Question

Please record your observations whether you will

1. hedge in both the currency markets or

2. hedge only that currency exposure which is expected to move against you or

3. you will keep your exposure open.

Analyse all the scenarios, give reasons and put all assumptions , Need the detailed explanation for each scenario

The current spot exchange rate is GBP/USD 1.2582 and GBP is expected to appreciate against USD in the coming months. USD/INR is presently at 71.83. In the coming months INR is expected to appreciate against USD due to fall in oil price and certain domestic reasons.
XYZ Indian company has an export contract with one of the leading UK firms. You will be invoicing your exports in GBP 10,000. Looking into the future currency movements you have to decide your hedging policy for above scenarios

Answer 1

1) Both the currency is going to appreciate - where your revenue which is GBP 10000 is going to be constant.Since case explains INR appreciates against both currency. It is advisable to hedge against both currency and ensure your revenue is not going to go down further

2)Since you are hedging only GBP/INR - In this case you might not get the benefit of GBP/USD appreciation and situation can arise where GBP/INR does not appreciate.

3)If your keep your exposure open - your revenue will go down further in INR compared to what you get when you hedge.