KAILAS SUPERNA

7/31/2019 KAILAS SUPERNA

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1

A

SUMMER INTERNSHIP PROJECT

ON

“MANAGING TRANSACTION EXPOSURE (EXPORT) BY USING VARIOUS HEDGING

TECHNIQUES”

SUBMITTED TO – PRO. MAULESH RATHORE

PREPARED BY- MEHUL PATEL AND KAILAS PATIL

MAY-2012

GIDC RAJJU SHROFF ROFEL INSTUTUTE OF MANAGEMET

STUDIES (GRIMS)

VAPI

AFFILIATED TO- GUJARAT TECHNOLOGICAL UNIVERSITY



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DECLARATION

We are Mr.MEHUL PATEL & Mr. KAILAS PATIL of GIDC RAJJU sSHROFF

ROFEL INSTITUTE OF MANAGEMENT STUDIES, VAPI, affiliated to

GUJARAT TEHNOLOGICAL UNIVERSITY, AHMEDABAD hereby declare that

this project report is a result of culmination of my sincere efforts.

we declare that this submitted work is done solely by us and to the best of our

knowledge; no such work has been submitted by any other person for the award of

degree or diploma. we also declare that all the information collected from various

secondary sources has been duly acknowledged in this project report.

MEHUL PATEL & KAILAS PATIL



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CERTIFICATE

This is to certify that Mr.MEHUL PATEL AND KAILAS PATIL has

satisfactorilycompleted the project work entitled, “MANAGING TRANSACTION

EXPOSURE(EXPORT) BY USINGVARIOUS HEDGING TECHNIQUES”.Based

on the declaration made by the candidate and my association as a guide forcarrying

out this work, I recommended this project report for evaluation as a part of theMBA

programme of GUJARAT TECHNOLOGICAL UNIVERSITY.

Place: VAPI

Date:

Prof.MauleshRathore

(Project Guide)

The project is forwarded for evaluation to GUJARAT TECHNOLOGICAL

UNIVERSITY for viva-voce.

Place: VAPI

Date

Dr. Pankaj Patel

(Director)



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ACKNOWLEDGEMENT

It is indeed a moment of great pleasure to express our sense of profound gratitude &

indebtedness to all the people who have been instrumental in making our project a

rich experience. we got the opportunity to do a challenging project on “MANAGING

TRANSACTION EXPOSURE (EXPORT) BY USINGVARIOUS HEDGING

TECHNIQUES”. At the outset we would like to thank Mr. MADAN sir

Administrative manager. It was our proud privilege to complete our project under

him, as we have gained immense valuable guidance & cooperation from him,

throughout our research.

we express my gratitude to Lec. MauleshRathore, under his valuable

cooperation and guidance we have been successful in completing this training.

Last but not the least we extremely appreciate the benevolence to all our colleagues

for their ingenious support and thought provoking view and veracity and whole

hearted co-operation and those whom we may have forgotten, who have been

instrumental in bringing this work into existence. we attribute the success of this

project to all of them.

MEHUL PATEL & KAILAS PATIL



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TABLE OF CONTENTCHAPTER

NO.TOPIC PAGE

NO.

CHAPTER 1 INTRODUCTION TO FOREIGN EXCHANGE 6

1.2 INTRODUCTION TO COMPANY 15

1.3 INTRODUCTION OF PEN INDUSTRY 18

1.4 PRODUCTS 20

1.5 COMPANY PROFILE 23

1.6 DEPARTMENTS IN SUPERNA 26

CHAPTER 2 LITERATURE REVIEW 46

CHAPTER 3 RESEARCH DESIGN 49

CHAPTER 4 DATA ANALYSIS 52

4.1 FORWARD CONTRAT 53

4.2 MONEY MARKET HEDGING 54

4.3 CURRENCY FUTURE CONTRACT 56

4.4 ALTERNATIVE HEDGING TECHIQUES 58

CHAPTER 5 FINDINGS 63

5.1 CONCLUSION 65

CHAPTER 6 BIBLIOGRAPHY 66

CHAPTER 7 ANNEXURE 67





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FOREIGN EXCHANGE RISK MANAGEMENT

Definitions:-

Foreign exchange exposure means the risk of loss stemming from exposure to adverse

foreign exchange rate movements.

