Market turbulence kicked up by the Iran war is reverberating across corporate India’s foreign-exchange hedges, with exporters grappling with mark-to-market losses and importers increasingly turning to forward contracts over favoured option structures.
The surge in oil prices pushed the rupee to a record low beyond 92-per-dollar earlier this week and lifted both forward premiums and volatility expectations.
The rupee’s decline and higher volatility have upended hedging structures that rely on the currency avoiding outsized moves. These structures are popular with large and mid-sized corporates, according to three bankers.
The current bout of market swings highlights the limitations of the zero-cost option structures widely used in India, bankers said. While these minimise costs, they provide limited protection when volatility spikes.
The one-month dollar/rupee implied volatility has jumped to a nine-month high of 6.6 per cent, from under 5 per cent before the Iran war.
“Many of the popular corporate hedges are short-volatility strategies. When implied volatility rises, they have mark-to-market implications,” said Abhishek Goenka, chief executive at FX advisory firm IFA Global.
Companies are usually aware of the trade-offs and reassess strategies when markets move sharply, bankers said.
A major steel company, finding its options hedges inadequate, has shifted to using more forwards, one of the three bankers said.
A large Indian conglomerate that was short on rupee volatility via options just before the war broke out, is now incurring mark-to-market losses, this banker added.
Reuters could not ascertain the names of the companies and the bankers quoted in the story requested anonymity since they are not authorised to speak to the media.
Shift to forwards
Since the Iran war broke out, hedging preferences have tilted toward forwards, bankers said, an instrument that tends to find favour in times of high uncertainty.
A currency trader at a large Indian bank said oil marketing companies have been lapping up dollars and are largely “price agnostic” about the exchange rate.
Increased hedging by importers has helped push up dollar/rupee forward premiums, with the implied one-year cost of hedging against rupee weakness up about 20 basis points since the war began.
“Our clients are reviewing their exposures much more frequently now,” said Goenka, noting that many treasuries are reassessing hedge ratios and whether their mix of forwards and options still makes sense. The firm serves more than 900 clients with foreign-exchange exposures of over $20 billion.
Exporters navigate uncertainty
A falling rupee allows exporters to book expected customer payments at a more favourable rate.
However, bankers say that many firms had increased hedge ratios following the announcement of a US-India trade agreement last month and are now facing losses on those positions.
The rupee, which rallied when the deal was announced, has since plunged to fresh record lows.
“We are being much more selective about when to hedge. The rupee is at levels we would typically want to lock in. However, the uncertainty (around the war) makes the timing tricky,” said Abhijeet Bhushan, CFO at Mumbai-based Hari Krishna Exports, which has annual forex exposure of over $600 million.