FOREIGN EXCHANGE AND
HEDGING PRODUCTS
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4/13/2015
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.
• S&P 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.
SBI-GLOBAL MARKETS
4/13/2015
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 bank’s rating was downgraded by Moody’s.
• 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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4/13/2015
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 Customer’s 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:
1 M FWD:
3 M FWD
6 M FWD
12 M FWD
52.62
52.98
53.50
54.21
55.04
Rs .87
Rs 1.32
Rs 1.75
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)
USD Liability
USD Cash Flows
Bank A
Corporate
INR Cash Flows @ spot
(pays premium %)
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INTEREST RATE SWAP (IRS)
Floating to Fixed
LIBOR Liability
Bank Pays Floating Interest Rate
6mL(0.53)+300
Bank
Corporate
Corp Pays Fixed $ Interest Rate
4.75%
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CIRS
USD Liability
(FCL)
Pays Floating Interest Rate (L+300)
USD Cash Flows
BANK
INR Cash Flows @ spot
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:
a. An undertaking may be obtained from customer that
supporting documentary evidence will be produced before
the maturity of all the contracts booked.
b. 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:
i. A certificate from statutory auditor of customer that all
guidelines have been adhered to while utilizing facility.
ii. 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
SBI-GLOBAL MARKETS
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Thank You
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4/13/2015