“A measure of the potential change in a firm’s profitability, net cash flow, and

market value because of a change in exchange rates”

The foreign exchange rate exposure of a firm is a measure of the sensitivity of its cash

flows to changes in exchange rates. Since cash flows are difficult to measure, most

researchers have examined exposure by studying how the firm‟s market value, the

present value of its expected cash flows, responds to changes in exchange rates

Foreign exchange exposure is defined as the degree to which a company is affected by

exchange rate changes. An important task of the financial manager is to measure

foreign exchange exposure and to manage it so as to maximize the profitability, net

cash flow, and market value of the firm.



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Types of foreign exchange exposure: -

1. Accounting Exposure:

Accounting Exposure arises when reporting and consolidating

financial statements require conversion from subsidiary to parent currency.

“Accounting Exposure = Transaction Exposure + Translation Exposure”

2. Economic Exposure: Economic Exposurearises because exchange rate changes alter the

value of future revenues and costs.

(1) Translation Exposure – also called accounting exposure, is the potential for

accounting derived changes in owner‟s equity to occur because of the need to

“translate” financial statements of foreign subsidiaries into a single reporting

currency for consolidated financial statements.

Methods of Measuring Translation Exposure: -

(a) Current / non-current Method: -

The current/non-current method of translation divides assets and

liabilities into current and non-current categories, using maturity as the

distinguishing criterion; only the former are presumed to change in value

when the local currency appreciates or depreciates vis-à-vis the home

currency.



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(b) Monetary/Non-Monetary Method: -

Under the monetary/non-monetary method all items explicitly defined

in terms of monetary units are translated at the current exchange rate,

regardless of their maturity. Non-monetary items in the balance sheet, such

as tangible assets, are translated at the historical exchange rate. The

underlying assumption here is that the local currency value of such assets

increases (decreases) immediately after a devaluation (revaluation) to a

degree that compensates fully for the exchange rate change. This is

equivalent of what is known in economics as the Law of One Price, with

instantaneous adjustment.

(c) Temporal Method: -

A similar but more sophisticated translation approach supports the so-

called Temporal Method. Here, the exchange rate used to translate balance sheet

items depends on the valuation method used for a particular item in the balance

sheet. Thus, if an item is carried on the balance sheet of the affiliate at its current

value, it is to be translated using the current exchange rate.

(d) Current Rate Method: -

The Current rate Method is the simplest; all balance sheet and income

items are translated at the current rate. If a firm„s foreign-currency-denominated

assets exceeds its foreign-currency-denominated liabilities, a devaluation must

result in a loss and revaluation, in a gain. One variation is to translate all assets

and liabilities except net fixed assets at the currant rate.



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(2) Transaction Exposure – measures changes in the value of outstanding

financial obligations incurred prior to a change in exchange rates but not due to

be settled until after the exchange rate changes.

Transaction exposure measures gains or losses that arise from the settlement of

existing financial obligations whose terms are in a foreign currency. The situations

include

Purchasing or selling on credit goods or services when prices are stated in

foreign currencies

Borrowing or lending funds when repayment is to be made in a foreign currency Being a party to an unperformed forward contract

Acquiring assets or incurring liabilities denominated in foreign currencies.



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Methods of Managing Transaction Exposure: -

(i) Currency Forward Contract

When dealing with major banks, you can ask for a currency forward contract, which is

a negotiated agreement between two parties to exchange specific amounts of currency

at a set rate on a particular day. The forward rate is priced based on the current

exchange rate, the interest differential for the contract time, a cost to cover potential

negative changes to the interest risk differential, and a flexible built-in commission

for the forward contract provider.

Advantages

1. The forward rate for purchasing or selling a foreign currency amount is locked

in at a future date. The future exchange rate is known.

2. Future changes to interest rates, whether positive or negative, will not impact

the forward rate. (Forward rates factor in the forward points or interest carry

costs, typically with some sort of additional cost to cover potential changes to

future interest rates for the traded currencies.)

