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Financial Foresights
FEDERATION OF INDIAN CHAMBERS OF COMMERCE AND INDUSTRY
Foreign Exchange Risk Management
FULL PAGE ADfor Digest PartnerSize- W-8, H-11.25Screen Ruling- 150Ad Color- CMYK
About FICCI
DISCLAIMER
Acknowledgments
We thank our Partners
Partner Exchange
Industry Insights Partner
Contents1. PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
2. INDUSTRY INSIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7The Risk Management Imperative 9
Role of Foreign Exchange Risk Management in Indian Corporate Performance 17
Divining the Rupee’s future 21
The macroeconomics of managing the rupee 25
Foreign Exchange Risk Management 30
Foreign Exchange Risk Management 34
Foreign Exchange Risk Management 38
Foreign Exchange Risk Management for Corporates 42
A perspective on the trends in the foreign exchange market and identifying and managing foreign exchange risk 46
Foreign Exchange Risk Management 50
Foreign Exchange Risk Management 56
Foreign Exchange Risk Management 62
Foreign Exchange Risk Management 65
Foreign Exchange Risk Management-The way forward 69
3. THE POLICY PULSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75Banking Sector 76Capital Markets Sector 79Insurance Sector 82Reforms Tracker
4. FICCI’S DATA CENTRE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87Indian Economy-An Update 89Investment Banking Updates 92Markets Watch 97
5. FINANCIAL SECTOR EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98
Synopsis of Past Events 98
6. FINTAINMENT SECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99
Preface
Dr. A. Didar SinghSecretary GeneralFICCI
Industry Insights
In association with
9Foreign Exchange Risk Management
Industry Insights
The Risk Management ImperativeMr. V.K. Sharma¹,
The last two years have been characterized by unprecedented and excessive volatility in asset prices and currency values, catapulting the critical imperative of Risk Management to the centre-stage like never before
________________________________________________________________________________________________________
¹
10
Industry Insights
11Foreign Exchange Risk Management
Industry Insights
12
Industry Insights
13Foreign Exchange Risk Management
Industry Insights
14
Industry Insights
Industry Insights Partner
15Foreign Exchange Risk Management
Industry Insights
As regards commodity prices, business and industry can use international commodity exchanges to hedge dollar price risk, and domestic commodity exchanges to hedge rupee price risk
16
Industry Insights
V.K. SharmaExecutive Director
Reserve Bank of India
17Foreign Exchange Risk Management
Role of Foreign Exchange Risk Management in Indian Corporate Performance
Mr. B. A. Prabhakar,
The economic liberalization has facilitated the introduction of derivatives based on interest rates and foreign exchange
18
39414345474951535557
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
19Foreign Exchange Risk Management
Role of the Boards in Forex Risk Management
Role of Banks in Forex Risk Management
Companies incurred huge forex losses
No Company2007-08
3
20
Industry Insights
Forex Risk Management- Accounting Standards
Way forward
It is essential for corporates to implement systematic hedging action plan so that any adverse movements in currency rates will not cause pressure on their margins and
B A PrabhakarChairman & MD
Andhra Bank
21Foreign Exchange Risk Management
Industry Insights
Divining the Rupee’s futureMr. Saugata Bhattacharya and Mr. Abhishek Upadhyay
Just as death and taxes are the two constants of life, forex markets have become the polar opposite in terms of volatility
22
Industry Insights
