Question
An Indian corporate expects to pay USD in 3 months and fears the USD will appreciate. Which hedging strategy is most suitable?
Solution
If USD appreciates, the firm must pay more in INR. For example, if the USD/INR is Rs. 88 per USD and it USD appreciates to Rs.90 per USD, the USD is said to appreciate and INR is said to depreciate. A USD call option gives the right to buy USD at a fixed strike (Say USD/INR of Rs.88), protecting the cost of USD payments. A put option protects USD receipts, not payments. Currency swaps are long-term instruments and not suitable for short-term hedges.
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