'Common Strike Seagull' to help India cos from Re volatility

Companies that raised dollar loans without forward cover or hedge are in trouble; they will have to pay more for their dollar loans in rupee terms

With the money market volatility, a lot of CFOs are losing sleep over the rupee’s continuous fall against global currencies.  Some companies, which raised dollar loans without any forward cover or natural hedge like export earnings, are especially in trouble as they will have to pay more for their dollar loans in Indian currency. 

 

In this background, CFOs say it will be ideal to strike specific protective derivative structure for their forex loan exposure and corporates should not entertain any speculative structure at all. 
 

One simple instrument that is very useful in today's scenario could be "Common Strike Seagull”, says Prabal Banerjee, President-International Finance of  Essar Group.

In this structure, one can have a call at the current spot or even at lower level and can sell a put at say 68 or 70. This way, by sacrificing part or entire quantum of gain, they can subsidise the cost of forward accordingly, and can help in reducing the effective cost of hedge and also can be immune to the impact of Indian currency depreciation to a considerable extent.

 

Obviously,  a lot will depend on the outlook and how much they want to fund for the forward protection cost for the exposure and once that is decided -- the structure can be tailor made suitably.

 

“In my opinion, this is one of the best deals that can be availed of by Indian corporates as a protection structure without any speculative element in it, says Banerjee.