In January 2025, Veena Somesh, Chief Financial Officer of Uniroyal Marine Exports Ltd. (UML), was pondering over the concerns regarding the recent depreciation of the South African Rand (ZAR) against the Indian Rupee (INR) and wondering if this could adversely affect the company’s recent sales order. The deal with a Johannesburg-based company was finalized for INR 23.15 million (ZAR 4.836 million) using a ZAR/INR rate of 4.7863 (1 ZAR is equivalent to 4.7863) on December 11, 2024, and the payment was to be received by March end 2025. The company was not actively hedging its foreign exchange (FX) risk using any formal hedging instruments due to the weakness of the INR. However, a thin margin for this transaction called for a need to hedge.

Veena had to recommend to the board whether UML should employ financial hedging or not based on the future outlook of the exchange rate. Moreover, she had to analyse the payoffs for different hedging contracts and should come up with the best strategy.