23Foreign Exchange Risk Management
Industry Insights
80
85
90
95
100
105
110
115
120
125
130
Oct-10 Mar-11 Jul-11 Dec-11 Apr-12 Aug-12 Jan-13
CNY - China
BRL- Brazil
MYR - Malaysia
INR - India
KRW - Korea
TRL - Turkish
90
95
100
105
110
115
120
Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12
REER (6 country trade based, 2004-05=100)
Mean+ 1SD
Mean - 1SD
(April'04: USDINR - 43.9)
(July'12: USDINR -53.05)
47%
56% 50%53%
60%67%
79%
97%
114% 116%
99%
106%110%
0%
30%
60%
90%
120%
FY93 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
Total external flows as % of GDP
Trade flows % GDP
Financial flows % of GDP
Chart 1: Comparative performance of Rupee and other EM currencies
Chart 3: Real Effective Exchange Rate
Chart 2: India’s integration with the global economy
India’s growth is too strong an attraction for the vast pools of global capital in quest of returns
24
Industry Insights
38
42
46
50
54
58
62
70
75
80
85
90
95
Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
DXY Dollar Index USD/INR (RS, Inverted)
Chart 1: Comparative performance of Rupee and other EM currencies
Abhishek UpadhyaySenior Manager and
Economist, Axis Bank
Saugata BhattacharyaSenior Vice President and Chief
Economist at Axis Bank
Russia 2.9 10.0 0.7 5.3 97.6Brazil 4.2 5.2 -2.5 -1.5 65.4India 8.1 9.2 -7.8 -2.3 72.5S.Africa 2.7 7.0 -2.7 -4.9 52.0Mexico 1.5 4.4 -2.9 -0.8 42.4Turkey 3.6 8.1 -2.5 -6.0Korea 3.5 3.4 1.6 2.3 32.4China 10.5 3.7 -1.2 6.5 22.7US 0.6 2.2 -8.5 -3.8 86.9UK 0.1 3.2 -7.3 -2.1 64.5Japan -0.1 -0.2 -7.2 3.3 206.0
Fiscal balance as % of GDP
CAD as a % of GDP
Govt debt as % of GDP
GDP yoy%
Inflation yoy%
Table 1
25Foreign Exchange Risk Management
Industry Insights
Three phases of RBI policy
The macroeconomics of managing the rupeeMr. Indranil Sen Gupta,
INR will not stabilize till the RBI rebuilds FX reserves
26
Industry Insights
Till 2004: Buying FX to build reserves
2005-07: Buying FX to stem appreciation
2009-11: Strong INR at cost of FX reserves
Cyclically high current
challenge
38.0
42.0
46.0
50.0
54.0
58.0
M a r -0 0
M a y -0 1
J u l -0 2
S e p -0 3
N o v -0 4
J a n -0 6
M a r -0 7
M a y -0 8
J u l -0 9
S e p -1 0
N o v -1 1
I N R / U SD
Chart 1: Forex reserve management key to stabilize Rupee
27Foreign Exchange Risk Management
Industry Insights
Higher FX reserves, stronger INR
4
6
8
10
12
14
16
18
FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12
Import cover
Months
Chart 2: Import cover lowest since FY96
Item FY10 FY11 FY12 FY13
28
Industry Insights
Higher nostro balances can fund US$5-8bn FX intervention
The Rupee’s Dilemma
1. RBI buys FX, market buys INR:2. RBI doesn’t buy FX, market sells
INR:
Table 2: India’s external indicators are trailing BRIC levels
Pre-Crisis Crisis Current
Brazil
Russia
India
China
4
6
8
10
12
14
16
18
FY96 FY98 FY00 FY02 FY04 FY06 FY08 FY10 FY12
Import cover
Months
Chart 2: Import cover lowest since FY96We think the best solution surely will be for the RBI to accumulate FX and the FX market to buy INR. The RBI should then achieve its twin objectives of stabilizing the FX market and reducing
pressures
29Foreign Exchange Risk Management
Industry Insights
3. RBI buys FX, market sells INR: 4. RBI doesn’t buy FX, market buys
INR:
Sen Gupta, IndranilEconomist – India
30
Industry Insights
O
Foreign Exchange Risk ManagementMr. Vipul Chandra,
Asian Companies have been severely impacted by this increased volatility in FX Markets
31Foreign Exchange Risk Management
Industry Insights
Interplay between Financial and Business risks:
Risk Management Process
95% CFaR
Forecasted Firm Value
Firm Value Rs MM
32
Industry Insights
3. Setting Risk Strategy:
4. Hedging Strategy and Alternatives evaluation:
