Traditional Risk Management devotes much space to Natural Hedge, a theoretical construct wherein Exports = Imports. It propounds that there is no risk because the exports and imports cancel each other out and hence 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 is because many do not know that a Natural Hedge could really be losing them money.

There is a company that has sizeable exports and imports, amounting to almost $4.5 bln on each side over a 11-year period from 2013-14 to 2023-24. They follow the principle of Natural Hedge and hedge only the net exposure on either side.

On calculating the Net Effective Exchange Rate (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, or an average loss 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 in the way that accounting standards have evolved so far.

In contrast, the KSHITIJ Hedging Method hedges both Exports and Imports on a GROSS basis, meaning both sides are hedged separately. Over the years, the KHM has earned an average positive spread of 59 paise/$ p.a. between the Export Realisation rate and the Import Payment rate, 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 -33 paise/$ earned by the company. This amounts to a delta of ₹387Cr over the 11 year period, or ₹35 Cr p.a.

It is time to junk the natural hedge and move over to Gross Hedging, the KSHITIJ Hedging Method way.



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.

More reading links:

• Netting – an outdated concept

Gross Hedging, not Net Hedging

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