By Nimesh Vora
MUMBAI (Reuters) – For nearly two years, Indian importers flocked to a commonly used option strategy to hedge their forex risks amid the rupee’s tranquillity, but a precipitous slide in the currency’s value recently and a surge in its volatility have left them exposed.
This strategy, called the ‘seagull’, allows an importer to hedge their future dollar payments for a lower cost than a regular forward contract but does not lock in a predefined rate, leaving them exposed to any sharp currency declines.
A forward contract, on the other hand, might cost more but is rate-locked, making it immune to the rupee’s value when the liability is due.
“Seagulls, essentially, are designed to reduce the cost of a hedge, assuming that the underlying does not move too far away from the current market price,” said Akshay Chinchalkar, head of research at Axis Securities.
“They do not work when volatility is high.”
The rupee has plunged 3% in the two-and-a-half months since Donald Trump won the U.S. elections. The last time it fell this quickly was in December 2022.
As a result, importers are now down by 1 rupee to 1.5 rupees on the underlying exposure hedged via a seagull, relative to if they had used a simple forward, an fx derivatives salesperson at a bank estimated.
Volatility, meanwhile, has spiked. The 1-month realized volatility has jumped to 2.5% from under 1% before Trump’s victory, while the 1-year implied volatility has nearly doubled.
The rupee hit an all-time low of 86.6475 per dollar on Tuesday. It was at 86.4800 at 12:10 p.m. IST.
“With market uncertainty about Donald Trump’s actions on tariffs and their impact, it makes sense, from a risk management perspective, to maintain a healthy hedge ratio,” said Sameer Karyatt, Executive Director – Treasury and Markets, DBS Bank.
“Importers with structures that do not have protection beyond a certain point (like a seagull) need to revisit the levels where their protection runs out.”
(Reporting by Nimesh Vora, additional reporting by Jaspreet Karla; Editing by Savio D’Souza)