5. Review and Re-balancing :
Accounting and Risk Management
33Foreign Exchange Risk Management
Industry Insights
Vipul ChandraManaging Director
Corporate Sales & Structuring -South Asia Markets
34
Industry Insights
Foreign Exchange Risk Management
Introduction
Mr. Himanshu Kaji,
Ministry of Corporate Affairs has taken the cognizance of high rupee volatility and has permitted Indian companies to capitalize
term foreign borrowings due to exchange rate
35Foreign Exchange Risk Management
Industry Insights
Risk Awareness
Risk Management StrategiesRisk Transfer Strategy
Risk Avoidance Strategy
Risk Mitigation Strategy
Hedging through Exchanges
36
Industry Insights
Hedging through OTC contracts
Right Risk Strategy:
Recommended Exchange related reforms
Low liquidity on the exchanges across the existing contracts is one of the key concerns for the Indian companies
37Foreign Exchange Risk Management
Industry Insights
Recommended OTC related reforms
Conclusion
Himanshu KajiExecutive Director, Edelweiss Financial
Services Limited
38
Industry Insights
Mr. Baby K P,
Foreign Exchange Risk Management
“In life, as in chess, forethought wins.”
39Foreign Exchange Risk Management
Industry Insights
Foreign Exchange Risk Management framework
and exchange rate risks
3.
Forecasting exchange rate movements
Factors affecting exchange rate
Movement of Capital:
Interest Rates:
Current account position:
Public debt:
40
Industry Insights
Measurement of risk
Benchmarking and formulation of policy guidelines
Risk mitigation
Forward contracts,
Currency options
41Foreign Exchange Risk Management
Industry Insights
Option contracts maybe combined to form strategies that reduce cost and achieve desired pay
Currency futures
It is obvious that multiple currencies are here to stay for the foreseeable future and so is the foreign exchange risk
Baby K P Asst General Manager,
Federal Bank
42
Industry Insights
Foreign Exchange Risk Management for Corporates
Why manage foreign exchange risk?
Mr. Mohan N. Shenoi,
In India, the gradual liberalization of the Indian economy after the 1990s and its integration into the global marketplace has resulted in substantial exposure to foreign exchange risks for Indian corporates
43Foreign Exchange Risk Management
Industry Insights
How is foreign exchange risk managed?
start by isolating and enumerating the currency exposures
A. Transaction Risk:
B. Translation Risk:
C. Contingent Risk
D. Economic Risk:
E. Policy Risk:
The risk management policy should be primarily driven by the business the company is in
44
Industry Insights
How can foreign exchange risk be managed?
Recent Lessons
Hedge accounting:
45Foreign Exchange Risk Management
Industry Insights
RBI regulations:
Mohan N. ShenoiPresident- Group Treasury
& Global MarketsKotak Mahindra Bank
Limited
46
Industry Insights
A perspective on the trends in the foreign exchange market and identifying and managing foreign exchange risk
Introduction
.
Mr. Ramaswamy Govindan,
As the liquidity across markets dried up,
challenged the micro-structure of foreign exchange markets across many countries with increased volatility
47Foreign Exchange Risk Management
Industry Insights
Global FX Markets – Deep, liquid but volatile
The FX market in India
48
Industry Insights
Foreign Exchange Risk Management – L&T Perspective
Risk management process involves following elements:-
Under this stricter operating environment, an increasing number of corporates, especially, the medium scale enterprises have found
with the regulatory requirements.
49Foreign Exchange Risk Management
Industry Insights
Risk Evaluation:
Risk Mitigation:
Risk monitoring:
Ramaswamy Govindan
Toubro Limited.
