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Movements In The Value Of Indian Rupees Finance Essay

Until 1991, India had a fixed exchange rate system with the value of the Indian Rupee (hereafter INR) pegged to the value of a basket of currencies of major trading partners (Reserve Bank of India). Following the economic crisis of 1991, India began to remove some of the restrictions on its currency. By 1999, the INR had devalued substantially from its earlier position. From 2000 onwards, the rupee has stabilized in the range INR 44-48 per US$. However, in mid 2007, the rupee experienced a phenomenal appreciation, creating severe implications for Indian software firms dependent on foreign outsourcing.

At this point in time, the Indian economy is again undergoing a dramatic upheaval, this time due to the global financial crisis. Since January 2008, the rupee has experienced an almost unprecedented depreciation against the dollar. This report will trace the movements of the INR against the USD from the year 2000 to date. It will further attempt to estimate the value of the INR/USD in six months and describe how our software firm can hedge against the exposure associated with its global operations.

Figure 1

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The year 2000 saw the Indian rupee (INR) depreciate a massive 3.6% against the dollar. Analysts predicted the rupee to slip to the INR 46 mark against the greenback. As Figure 1 shows, this was proven right in the last quarter. The rupee shifted from 43.30 to 46.80 INR/USD within the year. The increase in oil prices and the selling by foreign funds in Indian stocks only contributed to the depreciation. India's economic situation in 2000 was also compromised by poor agricultural sector growth (owing to low rainfall for a second consecutive year) which reduced exports and contributed to the weakening rupee.

The rupee started 2001 on a steady note owing to an expected large influx of foreign direct investment and the announcement that US sanctions imposed on India following the 1998 nuclear tests, would be lifted. January recorded a high of INR 46.33/USD but this did not prevail for long. Market sentiments were changed by the Gujarat earthquake. This was followed by border tensions and reported setbacks in defence deals thus prompting a rating downgrade by Fitch. The September 11 attacks further aggravated the situation causing the rupee to fall to INR 48.43/dollar. Timely sales of dollars during late September 2001 by state run banks saw the rupee stabilise a little to INR 48.03/US$. This was a short lived boost as terrorist attacks on the Indian Parliament in mid December worsened the climate and the Indo-Pak relationship reached its worst state in the last week of December, resulting in a loss of nearly 40 paise to the dollar.

Regardless of the volatility in the global currency market in 2001, following the events of September 11, the exchange rate of the INR remained somewhat stable ranging from INR46.56-48.85 per USD. This was due to the monitoring and buying of the dollar on a regular basis by the Reserve Bank of India (RBI). The INR started 2002 at a bearish trend of INR 48.3/US$. In May 2002, the rupee plunged to INR 49/ USD only to regain strength at the end of the year at INR 48/USD. However, starting from INR 48/US$, the rupee experienced a sustained appreciation throughout 2003 to end at INR 45/USD. The Indian Economy suffered major setback with an attack on the American Centre, Kolkata in January (Reuters). Tensions between bordering Pakistan created an outflow of funds from the economy by FIIs. Mid-year in June, Talks between India and Pakistan brokered by the International Community, brought in confidence among the business community. The Indian Rupee displayed a bullish trend touching the 48 mark in the third week of December, the lowest INR/USD rate for the year (High Beam Research).

In 2003, India experienced a current account surplus after 23 years due to buoyant net invisible inflows equivalent to 2.9 percent of GDP, which at US $14.05 billion, were the highest in the last decade. This, and the service sector boom (especially the IT sector) contributed to the rebound of the INR. Further InfoTech exports rose by at least 30% (BBC) adding to the appreciation of the rupee. A 26-week high was reached in mid-June (BBC). This was seen as a vote of confidence in the Indian economy, considering the appreciation trend which was 4% to the USD. The trend is largely attributed to the weakening of the dollar spurred by trade deficits and a weakening stock market.

