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Q 372: What is dollar hedging?
A: 1. International business involves foreign currency.
2. Exporter earns foreign currency which he gets converted into INR.
3. At the time of conversion from one currency to another (INR), the bank applies current exchange rate between the two currencies involved.
4. The exchange rate keeps on fluctuating constantly.
5. These fluctuations in exchange rate may result in gain or loss to the Indian exporter.
6. Many exporters consider this loss or gain due to fluctuation as normal and do not take any specific steps/precautions.
7. However, there are many exporters who want to protect themselves against such fluctuations in exchange rate and loss/gain due to the same.
8. Hedging is the solution.
9. Currency hedging is done by using financial instruments to manage financial risk.
10. Forward Contract is one such method/instrument which is widely used by the exporter. A forward exchange contract is an agreement under which an exporter agrees to sell a certain amount of foreign currency on a specific future date.at a particular exchange rate.
11. Exporter enters this forward contract with his bank.
12. There are other instruments of hedging. i.e. (1) Forward Contract, (2) Currency Option.
13. Each instrument has its pros and cons.
14. You need specialised knowledge for hedging, more particularly when the transaction involves very high value.
15. The calculation for hedging will become more complicated if the duration is long.
16. The person should have sound knowledge about various currencies and the trend of their fluctuations.
17. The entire process of hedging is on the basis of estimation and assumption. However, there is use of data analysis.
18. Chartered Accountants, Bank Officers and MBA Finance have good grip on this subject.
19. It involves one or more financial instruments as a buffer for potential loss.
20. The best part about currency hedging is that it helps you to avoid/minimise/limit the risk of losses.
21. Hedging is knowledge-based strategy.
22. Hedging is equally applicable in import business.
Q 373: What is Export Packing Credit?
A: 1) Finance is the most important element in every business.
2) Export is not an exception to this requirement.
3) Out of many sources, bank finance is one of the most common sources of finance.
4) Bank provides finance under different methods and under different headings.
5) Export packing credit is one of the financing products.
6) Packing credit refers to loan or an advance given by the bank to an exporter.
7) The purpose of export packing credit is to make the funds available for:
* Purchase of raw material
* Processing of raw material
* Manufacturing of goods
* Packing of goods prior to shipment
8) The period for which packing credit is granted depends on case to case basis.
9) If the pre-shipment advances are not liquidated out of export proceeds within particular period from the date of advance, then the advance will cease to qualify for concessional rate of interest to the exporter.
10) In this case, the bank will recover higher rate of interest.
11) The exporter is required to provide confirmed order backed by Letter of Credit opened in his favour by an overseas buyer.
12) Export packing credit is a financing option in India with low interest rates that supports both pre-shipment and post-shipment stages for you to optimise your export activities.
13) Export packing credit helps exporter for working capital.
14) The exporter is required to make the application along with necessary documents like:
15)
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mporter-Exporter Code (IEC) |
Confirmed Export Order or Letter of Credit (LC) |
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Compliance with RBI and ECGC |
Formal Application and Documentation |
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Export Commitment/Order |
Balance Sheet/Financial S
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16) The amount of packing credit is generally certain percentage of export order.
17) The list of documents required along with the application may differ from bank to bank, to some extent.
18) Export packing credit will improve cash flow, optimise cash flow management, cover manufacturing related expenses and support exporter’s supply chain.
19) Many exporters are able to handle large orders due to the facility of packing credit.
20) There are different types of export credit :
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Pre-shipment credit: PC in INR
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Pre-shipment credit: In Foreign Currency (PCFC) |
Post-shipment credit
|
23. Post-shipment finance is provided after the shipment of goods to allow your business to sustain operations and manage expenses as you wait for your shipped goods to realise the proceeds.
24. The interest rates are generally lower than other available loans.
25. The actual rate is based on:
*The nature of the business
* The amount, the export order
* Creditworthiness of the exporter
*Bank
Exporter is advised to contact your banker and understand specific requirements of your bank for the purpose of availing packing credit.