MANAGEMENT OF FOREIGN EXCHANGE EXPOSURE AND RISK 167
benefited by INR10 million as the spot rate is lower than the forward rate. If, however, the
spot rate is higher than the forward rate, say, INR 62, the Indian firm will lose money as it
could have sold the foreign currency at a higher rate by remaining un-hedged. As in buying
forward, gains and losses may also arise in selling the foreign currency forward, depending
on the future spot rate and the forward rate. Note that the firm could eliminate the foreign
exchange exposure (downside risk) at the cost of the upside potential of the exchange rate by
entering a forward contract to sell the foreign currency.
A firm’s decision on hedging (or not hedging) depends on three considerations: (i) ...