In 2004, the rupee started off at INR 45.456/USD but reached INR 43.4/USD during April, reflecting a 3.4% appreciation of the rupee against the dollar. Figure 1 depicts how the rupee later demonstrated a gradual depreciation till the third quarter after which it showed signs of appreciation towards the end of the year. The appreciation of the rupee in the first quarter was witnessed against all major currencies and was also evident in the 5-country export weighted NEER [1] . The reason for the appreciation was largely attributed to the ceasing of the Reserve Bank of India [RBI]'s intervention in the FOREX market to 'arrest' the rupees appreciation [2] . Thereafter, when the RBI limited its intervention, the rupee's appreciation started on March 19th and further zoomed during the latter part of March and further into April. The appreciation of the INR during the last quarter can be accredited to the increasing Foreign Institutional Investors [FII]'s Sub Accounts, which jumped from 14 to 34 during July-August according to DBS research. The announcement of the BOP deficit and other political matters undermining the US economy led to the depreciation of the USD, thus strengthening the status quo of the INR.

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The INR emerged strong at the start of the year 2005, touching a five year high of INR 43.4/USD according to a Deutsche Bank Report. The trend continued to be quite stable, with the INR moving within a bandwidth of 43.4 and 43.65 to the US dollar till year end. The Dubai based AME INFO reported that the INR was artificially kept high [3] during the first three quarters of the year; given that the monthly trade deficit [4] in April 2005 was a record USD 3.85 billion. Similar views were presented by Pranav Thakur of HSBC, Mumbai. He also claimed that sentiments among currency traders were optimistic of the Indian Rupee in view of the high growth rates, which has thus led to the steady INR/USD rate. AME INFO pointed out to the high capital inflows, high growth rates, and speculation of an exchange rate regime change in China as possible factors for the strong INR/USD rate. However, during the last quarter of 2005, the dollar appreciated despite the large U.S. trade deficit. Research from the Federal Reserve of St Louis suggests this was because of the purchasing of US dollar securities worth upto $269 billion [5] , by Asian developing countries with China being the major purchaser. Political reasons also lead to the depreciation of the rupee, particularly the triple bomb blast that killed 61 in New Delhi on 29th October.

In January 2006, the average rate was INR44.23/US$. The currency movements through this period have been attributed to high speculation in the FOREX market, especially fluctuations in Oil and Commodity markets. A gradual depreciation is visible of the Indian rupee for the period April to August 2006. The depreciation of the rupee can be attributed to political factors such as the two bomb blasts on 7th March and 11th July, and the Fire at the Brand India Fair on 10th April. Articles also point towards the outflow of funds from India removed by Foreign Institutional Investors (FIIs) from the economy as an underlying reason. Scholarly articles point to FED rate hikes in the US as one of the underlying factors for the appreciation of the dollar [6] . In September however, the rupee began a gradual appreciation. Professors [7] of ICFAI B-School point toward the high influx of FDI, External Commercial Borrowings [8] and remittance to India as the underlying reason for this.

The year 2007 was phenomenal for the INR. The rupee began trading at INR 44.12/USD and it averaged at INR 41.36/USD during the year (FX History). At its highest point on October 11, the rupee traded at 39.275 against the dollar (DBS Group Research). This marked a personal best against the greenback since 1998. The rapid appreciation can be attributed to a number of causes; one of them being the foreign investment pouring into India [9] . These surplus foreign currency inflows are usually purchased by the Reserve Bank of India (RBI) with the purpose of managing the value of the INR in global markets. However, in the face of the increasing inflation levels in 2007, any further intervention by the RBI would take place at the expense of a vital economic indicator [10] . Instead, the RBI chose to tighten monetary policy [11] .This served to further strengthen the rupee against the dollar especially considering the Feds Funds Rate peaked at 5.25% in June 2006 (see Appendix 1). The strong performance of the Bombay Stock Exchange Sensitive Index (SENSEX) against the Dow Jones (Appendix 2), further contributed to the positive sentiment surrounding the rupee. By the end of 2007, the INR/USD rate stood at 39.43 (FX History).

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Until October 2008, the lowest the Rupee had plunged against the US dollar was INR49/USD in May 2002 (MEDC). Clearly the positive sentiment (see Appendix 2) was thwarted by the financial crisis plaguing the global economy [12] . By May 2008, the INR/USD rate had fallen below the 42 mark and since then has been on a downward spiral, hitting what many journalists are sensationalizing as a 'psychological' all-time low of 52.1 on October 25, 2008. (FX History)

