An importer expects USD/INR to rise from 83.0 to about 84.5 in three months but not beyond 86. Compare a forward, a call struck at 84 and an 84/86 call spread on cost and payoff, and choose a structure.

On this view the forward is the right hedge: it locks about 83.42, below where the treasurer expects spot to be, with no premium and no hole. The 84 call costs 0.57 a dollar and the call spread 0.45; both pay for protection against a fall the view rules out. The spread is the cheaper option, but it stops protecting above 86, the outcome that would hurt an importer most. Options earn their premium only if a rupee rally is a real possibility.

Start with the forward, because it is the benchmark everything else is measured against. Holding rupees for three months earns 6.5% and holding dollars 4.5%, so the forward sits above spot by roughly the 2-point difference for a quarter: 83.0 x e to the 0.02 x 0.25 gives 83.42. The forward is not a forecast of where spot will be; it is simply where the interest differential puts the price for delivery in three months, and here the treasurer's view of 84.5 is above it. The options are priced off that same forward: at 5% volatility the 84 call costs about 0.57 rupees per dollar and the 86 call about 0.11, so the call spread costs 0.45. On USD 5 million that is Rs 28.3 lakh for the call and Rs 22.7 lakh for the spread.

Draw the rupees paid per dollar against spot at expiry. Unhedged is the diagonal. The forward is flat. The call follows spot up to 84, then goes flat at 84 plus its premium, 84.57. The spread does the same up to 86 at 84.45, then turns up again, because the sold 86 call hands back every rupee above 86. Inside the view, the forward line sits below both option lines: paying a premium buys the right to benefit if the rupee strengthens, and the view says it will not. It is like paying extra for a refundable ticket when you are certain you will travel.

The spread is the cheaper way to own the view that spot finishes between 84 and 86, and for a trader expressing that view it is a natural choice: it gives up payoff above 86, which the view does not expect, in exchange for a premium 0.11 lower. For a hedger the trade-off runs the other way, because the region it gives up is exactly the outcome that hurts an importer most. At 88 the spread leaves Rupavati paying 86.45, about Rs 1.52 crore more on USD 5 million than the forward would have. And against the forward, the options only win if spot falls below about 82.96 for the spread and 82.85 for the call.

Choose, and attach the condition. For Rupavati, the forward on most or all of the USD 5 million: it matches a view that the rupee weakens, costs nothing upfront and leaves no gap. If the board wants to keep some benefit in case the rupee rallies, the 84 call on a slice does that at a known cost; the call spread belongs with the trading desk, not the treasury. The limits: volatility of 5%, the rates and the forward are illustrative, and a premium paid today costs a little more once funding is counted. Accounting treatment of each structure also differs, so confirm how the company's auditors treat option hedges before choosing on economics alone.