Sindhuja Electronics owes US $20 million in six months. Compare leaving it open, a forward and a call option if the rupee ends at 80, 84 or 88, and say what each choice is really a decision about.

The forward fixes the cost at Rs 168.4 crore; the option caps it at Rs 170 crore for a Rs 2 crore premium; no hedge ranges from Rs 160 to Rs 176 crore. At 80 the open position wins and the forward loses; at 88 the forward wins and the open position pays Rs 7.6 crore more. The option beats the forward only below Rs 83.2 and beats no hedge only above Rs 85. An importer on a thin margin should treat the choice as policy, not a view on the rupee.

Think of a family that has agreed to buy a flat in six months. It can wait and pay whatever the price is then, fix the price today with the seller, or pay a non-refundable fee for the right to buy at a fixed price if it still wants to. No hedge is a bet on the rupee; a forwardA binding agreement to exchange a set amount of one currency for another at a fixed rate on a future date. swaps the bet for certainty; an optionThe right, not the obligation, to buy the currency at a fixed strike by a date, bought for a premium paid up front. buys insurance against the bad ending and keeps the good one, at a price. The forward rate of 84.2 is above spot not because the bank expects the rupee to weaken but because rupee interest rates are higher than dollar rates; that gap is the cost of carry, not a forecast.

Unhedged, every rupee of movement is Rs 2 crore; the forward removes all of it; the option removes the upside beyond 84 and leaves the downside, less the Rs 2 crore premium. At 84 the option is the worst of the three, Rs 170 crore against Rs 168.4 crore and Rs 168 crore, because the insurance was bought and not needed. That is not a mistake; it is what insurance costs in the year the house does not burn.

Two rates decide it. The option beats the forward only if the rupee ends below Rs 83.2, where spot plus the premium is less than 84.2; and it beats no hedge only above Rs 85, where the cap starts to pay. Between 83.2 and 85 the option is the dearest choice. So the option is for a company that genuinely expects a large move either way and cannot say which. For an importer that prices its panels in rupees on a thin margin, the honest answer is that it is not in the currency business: a rupee of depreciation is Rs 2 crore off profit it did not plan to risk.

The policy, then, is not a view on 80 or 88. It is a rule: hedge a set share of confirmed payables, say 70 to 100%, with forwards as soon as the order is firm, and use options only where the payable itself is uncertain, for example a tender not yet won, so that a forward could leave the company holding dollars it does not need. Say the limit too: the forward's Rs 8.4 crore of regret at 80 is real, and a board that will punish the treasurer for it in a strong-rupee year is a board that has not agreed the policy.