The Indian Rupee's depreciation has been affected by both external shocks and internal policy decisions. Perhaps, the most severe determinant was the pullout of financial investment institutions because India welcomed external financing more than other countries in the region (Barbe quoted by Yong, Bloomberg). In the wake of the global crisis, over $11.96 billion was drained from the Indian stock market, resulting in a drop of 52% in the SENSEX so far this year (WSJ). In terms of commodities, global fuel prices have been falling steadily. Considering oil is a dollar denominated import of which the United States is the biggest consumer in the world, the US dollar has recovered considerably against other currencies. WSJ describes how the weak INR/USD has only aggravated [13] the current account deficit and led to more dollar-buying by local companies, thus weakening the rupee even further. Internally, the RBI also has a part to play in engineering the rupee's depreciation [14] . With a view to curbing the appreciating rupee of 2007, the Market Stabilisation Scheme (MSS) was implemented to purchase surplus US dollars, external borrowings were curbed and the cash reserve requirement was raised to absorb excess liquidity in the financial sector, amongst others (see Appendix 3).


To summarise, post 1991, the Indian rupee has been subject to the volatility of the global foreign exchange market. After its shaky foray into the flexible exchange rate regime, the rupee achieved a relative strength and stability in the period 2003-06, followed by the exceptional appreciation of 2007. This progress however has been thwarted by the onset of the global financial crisis, which has sapped the value of the Indian rupee to levels of INR50/US$. As the next section will indicate, the immediate outlook for the rupee is somewhat bleak. It is highly unlikely that the rupee will be able to return to its pre-crisis values in the near future but it is hoped that RBI interventions may salvage some of the lost value by 2009-10.

Future INR/USD exchange rate estimation (6 months from November 1, 2008)

The global foreign exchange market is in a constant state of flux and the path to predicting the future value of the INR/USD is perhaps more tortuous during the present credit crunch than at say, periods of relative stability. Bearing in mind that any forecast is at best an estimate of future value; purchasing power parity, forward rates, technical analysis and an examination of macroeconomic fundamentals have been utilized in developing an estimate for the INR/USD exchange rate in 6 months.

Purchasing Power Parity (PPP)

St X (1 + πINR)

(1 + πINR)This theory has been hailed as one of the oldest tenets behind exchange rate determination. According to Eiteman et al (2007), under PPP theory, 'the long-run equilibrium exchange rate is determined by the ratio of domestic prices relative to foreign prices'. As such, this is used as a starting point for analysis. The formula to calculate the future spot rate using PPP theory is listed below:

St+1 =

Selection of Values

The website of the Office of the Economic Advisor [15] cites a forecasted inflation rate of 9.9% for the period ending April 2009.

A forecast obtained from shows the US inflation rate at 3.7% in April-May 2009.

Based on this data, the future spot rate is estimated to be INR 52.274/USD.

Future Spot Rate = 49.325 x (1 + 0.099)

(1 + 0.037)

= 49.325 x 1.05979

= 52.274

Eiteman describes how the validity of these PPP calculations is compromised by the structural differences across countries. Meredith's findings (2003, IMF Working Paper) are also consistent with the view that PPP does not robustly predict exchange rate movements due to estimation bias. Nevertheless, he does highlight the tendency of a greater predictability to exist over a medium term horizon since the magnitude of the bias increases as the time horizon for the exchange rate prediction increases. In this case, the time horizon for predicting the future value of the INR/USD is 6 months, which can be classified as short-medium term. Despite this, there seems to be a high degree of estimation bias owing to the exceptional circumstances afforded by the global credit crunch [16] . As in the US, inflation rates in India are expected to fall. Considering this information, it is unlikely that the forecast inflation rates used in the PPP calculations are accurate. Therefore, it is concluded that PPP is not a very satisfactory determinant of future spot rate.

The next technique examined is the forward rate. Eiteman et al (2007, p 113) defines the forward rate as "an exchange rate quoted today for settlement at some future date". The forward rate incorporates the interest rate differential between the two countries [17] . Meredith describes that under the joint hypothesis of risk neutrality and efficient markets, the forward rate should be an unbiased predictor of future exchange rates and that it should be a 'sufficient statistic', in that no further information should add power to the forecast.

Forward Rate Equation

S x [1 + (iINR x n/360)]

[1 + (iUSD x n/360)]


Selection of Values

The spot rate (S) of INR 49.325/$ as of November 1, 2008 was selected from a list of historical rates on

The interest rate on INR deposits (iINR) was determined using 6-month fixed deposit rates from 38 commercial banks in India [18] . The 6-month LIBOR in US dollars is utilized as the interest rate on US dollar deposits (iUSD). According to the website of the British Bankers Association (BBA), this value is 3.085% as of November 3, 2008. This LIBOR rate is utilized because it is the average of interbank offered rates for U.S. dollar denominated deposits with a maturity of 6 months in the London market, and because LIBOR is widely used as a reference rate in pricing forward rate agreements.