References
Indian Derivatives Market – a regulatory and Contextual Perspective - RBI SpeechesBIS Triennial Survey 2007 & 2010 – ww.bis.orgReport on Currency & Finance – RBI Publications
50
Industry Insights
Foreign Exchange Risk Management Smt. Usha Ananthasubramanian,
The Backdropation and
Globalisationhas yielded magnanimous scope for international businesses
51Foreign Exchange Risk Management
Industry Insights
Indian Perspective To Economic Liberalisation And International Businesses
52
Industry Insights
Foreign Exchange Risk
3.
1. Exchange Rate Risk:
Exchange Rate Risk
Forex Forward contracts:
Currency Futures:
53Foreign Exchange Risk Management
Industry Insights
Currency Options:
Cross Currency Swaps: A
Interest Rate Risk:
Forex Exposure Hedging Instrument
Unhedged Company Effect of Hedging
Money saved by hedging: 60,150,000 – 58,000,000 = Rs 2.15 mio
Graphical Representation of Currency Option Payoffs
54
Industry Insights
Interest Rate RiskSovereign risk
Compliance Risk: compliance risk
Settlement risk:
55Foreign Exchange Risk Management
Industry Insights
settlement risk
Summary and Conclusion
The need of the hour is to educate ourselves with the vibrant derivative products and participate effectively in the derivatives market to help it evolve to its optimum levels
Usha AnanthasubramanianExecutive Director
Punjab National Bank
56
Industry Insights
Domestic Scenario
Foreign Exchange Risk ManagementShri Nishant Jha,
Shri Selvaraj Kalyanasundaram,
“Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so.”
57Foreign Exchange Risk Management
Industry Insights
India – Highly Exposed to Exchange Rate Fluctuations
Sources of Risk for Corporates
Exchange Rate Risk Management
Risk Measurement
58
Industry Insights
Risk Control and Mitigation – Hedging
59Foreign Exchange Risk Management
Industry Insights
Hedging Products in India
3.
Companies should
break even exchange rate based on their costing and then hedge the risk after accounting for some margin
60
Industry Insights
3.
Documentation - ISDA Master Agreement and CSA
Move Towards Transparency – Exchange Traded Products and CCPs
61Foreign Exchange Risk Management
Industry Insights
Nishant Jha
Selvaraj KalyanasundaramDeputy General Manager
62
Industry Insights
A.
.
Foreign Exchange Risk Management Mr. James Berry,
The global FX turnover has tripled between 2001 and 2010
________________________________________________________________________________________________________
63Foreign Exchange Risk Management
Industry Insights
3.
________________________________________________________________________________________________________
3
With the Indian economy expanding at circa 6% p.a, there is an increased focus on FX risk management
64
Industry Insights
James Berry
India & South Asia,Standard Charted Bank
65Foreign Exchange Risk Management
Industry Insights
‘Hedging’ of market risk
Foreign Exchange Risk Management Mr. Ananth Narayan G,
I will never die for my beliefs; because I might be wrong
66
Industry Insights
So what should the
67Foreign Exchange Risk Management
Industry Insights
Managing market risks has become a critical imperative of every corporate treasury
Industry Insights Partner
68
Industry Insights
In Summary
Ananth Narayan GCo-Head of Wholesale Banking, South Asia.
Standard Charted Bank
69Foreign Exchange Risk Management
Industry Insights
Introduction
Foreign Exchange Risk Management-The way forward
Mr. Apoorv Srivastava,
In India, the economic liberalization in the early nineties provided the economic rationale for the introduction of Foreign exchange (FX) derivatives
70
Industry Insights
Foreign Exchange Risk: A Historical Perspective
Need for a dynamic foreign exchange market in India:
________________________________________________________________________________________________________
71Foreign Exchange Risk Management
Industry Insights
Issues in the Indian market:
Impact of Global economy and the India story
72
Industry Insights
3.
Way Forward:
Recommendations:
The problem in the Indian context is that the market for derivatives in India other than forward contracts is very shallow
73Foreign Exchange Risk Management
Industry Insights
References:
3.
Apoorv SrivastavaResearch Associate - Financial Sector
FICCI
Disclaimer: Views are personal and not of the organization.