Disadvantages

1. Often, the forward rate includes an uncompetitive exchange rate or built-in

commission, making this solution costly;

2. You would require many forward contracts for more complicated scenarios

(such as monthly payments);3. Since a forward contract is between two parties, there is no secondary market

for the purchase and sale of these contracts, making them rather inflexible or

expensive to terminate early or extend; and



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(ii) Futures Contract

Futures are similar to forward transactions in that the cost is based on the current

exchange rate, the interest differential for the contract time, an amount to cover

potential negative changes to the interest risk differential, and a formal commission.

Advantages

The major advantage of futures contracts over forward contracts is the existence of a

liquid secondary market so they can be sold at any time on the open market and do

not have to be held until their maturity date. Futures contracts can be traded on

organized exchanges, such as the Chicago Mercantile Exchange (CME) or London

International Financial Futures Exchange (LIFFE). These exchanges dictate

contract specifications, such as expiration times (third Wednesday of March, June,

September and December), face amount, and margin requirements.

Disadvantages (from a hedging perspective)

1. Futures contracts involve not just a spread, but also a commission;

2. The face value of futures contracts traded on exchanges are fixed. Forexample, British pound futures are sold in lots of GBP 62,500 and euro‟s are

generally sold in lots of EUR 125,000, making it difficult to hedge an exact

amount;

3. A margin deposit must be posted and maintained daily;

4. There are limited expiration times;

5. Futures contracts are typically speculative, so taking delivery of the money at

the end of the term are not expected and may cost a commission.



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(iii) Money Market Hedge –

Also known as a synthetic forward contract, this method utilizes the

fact from covered interest parity, that the forward price must be exactly

equal to the current spot exchange rate times the ratio of the twocurrencies' riskless returns. It can also be thought of as a form of financing

for the foreign currency transaction.

A firm that has an agreement to pay foreign currency at a specified

date in the future can determine the present value of the foreign currency

obligation at the foreign currency lending rate and convert the appropriate

amount of home currency given the current spot exchange rate. This

converts the obligation into a home currency payable and eliminates all

exchange risk. Similarly a firm that has an agreement to receive foreign

currency at a specified date in the future can determine the present value of

the foreign currency receipt at the foreign currency borrowing rate and

borrow this amount of foreign currency and convert it into home currency

at the current spot exchange rate.

Since as a pure hedging need, this transaction replicates a forward,

except with an additional transaction, it will usually be dominated by a

forward (or futures) for such purposes; however, if the firm needs to hedge

and also needs some short term debt financing, wants to pay off some

previously higher rate borrowing early, or has the home currency cash

sitting around, this route may be more attractive that a forward contract.



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1.2) INTRODUCTION TO COMPANY

Suparna Chemicals was formally incorporated in 1980. Suparna Chemicals was

founded by Mr. R.N. Mandal, Chemical Engineer, I.I.T. Kharagpur. We are a

research, development and manufacturing company of specialty chemicals. We

specialize in commercializing products developed by our R&D for manufacture and

supply of products meeting global standards.

SERVICES

We are a research, development and manufacturing company of specialtychemicals.

We specialize in commercializing products developed by our R&D formanufacture and supply of products meeting global standards.

We serve the Agro, Coatings, Inks, Explosives, Electronics Pigments, Defense,Under-ground Mining and, in particular, the Pharmaceutical Industries.

SUPERNA VISSION

Strive to be industry leader based on:

1 ] Knowledge Management.2 ] Research Orientation.3 ] Quality Consciousness.4 ] Good Environment, Health and Safety practices.



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1.4)PRODUCTS

Breathing Apparatus

Sodiam Potassium Alloy

sodium and potassium are miscible in all proportions giving a mobilesilvery liquid. Thephase diagram shows that nak alloy in the concentration of 40-90 wt % of k remainsliquidat room temperature.

Cyclohexanone-Formaldehyde ResinsKetonic Resins (KTR) dissolve readily in alcohol (except methanol), Ketones (exceptacetone) ester and in low chlorinated hydrocarbons. It is neutral, light in colour andinert to

saponification. Ketonic Resins have good pigment-wetting properties. This leads tobrilliantgloss even at high pigmentation. In printing inks, KTR improves solid content,hardness,adhesion and drying time. KTR also increases yield of coating systems.



