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Garg Brothers & Co. Case

MANAGING FOREIGN

EXCHANGE RISK USING

DERIVATIVES

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• Garg Brothers & Co., a 25 year oldcompany

• Handicrafts exporter•  Annual Prots ! "s. 25cr

• Gross #argin $ %'

•

(et #argin $ 25'• Payment to suppliers $ on deli)ery *

Client pays on +th day

 ABOUT THE COMPANY 

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• xpansion plans to export other asianhandicrafts li-e chinese and middle

eastern ones• or the same /2 cr to 0e spent on

ad)ertising in europe 1 5cr surplus, 5crexpected payments, 2cr loans

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• Payments amounting to 5cr expected

• "s34 falls to 2.65 from 5.5 at time of

deli)ery•  ie a loss of almost 2 lacs

• "s34 expected to 0e 5+.5 on +th day from

deli)ery•  An-it to fall short in the ad)ertising

0udget

SITUATION

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•  A hedge is an in)estment to reduce theris- of ad)erse price mo)ements in an

asset. (ormally, a hedge consists ofta-ing an o7setting position in a relatedsecurity, such as a futures contract.

• 9here is a ris-!re:ard tradeo7 inherentin hedging* :hile it reduces potentialris-, it also chips a:ay at potential gains.

HEDGING

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;pot "ate $ "s 2.6534

+ day :d "ate $ "s .534

+ day Call at "s .534, premium"s .5

+ day Put at "s. .534, Premium"s ./

DERIVATIVES DATA 

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 An-it should denitely go in to hedge hispositions to account for the depreciating

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Boo-ing "ate ";34 5.5

 Amount >5?.?

xpected Amount @(" 5

Prot3 oss 1at 25'margin

1250000

0

Prot3oss at "s 5+.534 7919847

Prot3oss at "s 34 801527

CASE 1! NO HEDGE

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5?.6? 6>,>5?.?

xpected Amount @(" 5,,, %,/,?>,2

Prot3 oss 1at 25' margin 1"25"00"000 8#"8"20#

Prot3oss at "s 5+.534 79"19"847$ 8#"8"20#

Prot3oss at "s 34 8"01"52#$7 8#"8"20#

CASE 2! FUTURES HEDGE

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5?.6? 6>>5?.?

Premium 6>>5.??

xpected Amount @(" 5 %/?6

Prot3 oss 1at 25' margin   1"25"00"000 8#"0#"870

Prot3oss at "s 5+.534   7919847$ 8#"0#"870

Prot3oss at "s 34   8"01"52#$7 8#"0#"870

CASE ! PUT HEDGE

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5?.6? 6>>5?.?

Premium //%5>.?

xpected Amount @(" 5 %?62

Prot3 oss 1at 25' margin 12500000 85#8702

Prot3oss at "s 5+.534 7919847$ 85#8702

Prot3oss at "s 34 80152#$7 85#8702

CASE 4! OPTIONS STRATEGY

1

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5?.6? 6>,>5?.?

Premium /,/%,5%

xpected Amount @(" 5,,, %,%5,?,62

Prot3 oss 1at 25' margin 1"25"00"000 70"#8"702

Prot3oss at "s 5+.534 79"19"847$1"70"#8"70

2

Prot3oss at "s 34 80152#$7

1"20"#8"70

2

CASE 5! OPTIONS STRATEGY

2