A natural hedge can lose you money - Kshitij.com
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A natural hedge can lose you money

Traditional Risk Management devotes much space to Natural Hedge, a theoretical construct wherein Exports = Imports. There is no risk since they both cancel each other out and there is no need to hedge. However, a Natural Hedge can be found only in books, not in real life.

To have a Natural Hedge in terms of the amounts of exports and imports being the same and both falling due on the same day is a rarity.

Yet, many corporate risk management teams seem to follow the Natural Hedge. This possibly is because many do not know that a Natural Hedge could really be losing them money.
Loss due to natural hedge

There was a company that had sizeable exports and imports, amounting to almost $4.5 bln each side over the 11-year period from 2013-14 to 2023-24. They have been following the principle of Natural Hedge and hedging only the net exposure on either side.

On calculating the NEER, it was seen that their Export realisation per $ was less than what their Import payment rate per $, resulting in a CASH LOSS of ₹146 Cr over the 11 years, an average of ₹13 Cr p.a.

Unfortunately, this cash loss does not get captured in the current MIS, because the NEER is not needed to be calculated, the way the accounting standards have evolved so far.

In contrast, the KSHITIJ Hedging Method hedges both Exports and Imports on a GROSS basis, meaning both sides separately and over the years has earned a positive spread between the Export Realisation rate and the Import payment rate, averaging 59 paise/$ since April 2006, as seen in the table below.

The Export- Import Spread since April 2013 has been a positive 54 paise/$, a delta of 87 paise/$ over the negative spread of -033 paise/$ earned by the company. This amounts to a delta of ₹387Cr over the 11 year period, or ₹35 Cr p.a.

KSHITIJ Hedging Method Results

The KSHITIJ Hedging Method works for both Exporters and Importers and to try earn a positive spread between the two is a central focus all the time.

No entry for wrong ideas

More reading links:

Gross Hedging, not Net Hedging

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