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I got an order to export shoes to USA. I wanted to receive Rs. 55,000 for the shoes.

I am an exporter from India and I recently lost money due to no fault of mine. It was just bad luck! Do you want to know what happened? . I got an order to export shoes to USA. I wanted to receive Rs. 55,000 for the shoes. At that time, the exchange rate was $1 = Rs. 55.

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I got an order to export shoes to USA. I wanted to receive Rs. 55,000 for the shoes.

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  1. I am an exporter from India and I recently lost money due to no fault of mine. It was just bad luck! Do you want to know what happened? I got an order to export shoes to USA. I wanted to receive Rs. 55,000 for the shoes. At that time, the exchange rate was $1 = Rs. 55. So, I charged my US client $1,000, so that I would get Rs. 55,000.

  2. But now the exchange rate had changed to $1 = Rs. 50. So, I have got only Rs. 50,000 for the shoes. I delivered the order 2 months later and my client happily gave me $1,000.

  3. Why didn’t you protect yourself with currency derivatives? Currency derivatives? What is that? And how can I protect myself?

  4. You cannot eliminate currency risk while trading with another country. But you can surely MANAGE the risk. You can take steps to protect yourself from unforeseen losses due to changes in the foreign exchange rate. Currency derivatives help you to do this. It may sound complex, but it is very simple.

  5. I have got an order from USA again. The exchange rate is $1 = Rs. 60. How can I protect myself ? The current rate is called the spot rate. Now come, let me take you to a currency trader, who will help you hedge your risk.

  6. Tell the currency trader that you want to sign a forward contract. This is a simple agreement – you agree to give $1,000 at the end of 2 months and the currency trader agrees to give you Rs. 60,000. Even if the exchange rate changes after 2 months, you will still receive Rs. 60,000.

  7. But what happens if the exchange rate fluctuates ? Well, there can be three scenarios after 2 months when your contract matures. Scenario 1: the exchange rate remains the same @ $1 = Rs. 60. Scenario 2: the exchange rate falls and becomes $1 = Rs. 58. Scenario 3: the exchange rate rises and becomes $1 = Rs. 62. Let us see what happens in all these cases.

  8. Scenario 1: When the contract matures after 2 months, the exchange rate remains the same @ $1 = Rs. 60 You give your $1,000 to the currency trader. The currency trader gives you Rs. 60,000. Neither makes a profit or a loss from this transaction.

  9. Scenario 2: When the contract matures after 2 months, the exchange rate falls to $1 = Rs. 58. You give your $1,000 to the currency trader. The currency trader gives you Rs. 60,000. If you had NOT hedged your risk, you would have got only Rs. 58 for every dollar. You would have suffered a LOSS of Rs. 2,000.

  10. Scenario 3: When the contract matures after 2 months, the exchange rate rises to $1 = Rs. 62. You give $1,000 to the currency trader. The currency trader gives you Rs. 60,000. If you had not hedged your risk, you would have got Rs. 62 for every dollar. You would have gained Rs. 2,000 more in total. But for a business or an entrepreneur, CERTAINTY is the most important thing. It is better to safeguard yourself against risks by hedging. Choose “certainty” and know exactly how much you will receive!

  11. The important thing to remember is that you get Rs. 60,000 at the end of 2 months. You are happy because that is what you had expected to get from the sale of the shoes.

  12. But what if I get paid from another client in Euros? • You can enter into • forward contracts on • various currency pairs. • The most common ones • are: • - US dollar • - British pound • - Euro • - Japanese yen

  13. The advantages of a forward contract are: • You can hedge the risk that arises from currency • fluctuations. Thus, your earnings will not be volatile, even if there are large fluctuations in the currency pair. • You can customize the contract according to your • needs. • You can choose a maturity date according to your • requirements.

  14. That’s a good question. They are called derivatives because they “derive” their value from the underlying assets (the currency that is being exchanged). For instance, milk has calcium and protein. When we make curd from it, the curd still gives us calcium and protein… because the “underlying asset” is still milk. Thank you. I understand how currency derivatives work. But why are they called “derivatives”?

  15. Currency derivatives are POWERFUL tools used in business today. And they are safe. But choose the broker carefully. • Always choose a broker who is: • 1. SEBI regulated • 2. Offers the lowest brokerage • 3. Is established and experienced • 4. Has a presence in many • countries • 5. Gives you good customer • support

  16. Investor Grievance Call: +91-9818803356 or +91-120-4533770Email: grievances@nordfx.in Information & Queries Call: +91-120-4333103 or +91-120-4533770Email: support@nordfx.in Compliance Officer Call: 9818803356Email: compliance@nordfx.in Corporate Office Nord Forex India Private Limited 3FCS-37, 3rd FloorAnsal Plaza, Vaishali, Ghaziabad , UP - 201010Call: +91-120-4747950 E mail: contact@nordforexindia.com Website http://nordfx.in/

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