Forex Related Topics

7/29/2019 Forex Related Topics

1/27

NBFCs want to bond with

Investors

- Ayushi Srivastava


2/27

RBI removed priority sector status on

NBFCs.NBFCs are issuing non-convertible

debentures (NCDs).

Why? because they are restricted fromborrowing from banks.

NBFCs want to bond with Investors


3/27

Companies will benefit due to long-term

funding without much hassle. Theycould benefit from swapping theseloans even when the rates fall.

But retail investors must remember thathigher yields are coming fromcompanies that do not carry a high

credit rating.

Should Retail Investors invest inNBFCs??


4/27

NBFCs can issue perpetual bonds to

investors, with a 10-year optionenabling NBFCs to repay but investorscant demand repayment.

After the first 10 years, if the NBFC doesnot repay, it cannot repay ever.

NBFCs can raise subordinateddebt .

Risks for retail investors


5/27

INVESTMENT IN DEBT-FREE COSPAYS OFF


6/27

INVESTMENT IN DEBT-FREE COS PAYSOFF

Investors holding shares of companies such asITC, Hindustan Unilever, Voltas and Bata India havebecome richer by 20-70%.

Compared with those owning scrips of Bharti Airtel,Adani Enterprises and Reliance Communications, which

fell 20% and 42%


7/27

Little or no debt.

Strong Balance Sheets.

Punishing those who piled up large debt on theirbooks.

Difficult economic situation and uncertain policiesnot many companies are keen on borrowing to

financing expansion that too with interest rates ashigh as 13% to 14%.

In such a scenario companies with little debt andhigh cash flows can only grow and create wealth.


8/27

Bata India.

Largest footwear retailer in India.

One of the best performers. Nearly 68% return so far this year.

The shift in strategy like focus on enhancing thepremium portfolio, aggressive store expansion and

refurbishment plans with a low debt of Rs 19 crore andover Rs 508 crore reserves as of March 2012 has led toaccelerated growth for Bata.


9/27

Eicher Motors, maker of Royal Enfield, and pizza maker

Jubilant Foodworks, are classic examples of no or lowdebt companies generating stellar returns.

Eicher Motors has debt of a mere Rs 150 crorewhile Jubilant Foodworks is a debt-free company.

Eicher and Jubilant respectively have given mammoth

returns of 578% and 410% over the past three years.


10/27

Cheaper Funds Lure Firms To

Debt Market


11/27

Debt Market

Different modes of raising finance- Most prominent is

Debt Market. Non-convertible debenture and commercial papers.

Need funds for less than a year-CP.

Need funds for more than a year-NCD.


12/27

Reasons for attractive debt market

Improvement in liquidity conditions and increasing investor

interest in debt market instruments have contributed to afall in rates.

Offers attractive interest rate differential for both issuersand investors.

There are issuances worth Rs 1,500 crore-3,000 crore everyweek.


13/27

Debt is available at 8.5-9.5 per cent for three-six months. Investing in NCDs is a simple transaction.

Challenges and risks of equity markets.

Tata Power, Mittal-HPCL Pipelines, UltraTech Cement,

Torrent Power and Tata Sky are expected to raise funds viaNCDs.

Tata Motors, Marico and IOC have been raising funds viaCPs.


14/27

Statistics

Banks investments in CPs rose to Rs 21,550 crore

from Rs 13,550 crore a year ago. Banks investments in bonds or debentures issued by

public and private sector companies rose to Rs 1.23lakh crore from Rs 92,200 crore, according to data

from the Reserve Bank of India.


15/27

4 & 5. Hedging, speculation and

Derivatives


16/27

Hedging, speculation and DerivativesSome nationalized banks, had issued fixed interest rate, long-term

bonds to augment their Tier II capital, had exchanged the coupons forJPY LIBOR-based interest in the Japanese currency, calling them ashedges and others had exchanged the fixed rate coupons into floatingrate.

The main objective was to reduce cost.

But could these transactions be consideredas hedges?


17/27

The bonds had no price risk which could be, or needed to be,hedged.

The coupons were fixed and there were no interest-fluctuation

risk.

The issued bonds were not marked- to-market in the books of

the issuer and, therefore, there was no fair value risk either.

The coupons might be high in relation to the ruling interest rates

and might therefore be uneconomic

But economic risks are not necessarily hedgeable price risks.

In India, economic exposures to

exchange rates cannot be hedged.


18/27

Hedging is a strategy of making an investment to reduce the riskof adverse price movements in an asset. A hedge consists of taking an offsetting position in a relatedsecurity, such as a futures contract. Hedging is mainly done to reduce cost and increase the earnings.

Speculation is the practice of engaging in risky financialtransactions in an attempt to profit from short or medium termfluctuations in the market value of a tradable good such asa financial instrument.

Derivatives are financial instruments whose value is based onone or more underlying assets. The most common types of derivatives are: forwards, futures,options, and swaps


19/27

What is Hedging ,Speculation and Derivatives?

The writing options cannot be considered a hedge as the regulationsseem to permit writing of options for the limited purpose of reducing the

cost of purchased options and that too without earning fees orincreasing risk in any manner, i.e. by giving up potential opportunity

gains.


20/27

Rupee fluctuation!

EH??!!!!!!?

Hedging

Nothing canbe done Rupee

invoicing


21/27

Derivatives available for hedging

Rupee invoicing.

By invoicing in the domestic currency (Rupee), thebusiness shifts the risk inherent in exchange rates tothe purchaser.

This technique is most advantageous when acompany's market share is large.

This does not eliminate foreign currency exposure butshifts from one party to another. If a currency is morevolatile during a given period , this is avoided.


22/27

Forwards:

Agreement between two parties to buy/sell a specifiedamount of a currency at a specified rate on a particulardate in the future

The depreciation of the receivable currency is hedgedagainst by selling a currency forward.

If the risk is that of a currency appreciation (if the firm hasto buy a currency in future it can hedge by buying thecurrency forward


23/27

Futures

A futures contract is similar to the forward contract

but is more liquid because it is traded in an organizedexchange i.e. the futures market.

Depreciation of a currency can be hedged by sellingfutures and

Appreciation can be hedged by buying futures


24/27

Options

A currency Option is a contract giving the right, not the

obligation, to buy or sell a specific quantity of one foreigncurrency in exchange for another at a fixed price; called theExercise Price or Strike Price.

If we need to buy foreign currency,

Call Options are used if the risk is an upward trend in priceof the currency,

While Put Options are used if the risk is a downward trend.


25/27

What is happening in the Indianderivatives market..

OTC instruments in

currency forwardsand swaps are themost popular.

Maturity contracts

of one year orless. The typicalforward contractis for 1 month, 3months, or 6months, with 3

months being themost common.

Earnings of all

the firms arelinked toeither USdollar, Euro orPound


26/27


Swap usage is a long term strategy for hedging

Suggests that the planning horizons for thecompanies are longer

These businesses, by nature involve longer gestationperiods and higher initial capital outlays and this could

explain their long planning horizons.


27/27


Companies prefer to hedge its exposure to the US Dollarthrough options rather than forwards. This has been adopteddue to the marked high volatility of the US Dollar against theRupee.

Options are more profitable instruments in volatile conditions asthey offer unlimited upside.

Firms that rely on exports for the major part of their revenuestake up options.

They require additional flexibility in hedging when the volatility ishigh.

Another implication of this is that their planning horizons areshorter compared to capital intensive firms.

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