Forecast INR/USD rate in 6 months (April 30)

FINR/USD = 49.325 x [1 + (0.0779 x 180/360)]

[1 + (0.0309 x 180/360)]

FINR/USD = 49.325 x [1 + (0.0390)]

[1 + (0.0154)]

FINR/USD = 50.4714

Note: All values have been rounded up to 4 decimal places.

The percentage difference between the spot and forward exchange rate, stated in annual percentage terms, is shown below:

FINR = INR49.325/$ - INR50.4714/$ x 360 x 100

INR50.4714/$ 180

FINR = -4.54% per annum

If interest rate parity (IRP) theory holds, in 6 months, the Indian rupee (which has a higher interest rate) sells forward at a discount of 4.54% and the US dollar sells forward at a premium of 4.54%. The forward rate estimate above can be compared to the forward rate provided by the Scotia Bank Group [19] (Figure 2). The INR/USD exchange rate is forecasted to stand at 49.5 rupees per US$ by the end of the second quarter of 2009 while the 50 mark is touched again by the end of the fourth quarter.

Figure 2

However, as Eiteman points out, IRP is based on the assumption of market efficiency. In reality, the spot and forward exchange markets do not attain the state of equilibrium described by IRP due to the presence of transaction costs and because the financial instruments selected may not be perfect substitutes for each other. Unlike PPP calculations, the accuracy of forward rates tends to improve in the long run (Meredith, 2003) while short-medium term predictions tend to be less valid. The forward rate estimate is therefore, also discarded.

Next, technical analysis of past price behaviour is undertaken to predict future price movements. This is based on the notion that exchange rates follow trends which may be extrapolated into the future. For the purpose of this report, such analysis is undertaken using line and candlestick charting, which will be supplemented by Elliot Wave Analysis and Dow Theory.

The Elliot Wave Principle (EWP) catalogues the ways in which people move from extreme pessimism (bearish markets) to extreme optimism (bullish markets) and back again, over and over, regardless of news and extraneous events. Therefore, waves 1, 3 and 5 actually affect the directional movement while waves 2 and 4 are countertrend interruptions. Figure 3 below was created through the Pacific Exchange Rate Service and it depicts the movement of the INR against the USD over the past year. Lines were then superimposed on this graph, to indicate the pattern of the waves. As evident, the overall directional movement appears strongly bearish for the INR. The rupee is shown to steadily lose value against the USD over the time period.






Figure 3

% Change (Indirect Quotes) = Beginning Rate - Ending Rate [20] x 100

Ending Rate

% Change = 39.41 - 49.325 x 100


% Change since January 2008 = -20.1%

This depreciation gained momentum since September 2008, after the financial collapse in Europe and US. The next step is to calculate how much of these past price movements can help to influence the direction of future exchange rates. Dow Theory informs us that the main or primary movement of the market may last from a year to several years. The secondary reaction which follows the primary movement may last from ten days to six months and is expected to move in the opposite direction of between 30 to 40% of the primary price change since the start of the main movement (Maccaro, 2006). According to the candlestick chart depicting the exchange rate movements for the past three months, there was a secondary reaction shortly after November 1 which seems to have reversed by November 11, giving way to the primary bearish movement again.

Short-term volatility (noise)

Fundamental Equilibrium Path

Figure 4

This is complemented by the technique of differentiating short-term noise from long-term trends prescribed by Eiteman et al (2007, p 165). It is assumed that the fundamental equilibrium path continues and that the rupee value can be extrapolated to touch the 50 mark by the end of the fiscal year (see Figure 4). If so, the total INR depreciation for the year would be roughly 21.2% [21] . Absorbing 4 months worth (Jan-Apr) of the past year's depreciation would result in:

Future INR/USD Exchange Rate = (120/360) x Percentage of past depreciation

= 49.325 + [49.325 * (120/360 x 21.2%)]

= 49.325 + (3.486)

Value of Rupee in Six Months = INR 52.811/ USD

The less efficient a foreign exchange market is, the more likely it is that the above forecast could hold water, at least in the short run. Nevertheless it is important to examine macroeconomic fundamentals such as inflation rates, government policies and other events in both countries that could impact the foreign exchange market, before coming to any conclusions.

