An exporter has sold USD 20 million forward at an average of 83.10. Forwards for the same dates are now 85.00, and the board sees a mark-to-market loss. Compute it, and explain why it is not the whole story.

The forwards show a loss of about Rs 3.8 crore, USD 20 million times 1.90, but the export receivables they cover are worth the same Rs 3.8 crore more at the new rate. Together the company receives Rs 166.2 crore, exactly what 83.10 promised and Rs 1.2 crore above the budget rate of 82.50. The loss is upside given up for certainty. It becomes a real loss only if the exports behind the forwards fail to arrive.

The company has promised to sell USD 20 million at 83.10. If it had to replace those contracts today, it could sell the same dollars at 85.00, so each dollar is promised 1.90 rupees too cheaply. USD 20 million times 1.90 is Rs 3.8 crore, the amount the bank's statement shows as a loss. Strictly the bank will discount that to today, because the rupees change hands over the next six months; at 7% over an average of four months it would show about Rs 3.71 crore, which does not change the argument.

Think of a farmer who agreed in spring to sell his wheat at a fixed price. At harvest the market price is higher, and his neighbour sells for more. The farmer has not lost money; he has the price he planned for, and his wheat is worth more than he is being paid for it. Chinnar's USD 20 million of receivables is worth Rs 170.0 crore at 85.00, Rs 3.8 crore more than at 83.10; the forward loss and the receivable gain cancel, and the company receives Rs 166.2 crore either way. The statement shows one side of a two-sided position because the receivables are not marked to market in the same report.

When there are no dollars behind the contracts. If a buyer cancels USD 5 million of orders, the company still has to deliver USD 5 million at 83.10 and must buy those dollars at around 85.00, a real loss of about Rs 0.95 crore with no offsetting export. That is the honest risk in the board member's question, and it argues for hedging only orders that are firm, not for stopping hedging. Two practical points belong in the answer too. The bank may ask for collateral or use up part of the company's credit line as the loss grows, which is a cash and liquidity matter even though the economics net out. And whether the loss and the receivable gain are reported together in the accounts depends on hedge accounting rules and documentation, which the company should confirm with its auditors.

The answer to the board is short. The hedge locked a rate above budget, the rupee moved the other way, and the company gave up the extra it would have earned unhedged; that is the price of the certainty it chose, and the same hedge would have shown a gain had the rupee strengthened instead. A hedging policy judged on whether each quarter's hedge beat the market is a speculation policy under another name.