14 July 2012
i hav purchased a machinery which cost 90 lacs yen from a japan company with a credit period of two years.when i booked the machinery, the exchange rate was 1Re=.55 yen. my bank has sanctioned a loan for the said amount at ex rate 1Re=.55 yen payable after two years. The difference in ex rate hav to be met by me after two years. wat are the ways that i can protect myself from the currency fluctuation?
14 July 2012
There are a number of solutions that allow you to do this. Looking at a couple of the more basic ones:
1. A forward exchange contract provides you with a fixed rate for settlement on a future date or between two future dates. This approach eliminates the exchange rate risk and provides a fixed rate to cover your exposure. However, this solution doesn't allow you to take advantage if rates subsequently move in your favour as you are obliged to transact at the forward exchange contract rate.
2. A vanilla currency option offers you a flexible means of obtaining protection against adverse exchange rate movements – like a forward exchange contract – whilst at the same time allowing you to take advantage if rates move in your favour – like a spot deal. However, given this flexibility it will normally require payment of an up front premium. It may be worth exploring alternative structured solutions (at zero cost) which offer similar protection and the potential to participate in favourable spot rates to a predetermined level.
If you would like to discuss any of these solutions further, please contact your local Corporate Banking team or visit www.barclayscorporate.com
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