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There is an inherent “Exchange Rate Risk” in any international trade transaction denominated in a foreign currency, as an adverse movement in the exchange rate may reduce the realization of home currency for an exporter or increase the cost for an importer.
To reduce this exchange rate risk for a transaction to be concluded at future date, ‘Forward Contracts‘ maybe booked. It is a mechanism through which the rate is fixed in advance for purchase or sale of foreign currency needed at that future date.
An Option Contract gives a buyer the right (which is not an obligation) to buy/sell securities at a pre-determined price and date. The option is European style.
The buyer of the option contract is not required to buy/sell the security if they decide against it. They are however obligated in case of a forward contract.
This optionality comes with a price i.e. option premium which is generally paid upfront. Tenure, Volatility and Strike Price drive the Option Premium.
MTM and collateral are not required to book options.
Loans are usually taken for capital expenditure and working capital requirements. Loans in INR tend to be costly as interest rates are high. The principal and interest has to be repaid in INR.
For clients receiving payments in foreign currency (FCY), an INR Term Loan carries an inherent risk of currency fluctuation while converting FCY receivables into INR for loan repayment.