On one hand, the Economist predicts that the dollar will strengthen moderately from its current levels during 2009 and 2010, spurred by an expected narrowing of the current account deficit to 2.3% of GDP in 2009 and cuts in interest rates to restore market liquidity. This is consistent with the poorer standing of the INR against the USD, predicted by technical analysis. On the other hand, the RBI has been intervening in the FOREX market by selling dollars in an attempt to stabilize the value of the INR. The Times of India (2008) however point out the RBI's rapidly dwindling foreign exchange reserves, which have fallen from a peak of $302 billion on June 27 to $ 242 billion on November 27. With the US election in early November and the Indian parliamentary elections on the horizon in May, it is possible that monetary and fiscal policy will be manipulated to sway voter perceptions (Khemani) though it is difficult to predict exactly how.

Reuters also reported on the WEF-CII report released ahead of the India Economic Summit, stating that the global crisis is likely to generate a sharp increase in capital outflow and that India's dependence on capital flows to finance its current account deficit is a macroeconomic risk. This could mean a further weakening of the rupee in 2009. Sapir (2008) supports this by asserting it is unlikely that the USD will fall greatly from its current status quo with other currencies [22] . Considering the volatility of the current economic climate and the efforts on part of all nations to protect the value of their currencies while maintaining their current status quo with the USD, the indicative forward rates provided by Tamilnad Mercantile Banking (TMB) for April 2009 - 50.78 (Bid)/51.11 (Ask) - are considered satisfactory. These rates will be complemented with the outcome of technical analysis to provide an estimate of INR 51.7/USD [23] for the exchange rate in 6 months time.

Hedging Against International Exposure

From the analysis in the previous section, it can be seen that the firm faces a transactional exposure with regard to the $6 million payment to be received 6 months from now. The exchange rate forecast shows a gradual decline in the Indian rupee compared to the US dollar; this prompts a short position on the Indian rupee. A financial analysis [24] of an unhedged position shows a net flow of INR 310.2mn. Even though the firm faces a risk with regard to the volatility in its future income; if our predictions of the direction of the movement of the INR/USD pair are correct, then the firm would be in a better position when it actually gets the cash receipt on 30th April 2009. However, the non-financial factors have pointed out that there are possibilities that the currency pair may move towards the opposite direction. In taking a conservative view towards risk, it's advisable to enter into hedging. As such, hedging mechanisms appropriate to mitigate the given transactional exposure are discussed below.

The most convenient way out for the firm would be to switch the billing currency. This means that instead of billing the US customer for 6 million 'dollars', the firm can bill the customer in Indian Rupees [25] . However, if the customer [counterparty] is to take the risk, then an incentive must be given to them e.g. Discounts. But the problem with implementing this strategy, is that its not common practice in the INDIAN Software industry. Thus, this strategy is ruled out. Assuming the firm has no other global operations, the firm cannot use re-invoicing centres and natural hedges to mitigate the risk either, unlike Mastek [26] . And it's not viable for the firm to setup a new foreign entity solely to hedge the risk involved in the current deal. The firm can neither resort to other large scale hedging mechanisms [27] such as currency swaps, back-to-back loans etc. Thus, the firm has to rely on the following foreign exchange financial derivatives to minimize the firm's exposure to the volatility of the Indian Rupee.

First, the firm can use futures to minimize the level of exposure. {The use of OTC-Forwards has not been discussed due to lack of information with regard to the cost involved}. Futures are standardized contracts to buy/sell currency and other commodities. Forward covers have been favourites for hedging purposes among other Indian software giants like Infosys and Satyam. Futures contracts are currently being traded on the MCS Stock Exchange India and Dubai Gold and Commodity Exchange [DGCX] [28] ; for our research we concentrate on the DGCX, attributing to the availability of trading information. The futures price quote on DGCX is 197.63US$ [29] cents per 100 INR. Which means for the firm to cover the contract 'effectively' it should buy 140 lots [30] . The initial margin is $1500 per contract; the delivery period margin is $2500 and the tick charge of $2per contract [Refer Appendix 4 for DCGX Contract Specifications]. However, most important fact is that the settlement day is the third Wednesday of the expiry month [Which falls on 15th April]. Given the scenario, the firm has to initially make a 6-month borrowing for $210,000 at 5% annual interest, and on 15th April has to make another loan for $5,766,140.74 at 5.4% interest for a period of 15days. Thus when the firm receives the payment from the US customer, it will use $5,995,806 [Refer Appendix 5] to pay the US denoted loans and will remain with $4193.491 [This points to the fact that currency futures cannot be used to do 'prefect hedging']. And will thus have a net flow of INR 280,944,825.10 (Please refer Appendix 5). However, the arrangement is 'naked' i.e. not covered; thus in an event the US customer defaults, the firm would have to bear a significant loss, since our predictions point to a depreciating rupee.