The Policy Pulse
76
The Policy Pulse
December, 2012
RBI plans to push Export Lending
Companies in Agri Business now in Priority Sector
RBI plans to roll out gold – linked products
Gold deposit schemes
Gold - linked accounts
Gold accumulation plan
Banking Sector
77Foreign Exchange Risk Management
The Policy Pulse
Gold Pension Plan
Figures on Gold Imports
RBI bans bank loans to buy gold in any form
RBI to simplify KYC norms
RBI trying to mesh current liquidity, Basel-III norms
www.mcx-sx.com
India’s
new generation
stock exchange
offers hedging in
¥, €, £ and $
Manage your currency risk inYen, Euro, Pound and USD
78
RBI to set aside funds for buying illiquid gilts
payment system
The Policy Pulse
79Foreign Exchange Risk Management
SEBI allows Mutual Funds to take part in credit default swaps market
SEBI relaxes MF exposure for Housing Finance companies
SEBI allows trading of ETFs in SLB segment
Capital Markets Sector
SEBI seeks more powers to deal with defaulters
SEBI comes out with norms for RGESS and asks stock exchanges to furnish list of eligible stocks for RGESS
.
Government asks States to act against illegal share trading
The Policy Pulse
80
SEBI Committee to review depository system
Government may cut withholding tax on FII debt
SEBI discontinues mini derivatives contracts on bourses
SEBI allowed 12 more Alternative Investment Funds in October and November 2012
.
SEBI raises minimum capital requirement for brokers
www.mcx-sx.com
Hedge on
Insureagainst
fluctuating currency
prices
The Policy Pulse
81Foreign Exchange Risk Management
SEBI takes measures to beef-up retail investor safety
Companies Act gives SEBI a leg-up
Inc.
SEBI seeks approval for foreign funds in alternative investment funds
SEBI eases debt allocation mechanism for FIIs
SEBI to revise rules on insider trading; to synchronize norms with the guidelines of Companies Bill
SEBI mulls norms for trading permitted stocks on exchanges
The Policy Pulse
82
Standard insurance product for rural and social sector: IRDA
Finance Minister announced incentives to promote life insurance
applications
Insurance Sector
SEBI’s unveils share buyback proposals
Government asks SEBI to remove cool-off period in OFS
The Policy Pulse
83Foreign Exchange Risk Management
IRDA gears up to deliver better and faster product decisions
Insurers eye tier II and tier III cities to evaluate new business statistics
Premium collection drops for life insurance companies
Insurance Firms being investigated for suspected nonpayment of Service Tax
www.mcx-sx.com
SMS ‘MCXSX Currency Code’
to 567678
Currency codes:USDINR /GBPINR /JPYINR / EURINR
Currency FuturesPrices on mobile
The Policy Pulse
84
Motor Insurance Policy Tenure may rise to 2 Years soon: IRDA
Cabinet defers decision on Insurance and Pension reforms bill
Reforms Tracker: A Review of the Winter Session of Parliament and Bills Passed
IRDA relaxes proof of residence norms for micro-insurance products
Reforms Tracker
www.mcx-sx.com
Hedge on
Insureagainst
fluctuating currency
prices
The Policy Pulse
85Foreign Exchange Risk Management
Bills Introduced In Lok Sabha
Bills Passed By Lok Sabha
Bills Introduced In Rajya Sabha
Bills Passed By Rajya Sabha
Bills Passed By Both Houses
1. The Coal Mines
Amendment Bill, 2012
2. The Central Universities
2012
3. The Criminal Law
2012
4. The Competition
2012
5. The Appropriation
6. The Governors
Allowances
Amendment Bill, 2012
7. The Constitution
1. The Prevention of Money Laundering
2. The Unlawful Ac-
Amendment Bill, 2011
3. The Enforcement of Security Interest and Recovery of Debts Laws
4. The Appropriation
5. The Constitution -
Bill, 2012
6. The Banking Laws
7. The Companies Bill, 2012
1. The Child
Amendment Bill, 2012
1. The North Eastern Areas
Amendment Bill, 2012
1. The North Eastern Areas
Amendment Bill, 2012
Winter Session, 2012
The Policy Pulse
86
Enforcement of Security Interest and Recovery of
The Companies Bill, 2012
The Policy Pulse
FICCI’s Data Centre
89Foreign Exchange Risk Management
FICCI’s Data Centre
Indian Economy-An Update
Economic Scenario
3.
