hg wrote:Would you mind explaining the hedging strategy you mentioned?
Say you are saving 2000 SGD every month and intend to send to India. But you are worried that the exchange rate will not remain at 33 RS for 1 SGD, You can take a personal loan 6% for amount of 20,000 SGD for 1 year and immediately convert it to INR and send it to India.
Everymonth you have to pay 2000 SGD to the bank instead of sending it to India
If INR were to fall below 30 Rs it is a 10% loss from a price of 33! so even though you are paying 6% as interest you are still saving 4%.
This is called hedging because you can rest assured for a year that you are not affected if the SGD were to fall below 31 RS.
But if the SGD were to strengthen to 34-35 then you dont make any gains out of it. The only loss is the hedging premium which is the 6% interest you pay to the bank.
Another way of hedging will be to open a Forex trading account and short sell a 1 year forward future contract of SGD/INR for a value of 20,000$
In this case if the SGD strengthens at the end of the year you gain because of the short trade of the future contract but you also lose an equivalent amount because your salary savings at the end of the year is now worth fewer Rs. But net-net you are protected
If the SGD were to weaken at the end of the year you lose because of the short trade but you make up due to the salary savings in RS.
In this method the premium is much much lower than 6% but forex derivatives are very complex and you might need expert advise.
Sometimes even the experts who claim to be so are not really good. Because lot of IT companies in India who used forex derivatives for hedging against USD were not really sold the right products by the banks.
Another problem is you might not get the right lot size of the derivative product and of the right duration.
If you really savvy about trading and stuff you might want to employ hedging just for the heck of it. But if not dont bother it might not be worth the effort!
Cheers,
Revhappy