A company hedged forecast dollar imports with forwards, but the imports came in well below forecast and the rupee strengthened. What did the excess cover cost, and why is it a speculative position?

The excess USD 8 million of cover lost Rs 2.4 crore, with nothing to offset it. The forwards lost Rs 6.0 crore in all, but Rs 3.6 crore of that is matched by imports costing less, so the budget rate held on USD 12 million. Once imports fell short, the extra cover became an open bet on the rupee weakening. Hedge a share of uncertain forecasts, and cut cover as soon as the forecast falls.

Book a wedding hall for 300 guests at a fixed price, and then 180 turn up. The hall costs the same, and you have paid for 120 empty seats. A forward is a hedge only up to the size of the exposure behind it; beyond that it is a position. Lumirath's forwards lost Rs 3 on every dollar, Rs 6.0 crore on USD 20 million. On the USD 12 million of real imports, the goods cost Rs 81 instead of Rs 84, a saving of Rs 3.6 crore that cancels the forward loss. On the other USD 8 million there is no import, so Rs 2.4 crore is lost.

Look at what the excess pays in each world. If the rupee had weakened to 87, the USD 8 million bought at 84 would be worth Rs 2.4 crore more and treasury would have reported a gain. A position that gains when the rupee weakens and loses when it strengthens, with no exposure behind it, is a bet on the currency, whatever it was called when it was booked. That matters for governance: most treasury policies forbid speculation, and many firms lose hedge accountingAn accounting treatment that lets a hedge and the item it hedges be reported together, so their gains and losses offset; it requires the hedge to match a real, highly probable exposure. on the excess, so its loss hits reported profit directly.

Three rules. First, hedge forecasts in layers: cover firm orders fully, and only a share of the uncertain forecast, larger for next month and smaller for later months. Second, re-measure the exposure every month and cut cover the moment the forecast falls. Suppose Lumirath knew imports would be USD 12 million with two months to go, when the forward rate was 83: closing the extra USD 8 million then would have cost Rs 0.8 crore instead of Rs 2.4 crore. Third, use options for the uncertain slice. An option costs a premium but can be left to lapse if the imports never come, so it cannot turn into an open bet.

The limitation of the layered approach is real: hedging less of the forecast leaves more of it exposed if the rupee weakens and imports do arrive. There is no free answer; there is a trade-off between the risk of being under-hedged on real imports and the risk of being over-hedged on imports that never come, and the policy should state which one the company fears more.