Key Economic Indicators
90
FICCI’s Data Centre
91Foreign Exchange Risk Management
FICCI’s Data Centre
Rupee Movement
Reference:
3.
Information isjust a Tweet away
Follow mcxsx_currency for currency price updates
Follow mcxsx for Exchange news and developments
http://twitter.com/mcxsx
92
FICCI’s Data Centre
India
Outbound M&A
Inbound M&A
Domestic M&A
Investment Banking Updates Mergers & Acquisitions
93Foreign Exchange Risk Management
FICCI’s Data Centre
Equity Capital Markets
94
FICCI’s Data Centre
India DCM
Corporate IG and Agency
Reliance IndustriesPower
Finance Corp
Domestic DCM
International
Debt Capital Markets
95Foreign Exchange Risk Management
India loan
Leveraged
Investment grade
Building
Loan Markets
FICCI’s Data Centre
96
IB RevenueIndia IB Revenue
Syndicated Loan revenue
M&A revenue
ECM fees
DCM fees
FICCI’s Data Centre
97Foreign Exchange Risk Management
FICCI’s Data Centre
Markets Watch
98
Financial Sector Events
Synopsis of past events
Asian Financial Cooperation Conference26th- 27th November, 2012, Mumbai
99Foreign Exchange Risk Management
Across
Down
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Fintainment SectionCrossword
Notes:
Fintainment Section
100
Greenspan Put -Dogs of the Dow
Squawk Box
and Business Research, by 2015 which city is expected to employ
Roth and Lloyd Shapley in 2012, the Nobel Prize in Economic
last working day of February. What is the name of the Finance Minister who changed the budget announcement time to 11am?
Log on tohttp://m.mcx-sx.com
on your internet enabled handset
Currency futures
on your mobile
Financial Fundas
Fintainment Section
101Foreign Exchange Risk Management
1. StockTwits
2. FRED
3. IRDA
Jumble
Mangesh Ghogre
Fintainment Section Credits
Fintainment Section
102
I1
N S2
U R A3
N C4
E F5
I I P6
L C7
N U D R D D
D8
E B T O R E9
Q U I T Y C10
R R
E S D A
X I I P11
L12
T D13
D14
E A L T C15
A R T E L C
R16
Y O A O O F
B E17
C18
R I S I S P
I19
N C20
C21
F O H P22
U N T E R23
O O M24
B A E I E
N N P C O C
N25
A T I O N A L I26
Z A T I O N E
P A M N S U S
A27
N N U I T Y S28
E N S E29
X S
G C U U I
I30
P O S31
E C E32
M B A R G O O
O N
Answers of
Answer: 1
Answer: 2
Answer: 3
Answers of Jumble
Answer 1: a - b - c - d - e - f -
Answer 2: a - b - c - d - e - f -
Answer 3: a - b - c - d - -
Solution of Fintainment Section
Fintainment Section
Established in 1927, FICCI is the largest and oldest apex business organisation in India, FICCI’s stand on policy issues is sought out by think tanks, Government and academi.
Why Partner with FICCI
If already with Ficci, read on to know what else awaits you:
For any Feedback, Comments, FICCI’s Membership & Advertisements in Financial Foresights
Mr. Apoorv SrivastavaEditor-Financial Foresights
INDUSTRY’S VOICE FOR POLICY CHANGE
FEDERATION OF INDIAN CHAMBERS OF COMMERCE AND INDUSTRY
Financial Sector DivisionFederation House, 1 Tansen Marg, New Delhi - 110 001
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