Four layers of risk
A dollar-based investor holding Indian equities is exposed to the rupee, to the Indian market as a whole, to the sector and stock choices within that market, and to the occasional emerging-market sell-off where all of these fall together. The right hedge depends on which of these the investor wants to keep.
| Risk layer | What it protects against | Typical tools | Relative cost |
|---|---|---|---|
| Currency | Rupee weakness eroding returns in the investor's base currency | Forwards, NDFs, options | Carry-driven |
| Market beta | A broad fall in Indian equities | Index futures, index puts | Moderate |
| Sector | A concentrated sector bet going wrong | Sector pairs, relative-value baskets | Lower, if funded by the pair |
| Tail | A sharp, correlated sell-off across EM | Out-of-the-money puts, EM or USD proxies | Expensive to hold continuously |
Choosing what to keep
An investor who believes in Indian earnings growth but worries about the currency should hedge the rupee and keep the beta. An investor confident in a sector view but unsure about the market can pair the long position against the index or a related sector. Tail protection is rarely worth holding all the time. It is better bought when it is cheap relative to realised volatility.
The cheapest hedge is often a better-sized position. The second cheapest is a hedge on the risk you actually want to remove.
How we work on this
For clients, we map the portfolio's exposure to each layer, compare the historical cost and effectiveness of the available tools, and set out the risk-reward of hedged versus unhedged positions under a range of scenarios. We provide research and analysis, not trade recommendations. Execution decisions stay with the client.
This note illustrates our research approach. It is general in nature and is not investment advice. Iterate Analytics provides independent research and analysis to institutional clients only. We do not provide investment advice, and we are not registered with the Securities and Exchange Board of India (SEBI) or any other securities and exchange board or regulator as an investment adviser or research analyst. We do not work with retail or individual clients.