Apr, 12, 2019 By Vikram Murarka 0 comments

Yes, it is true. Like in all other important aspects of life, in forex hedging also, size indeed matters.
Remember that old formula, R = p.q, or Revenue (or Outgo) = Price x Quantity?

The successful businessman keeps an eye on both variables, whether he is selling or buying. Depending on the nature of price movements in the market he is operating in, monitoring the quantity becomes less or more important. If the price tends to be fixed, then the only thing to do to maximise revenue is to try and maximise the quantity.
However, if there is a fairly large degree of variability in the prices, then it becomes very important to judiciously increase/ decrease the quantity transacted at each different price with the aim of maximizing the sale revenue or minimising the purchase outgo.
The same simple concept applies to successful forex hedging as well, except that most of the time our attention is so fixated on the Price (rate) only, that we tend to totally forget the importance of the Quantity (amount) part of the equation. Picture the professional card player. He keeps varying the amounts that he bets.
Here, we remind that one of the most fundamental tenets of successful hedging is that we should never hedge 0% (be totally open) nor should we ever hedge 100% (be totally covered) and that we should always hedge in parts.
When we do that, we equip ourselves with a variable (Amount) that we have greater control on that the Rate. If the rate is not very attractive but we are compelled to hedge, we can look to reduce the amount. If the rate is good, we can increase the hedge amount.
Further while the difference between two hedged rates tends to vary by 1-5%, the amount that is hedged tends to be in the region of 8-20% of the exposure amount and should therefore actually have a greater weightage in the R = p.q. formula.
Taking another analogy, while driving, all of us regularly use the accelerator also (apart from the brake) to reduce speed, perhaps more often than the brake. Imagine what would happen if we were to use only the brake whenever we needed to slow down! Similarly, in hedging also, we have to make effective use of the lever of the Amount apart from that of the Rate.
As we said, Size Matters!
For the last few months we have been looking for Crude to rise towards $130-190 and pull up the US CPI towards 4.6% and the US10Yr Yield to 5.4% by Jan-27. This view has clearly gone wrong with Brent falling sharply below $90 as a result of the US-Iran peace deal, which is the …. Read More
In our June 2026 report (1-Jun-26, Brent @ $95.47), we had expected Brent to correct to $88 before bouncing back to $120 and $145 by Aug-26 and Sep-26, respectively. A sustained trade below $90 was said to be incumbent on a fully credible resolution of the US-Iran war. … Read More
In our June 2026 report (10-Jun-26, EURUSD 1.1546), we expected the Euro to rise towards 1.17 in Jun-26 before reversing lower, with surging crude prices, rising inflation, and potential central bank rate hikes posing key risks amid the ongoing US-Iran conflict …. Read More
In our last report on 03-Jun-26 report (10Yr GOI 7.03%) we remained bullish on Brent and therefore called for higher CPI and higher Yields. At the same time, we said, “Our view will come under threat if Brent trades … Read More
In our 10-Dec-25 report (USDJPY 156.70), we expected the USDJPY to trade within 154-158 region till Jan’26 before eventually rising in the long run. In line with our view, the pair limited the downside to … Read More
Our July ’26 Dollar Rupee Quarterly Forecast is now available. To order a PAID copy, please click here and take a trial of our service.

