An exporter wants a one-year forward to sell USD 25 million, and its credit line with the bank is Rs 10 crore. The forward is worth nothing today. Does it fit the line, and if not, how would you make it fit?

The forward uses Rs 12.6 crore, 126% of Beldora's Rs 10 crore line, although it is worth zero today. The add-on reserves for the rupee weakening and Beldora owing the bank. The trade fits if Beldora hedges USD 19.8 million now, splits it into six month forwards using Rs 8.4 crore, or posts about Rs 2.6 crore of cash margin against the excess.

Agree today to buy a friend's scooter in a year for Rs 50,000, its fair price now. Nothing has changed hands and the deal is worth nothing to either of you. If scooter prices jump, your friend is tempted to walk away, and your promise is suddenly worth something that you might not collect. A forward's credit risk is what it could be worth to the bank if the counterparty defaults later, not what it is worth today. Banks call that potential future exposureA high estimate of what a derivative could be worth to the bank at some point before maturity, if the market moves against the client..

Now the direction. Beldora has agreed to sell dollars at Rs 84. If the rupee weakens to Rs 89, Beldora must hand over dollars worth Rs 89 for Rs 84, and the contract is worth Rs 5 a dollar to the bank, Rs 12.5 crore on USD 25 million. The 6% add-on is the bank's estimate of how far the rupee could move against Beldora in a year: 6% of Rs 84 is about Rs 5.04.

Work backwards from the line. At 6% of notional, a Rs 10 crore line supports Rs 166.7 crore of forwards, which is USD 19.84 million at Rs 84. That gives four structures. Hedge about USD 19.8 million now and the rest later as the line frees up. Shorten the tenor: six month forwards at 4% use Rs 8.4 crore, and Beldora rolls them, accepting a cash settlement at each roll. Take a cash margin or a lien on a fixed deposit of about Rs 2.6 crore against the excess. Or ask credit for a higher line, which needs a fresh look at Beldora's finances.

The shorter tenor or the partial hedge, because each keeps the bank inside an approved line without extra paperwork. Remember that usage moves after the trade: if the rupee weakens early, the mark to market grows and eats into the line even though nothing new was booked. One mitigating fact is worth saying: when the forward loses for Beldora, its dollar receivables gain in rupees, so a genuine exporter can usually pay. The case that hurts is the exporter whose shipments fail and who is left holding the losing forward alone.