Best hedging strategy : Go Naked

CFOs are taking it on the chin again. Earlier they got the stick from their boards for not foreseeing the fall of the dollar. Now they are held guilty of not anticipating a Rupee fall. Poor bean counters, they’ve nowhere to hide.

Before the mortgage crisis hit the developed world, the surge of dollars into India strengthened the Rupee. It gained about 12% from Rs.44 to Rs.39 and all hell broke loose with India’s exporters. Businesses had to protect their margins and they sold dollars forward hoping the currency to keep its downward drift. Now the reverse is happening. The Rupee has weakened by 7% and is touching 42.50 to the dollar. There is an opportunity loss (of Rs.2.50) here since the exporters have already sold their dollars forward (at Rs.40). For those exporters who have taken leveraged options (selling 2 calls and buying 1 put to maintain a zero cost hedge), they face a cash loss since two calls would be exercised by the option buyers against one put exercised by the exporter.

Heads I win, tails you loose, huh….? Take my word. When you earn exchange windfalls next time, book those profits into a separate Exchange Fluctuation Reserve and don’t take credit for it as business income in your revenue account. The surplus realization is anyway available to you in the form of working capital. You didn’t earn it because of your endeavors. It just happened. Not many CEOs will like it, I know! Use the same reserve to write off losses you suffer when exchange rates turn adverse, some day in future. That way your ass won’t get laid on that fired up grill. No risky hedges called for; just go naked.
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Squeeze the Sheikh of every last Dirham and....

On Sunday US President George W Bush blamed India for rising global food prices, provoking a backlash from Indian politicians, who retorted that the US policy of promoting corn-based ethanol in motor fuel supplies has had bigger impact on world food prices.

Now I felt like a good laugh. Here is the President of the most powerful nation in the world asking a third world country of 1.1 billion people not to eat. Bad advise. Has the debilitating American economy dented Bush administration’s straight thinking skills? May be India can solve world food problem as he’d like to think; but should it starve itself in the process?

I think of a natural hedge. Oil prices surge above $122 per barrel. India is a net importer of oil and the price rise leads to inflation of over 7%. How about revoking the ban on export of non-basmati rice and exporting the grain at $ 2000 a ton to OPEC nations? Could it not offset oil price rise?

Squeeze the sheikhs of every last Dirham…. And buy their oil with some of it.
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A new kind of oil hedge

Ask Diana Farrell and Susan Lund in this McKinsey quarterly report dissecting the motives of sovereign wealth funds -

“How will state investors behave as public shareholders or owners of companies in foreign markets? Will they seek to maximize value creation and long-term growth, or will their investments reflect the political objectives of their governments and the interests of businesses in their home countries? Financial markets require the free flow of information to function efficiently. The presence of huge, opaque players with non-economic motives could distort the pricing signals that other investors need...

…..Can higher oil prices really be good for the world economy? As we have seen, petrodollars are creating inflationary pressures in markets for illiquid investments, such as real estate, art and companies. If the pressures move beyond those markets, the potential asset price bubbles could burst. So far the world economy has accommodated higher oil prices without a notable rise in inflation or an economic slowdown, but this may change in the future.”

I see an indirect oil price hedging opportunity here for net importers. Create a vibrant, deep local financial market across asset classes, rich with intermediaries that optimally deploy the huge surpluses of SWF. Whatever they lose by incremental oil bill can be hedged by tax revenues from incremental fee income generated by local SWF managers. Oil importing nations after all, can’t keep paying fat import bills forever by printing currencies :)

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Now I'm getting ideas. My daughter's been an avid painter ever since her junior school. I've archived some of those amateur works of art that look a lot better than a few of those auctioned for over a million $$ and probably bought by (who else?) SWF managers. Thinking of auctioning a few of them to help meet my fuel bills for the rest of my lifetime ;-)

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My fuel hedge - can I mail my car?

The military situation in Iraq is arguably improving, and Iraqi oil exports are beginning to flow again. Tensions between US and Iran have eased a bit. There are forecasts for a mild late winter in the United States, which should help bolster oil and gasoline inventories going into the spring and summer driving season.

So, why are oil prices going up now…?

Experts say the answer lies in the investment decisions of traders and hedge funds. With the markets in equities, housing, credit and currency shaky in the United States, traders are betting on oil and other commodities as a perceived safe haven. Recent interest rate cuts by the U.S Federal Reserve had underscored for traders the depths of the country's economic risks and led them to buy oil futures.

Vinod Khosla must be a sad man. He has been spearheading the new energy initiatives together with his friends from PE ecosystem and has been making some significant investments in solar and other non-conventional energy sector like wind and biofuel development, but so far they are making only a slight contribution to energy supplies.

To those holding euros or yen, the weakening dollar makes oil and gold look cheaper; they can bid up prices in dollar terms without spending any more of their own currency. Moreover, gold, and nowadays oil too, is seen as a haven when the dollar is weak—so the latter’s drop may be accelerating the former’s rise.

Is there a way to mail my car with me inside? I am a poor guy. I don’t want to be poorer. So what do I do? I bought MRPL stock so that I can offset my fat fuel bill with gains from stock price. That’s my inflation hedge. What say you?

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