lack of a secondary market and so no speculations are done whatsoever.

Currency Options

An option is a financial contract that provides the buyer the right but not an obligation to buy at a fixed price. With currency, the options include the fixed currency rate. This also includes the strike price at which the currency can be bought and sold along with an expiration date.

Foreign Bank Account

This is the simple but least effective option to hedge the currency risk. In the above-mentioned example, company ABC can protect its business by opening an account in Belgium and when the exchange rates are favourable, transfer the funds back home. The domestic bank will thus convert them into local currency and preserve the funds.

Currency Hedging Form

Related Blogs

Frequently Asked Questions


Important Message The information contained in this file is provided for informational purposes only, and should not be construed as legal advice on any matter. The content and interpretation of the law addressed herein is subject to revision. We disclaim all liability in respect to actions taken or not taken based on any or all the contents of this file to the fullest extent permitted by law. Every effort is made to avoid errors. In spite of that, errors and discrepancies may creep in. It is expressly stated that neither Findoc Investmart Private Limited nor any of the contributors of updates will be responsible for any damage to anybody on the basis of this document. Readers are, therefore, requested to cross check with the original sources e.g. Government publications, Orders, Judgments etc., before taking any action or making any decision. These services are being provided through our group companies Findoc Capital Mart Pvt Ltd and Findoc Finvest Private Limited

Attention Investors
  • 1. Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.
  • 2. Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.
  • 3. Pay 20% upfront margin of the transaction value to trade in cash market segment.
  • 4. Check your securities / MF / bonds in the consolidated account statement issued by NSDL/CDSL every month.
  • 5.Investments in securities market are subject to market risks, read all the related documents carefully before investing.
  • 6.The securities are quoted as an example and not as a recommendation.
No need to issue cheques by investors while subscribing to IPO. Just write the bank account number and sign in the application form to authorise your bank to make payment in case of allotment. No worries forrefund as the money remains in investors account.
Prevent Unauthorized Transactions in your demat account --> Update your Mobile Number with your Depository Participant. Receive alerts on your Registered Mobile for all debit and other important transactions in your demat account directly from NSDLon thesame day.....issued in the interest of investors.
KYC is a one-time exercise while dealing in securities markets-once KYC is done through a SEBI registered intermediary (broker, DP, Mutual Fund etc.), you need not undergo the same process again when you approach another intermediary. | (As instructed by SEBI, We hereby declare that we do engage in proprietary trading in all segment across the exchange.)
Effective communication & Speedy redressal of the grievances a. Register on SCORES portal b. Mandatory details for filing complaints on SCORES: i. Name, PAN, Address, Mobile Number, Email ID c. Benefits: i. Effective communication ii. Speedy redressal of the grievances link:
In case of grievances for any of the services rendered by Findoc Investmart Pvt Ltd write an email to
Mandatory updation of certain attributes of KYC of clients - The advisory is also displayed on the Depository website at following link:
1. NSDL:IN-DP-469-2020 2. Findoc Finvest Pvt. LTD. CIN no:U65910CH1995PTC016409 RBI REGISTRATION NO. B-06.00267 3. Findoc Investmart Private Limited CIN no:U74992CH2010PTC035180 SEBI REGISTRATION NO. INZ000164436 4. Findoc Investmart IFSC PVT. LTD CIN no: U65999GJ2017PTC095984 SEBI REGISTRATION NO. INZ000200735 5. INVESTMENT ADVISOR SEBI Registration no. INA100012297

Member I'd | Nse- 14697 | BSE- 6529 | MCX- 55205 | NCDEX- 01152


Registered Office :

1210/1211/1212/1213,1213A, Exchange Plaza, Near Mercury Hotel, Opp. WTC Tower, Gift City, Gandhi Nagar- 382355, Gujarat, India

Corporate Office :

4th Floor, Kartar Bhawan, Near PAU Gate No.1, Ferozepur Road Ludhiana -141001.

Copyright © 2024 FINDOC INVESTMART PVT. LTD. All Rights Reserved.

Developed & Content Powered by Accord Fintech Pvt. Ltd.

Open a Demat Account