FOREIGN EXCHANGE AND

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FOREIGN EXCHANGE AND HEDGING PRODUCTS
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Journey of USD/INR 2007
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USD/INR 2008
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USD/INR 2009 and beyond
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USD LIBOR 6 mth
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The US Economy

• Came to surface with sub-prime crisis Double
  dip recession.
• US GDP grew 1.3 in Q2 2011 and is put at 1.7 in
  2011 compared to 3 in 2010.
• SP downgraded USA to AA from AAA.
• US unemployment rate is around 9.
• Initial jobless claims hovering at around 400,000
  levels.
• Doubts being raised on the status of USD.

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The Euro Zone Economy

• The Euro zone is governed by the PIIGS
  economies.
• Huge public debt.
• Greece default risk jumps to 98.
• Downgrade of euro zone economies by rating
  agencies.
• French banks rating was downgraded by Moodys.
• IMF lowers global growth forecasts to 4.

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RISK IN FOREX OPERATIONS

• High volatility is the distinctive feature of
  foreign exchange market
• Globalization of Indian economy is increasingly
  exposing the Indian corporates to greater forex
  risks.
• The uncertainty of the moves and lack of clear
  trend rules the market.
• HEDGING AND NOT SPECULATING

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HEDGING PRODUCTS

A. FORWARD CONTRACTS
B. OPTIONS
C. SWAPS

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FORWARD CONTRACTS
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FORWARD CONTRACT

• A Right To Buy Or Sell Foreign Currency At An
  Agreed Price On A Future Date.
• Both A Right And An Obligation

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FORWARD CONTRACTS

• No chance of participating in market volatility
• Profit/loss crystallized on the date of booking
• The upside and downside (opportunity profit/loss)
  theoretically unlimited
• Forward points are difference between interest
  rates between the currencies.

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FORWARD CONTRACT

• Can be booked for period up to one year and
  beyond.
• Flexibility of one month option period.
• Gain or loss depends on prevailing rate.
• At the time of booking, no money changes hands.
  Debits/credits are carried in to the Customers
  account only on the settlement date.

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OPTIONS
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OPTION

• A Contract To Buy Or Sell Foreign Currency At A
  Agreed Price On A Future Date.
• A Right But Not An Obligation
• Premium payable upfront. Fixed Maturity.

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Options

• A call option is an option to buy a certain asset
  by a certain date for a certain price (the strike
  price)
• A put option is an option to sell a certain asset
  by a certain date for a certain price (the strike
  price)

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OPTIONS

• SPOT RATE 52.62
• 1 M FWD 52.98 Rs .87
• 3 M FWD 53.50 Rs 1.32
• 6 M FWD 54.21 Rs 1.75
• 12 M FWD 55.04 Rs 2.42

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SWAPS

• Swap Is A Contractual Agreement To Exchange
  Specified Cash Flows At Future Dates

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Mechanism of SWAP

• ABC Ltd, an Indian corporate borrows US Dollar at
  6 mths Libor 150 bps (0.5 1.50 2.00 ) to
  be repaid after 5 years. The company converts the
  USD into Rupees at present USD/INR rate (49.00).
  What risks the company is open to?
• What happens if Libor rate after 1 year goes to 3
  and keeps rising?
• What happens if the USD/INR rate on repayment
  date is more than present rate?
• ABC Ltd can enter into a SWAP deal to hedge
  uncertainty of future 1) Interest rate or 2)
  Currency rate or 3) both currency and interest
  rate.

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PRINCIPAL ONLY SWAP (POS)
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INTEREST RATE SWAP (IRS) Floating to Fixed
LIBOR Liability
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CIRS
USD Liability (FCL)
Pays Floating Interest Rate (L300)
USD Cash Flows
INR Cash Flows _at_ spot
BANK
CORPORATE
Corp Pays Rs Fixed Interest Rate 8.8
USD loan converted into a INR loan synthetically
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• Regulatory Requirement Governing Forward
  Contracts and Derivative Transactions

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Guidelines for Forward Contract and Derivative
Transactions

• RBI has classified exposure in two categories
• Probable Exposure
• Average of last three years turnover or last year
  turnover, whichever is higher. ( For importers
  the facility stands reduced to 25 of limit).
• Contracted Exposure
• Limits can be sanctioned to the extent of
  underlying exposure that is available.

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Guidelines for Forward Contract and Derivative
Transactions

• Guidelines for Contracted Exposure
• Underlying documents to be submitted while
  booking contract. Grace period of 15 days
  provided after which contract be cancelled and no
  exchange gain to be passed.
• Certificate that the exposure is not covered with
  any AD category 1 bank and if covered in parts,
  the details thereof.
• Quarterly certificate from statutory auditor of
  customer that contracts outstanding at any point
  of time during the quarter did not exceed the
  underlying exposure.
• RBI withdraws facility of rebooking once contract
  is cancelled ( which involves INR as one of
  currencies).

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Guidelines for Forward Contract and Derivative
Transactions

• Guidelines for Probable Exposure
• Limits to be assessed at the beginning of
  financial year. RBI has allowed a period of three
  months for submission of audited statement.
• Separate limit to be assessed for import and
  export and advised to customer both in terms of
  notional and credit exposure limit. These limits
  to be monitored separately for import and export.
• All fwd contracts under this facility on fully
  deliverable basis. In case of cancellation
  exchange gain, if any, should not be passed to
  customer.

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Guidelines for Forward Contract and Derivative
Transactions

• Guidelines for Probable Exposure
• Aggregate contracts booked during financial year
  and outstanding at any point of time should not
  exceed past performance eligibility , separately
  for import and export, subject to availability of
  CEL.
• Past performance limits once utilized are not to
  be reinstated either on cancellation or on
  maturity of contracts.
• Contracts booked under the facility once
  cancelled are not eligible to be rebooked.
  Rollover is also not permitted.

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Guidelines for Forward Contract and Derivative
Transactions

• Branches to allow customer to use past
  performance facility after satisfying that
  following conditions are complied with
• An undertaking may be obtained from customer that
  supporting documentary evidence will be produced
  before the maturity of all the contracts booked.
• Customers to furnish quarterly declaration, duly
  certified by Statutory Auditor, stating the
  amount booked with other AD Category I banks
  under this facility.

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Guidelines for Forward Contract and Derivative
Transactions

• c. Aggregate outstanding contracts in excess of
  50 of eligible limit may be permitted on being
  satisfied about genuine requirement of the
  customer after examination of following
  documents
• A certificate from statutory auditor of customer
  that all guidelines have been adhered to while
  utilizing facility.
• A certificate of import/export of customer during
  past three years duly certified by statutory
  auditor in the format prescribed by RBI.

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Uncertainty Remains .

• India will have to learn to live with
  volatility in the Global economy.
• RBI

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• Thank You