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I'm looking to purchase a property in India, where the local currency is INR. My earnings are in USD. My down payment on this property will be in the range of 100-200k USD. The USDINR exchange rate has been quite volatile the last few months, and quite a few of the reports I've read indicate that the volatility is expected to continue in the long term, even after the RBI steps in.

Let's say I transfer my money when the exchange rate is 1 USD to 50 INR, I'd like to hedge myself against any potential downside, that is, I don't want to lose money if the USD appreciates further against the INR, after my transfer (i.e, if the exchange rate changes to 1:55, I don't want to have lost that theoretical $10,000-$20,000 that I would've saved if I waited and transferred the money later).

How can I hedge myself against this? How much money would I need to spend to do this hedge? If the USD depreciates how much money can I expect to lose on the hedge?

Thanks!

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  • What period of time do you want to hedge for?
    – Ganesh Sittampalam ♦
    Commented Dec 18, 2011 at 23:10
  • @GaneshSittampalam 12-16 months would be quite reasonable.
    – Jon Wilk
    Commented Dec 19, 2011 at 5:18

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You could buy some call options on the USD/INR. That way if the dollar goes up, you'll make the difference, and if the dollar goes down, then you'll lose the premium you paid.

I found some details on USD/INR options here

Looks like the furthest out you can go is 3 months. Note they're european style options, so they can only be exercised on the expiration date (as opposed to american style, which can be exercised at any time up to the expiration date).

Alternatively, you could buy into some futures contracts for the USD/INR. Those go out to 12 months. With futures if the dollar goes up, you get the difference, if the dollar goes down, you pay the difference.

I'd say if you were going to do something like this, stick with the options, since the most you could lose there is the premium you put up for the option contracts. With futures, if it suddenly moved against you you could find yourself with huge losses.

Note that playing in the futures and options markets are an easy way to get burned -- it's not for the faint of heart.

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