Second, the firm can resort to hedging in the money market. This is one of the most riskless strategies, but like futures money market hedging also eliminates any gains that arise from the devaluation of the Indian Rupee [As being projected in our technical forecast]. In this kind of hedging, the firm would borrow a loan that would amount to a total repayment [principal + interest] of $6 million [loan is denoted in USD], for a period of 6-months. As of NOV 1st, such a borrowing would cost 4.8% per annum [31] . Thus, the firm would borrow $5.8594 million. The firm can then exchange the sum to Indian rupees at the spot rate on Nov1 [i.e. 49.325 INR/USD], and receive INR 289 million. The firm would then, deposit the proceeds (INR 289 million) in an interest bearing savings account in India. We take 8.2% as an indicative interest rate for a 6-month deposit of this volume. Thus at 30th April the deposit account would reap INR 300.849mn (289*1.041= 300.271) inclusive of interest. The proceeds from the US customer will then be used to pay the US denoted loan. Again since the hedging strategy is 'naked', as in a forward contract, if the US customer defaults on payments, the firm has to bear a significant loss.

Third and final is a popular strategy, commonly used in the global hedging market; Options. The firm in this case may resort to buying a put option. In a put option the buyer [the firm] of the put option has the right but not the obligation to sell the underlying asset [US dollars] to the Seller [Underwriter] at a given point in time [in a American option it would be period of time] at a given price [Strike Price]. Given the financial forecasts, from the point of view of the firm it is advisable to buy an in-the-money option. Emphasizing that the firm's aim is to hedge and not involve in gaining speculative profit, the firm may enter into a put option agreement at a strike price of INR 50.00/USD, thus only resulting in 'fair value'. Given that options' trading is not available in India, the firm has to resort to buying an OTC put option from an underwriter like major Investment Banks in India, such as Deutsche Bank, Citi Bank etc.

The Black-Scholes model was used to determine [32] the put option price [Refer Appendix 6 for calculations], thus the net cost of the put option would be INR 1.43343751mn. The firm would exercise the options if the INR appreciates further from the 50.00 INR/USD level. Thus, if the INR does appreciate above the specified level, the Net Cash Flow for the firm would be INR 298.566mn [(6mn*Rs.50)-1.43343751mn]. However, if the INR continues to depreciate as per the forecasts, then the firm would exchange the receipts of USD in the spot market. Thus, the net proceeds would amount to $6mn times the day's spot rate minus INR 1.43343751mn that has been already paid for the option. Thus, we can see that options tend to prove a useful derivative since they limit the downside risk but expose the buyer to unlimited gains from currency fluctuations.

Put Option

Currency Futures

Money Market Hedging

Unhedged Position Figure 5

The above analysis, gives an insight to the available derivative options. Figure 5 points to the fact that, until the INR/USD crosses the 50 mark, the money market hedging provides an ideal solution to mitigate risk, whilst ensuring a healthy cash receipt (and in this option the firm may even opt to utilize the funds obtained on NOV 1st in any other investment that may yield higher than 4.1% [6-months], and thus gain higher returns). Beyond the 50 mark, put options tend to be favourable; this is because options expose the buyer to gains unlike other derivatives discussed. However, it is important to emphasize that the cost of OTC options might be higher than our calculated cost, thus the effectiveness of its use may change accordingly. Futures can be eliminated as an ineffective derivative for the company's purpose, because the cost involved is high due to the limited trading of the pair in the global arena. Thus in conclusion, we completely ignore futures (as it is expensive) and an unhedged position (due to the high level of risk involved). Abiding by a very low risk tolerance strategy, we would recommend a mix of money market and put option hedging in order to mitigate the risk involved. The composition of each strategy would depend on the risk tolerance. [Total word count excluding footnotes - 4805]

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