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Potassium Metal

1. Appearance Soft, silvery white material

2. Potassium (%W/W) 99 min.

3. Sodium (%W/W) 0.5 max.

4. Boiling Point (ºC) 760 – 766

5. *Rod size (mm) Dia 50+-5; height 50+/-10

6. *Rod weight (gm) Approx 165+/-15

*Other Sizes are also available.

Potassium Superoxide

a] The product is packed under dry nitrogen with positive pressure of nitrogen inside the drum.

b]The quantity of the product deteriorates very fast if exposed toatmosphere even for a brief

period.

c]While sampling, please ensure that the sample is taken out under drynitrogen in a

preweighed stoppered bottle and analysis is done immediately.

d]After sampling, tie the bag securely with a thread, put positive nitrogenpressure in the drum

and tighten it properly. This is very important so that the product doesnot deteriorate on

storage.

Propellant Binder

1 ] Appearance. Clear straw coloured liquid

2 ] Reactive immine (%). 98 / 96 /92 min.

3 ] Moisture (%). 0.4 - 1.

4 ] Sp.Gr. at 25ºC. 1.075 - 1.085.

5 ] RI at 25ºC. 1.4780 - 1.4830.

resin (30) synthetic (29) ketone (28)ketonic resin (28) synthetic

ketonic (27) ktr (21)resin ktr (18) bags (14) wooden (12) paper (7)paper

bags (7) potassium (4) potassium tertiary (3)suparnaktr (3) suparna (3)

http://panjiva.com/Manufacturers-Of/resin

http://panjiva.com/Manufacturers-Of/synthetic


http://panjiva.com/Manufacturers-Of/ketone


http://panjiva.com/Manufacturers-Of/synthetic%20ketonic



http://panjiva.com/Manufacturers-Of/ktr


http://panjiva.com/Manufacturers-Of/bags


http://panjiva.com/Manufacturers-Of/wooden


http://panjiva.com/Manufacturers-Of/paper


http://panjiva.com/Manufacturers-Of/paper%20bags

http://panjiva.com/Manufacturers-Of/potassium


http://panjiva.com/Manufacturers-Of/potassium%20tertiary


http://panjiva.com/Manufacturers-Of/suparna







http://panjiva.com/Manufacturers-Of/paper%20bags












http://panjiva.com/Manufacturers-Of/resin



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1.5 COMPANY PROFILE

Suparna Chemicals Ltd.

Our Products : RakshaKavch

Web Site : http://www.suparnachemicals.co.in

Office Email : [email protected]

Factory Email : [email protected]

Office Address : 54-A Mittal Tower Nariman Point Mumbai-400021.

Office Phone : 022-22027446

Office Fax : 022-22830212Factory Address :Plot No. 656 100 Shed Area Vapi-Silvassa Road GIDC

Vapi-396195

Factory Phone : 0260-2450526

Factory Fax : 0260-2453132

Factory Cell :9377014481



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BOARD OF DIRECTORS:

Name Designation

DIRECTOR

DIRECTOR

DIRECTOR

DIRECTOR

DIRECTOR

1.6)Department in SUPERNA:

Sr. no Name of Departments

1 Human Resource Department

2 Marketing Department

3 Finance Department

4 Purchase Department

5 Production Department

6 Packing Department

7 Distribution Department



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Human Resource Department:-

Human resource plays a very important role in any

organization whether big or small, consumer goods industries or

manufacturing unit. So there should be proper human resource planning,

recruitment and selection, training etc.

Main task of Human Resource Department at SUPERNA are:-

HUMAN RESOURCE PLANNING

RECUITMENT & SELECTION

TRAINING

PERFORMANCE APPRAISAL

SALARY & WAGES

PROMOTION & TRANSFER

SAFETY MEASURES

MOTIVATIONAL PROGRAMMES

GRIEVANCE HANDLING

TRADE UNION



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1. MARKETING DEPARTMENT

Marketing is an important activity for any organization irrespective of

its nature, size, and the type of industry in which it operates. The main task of

marketing department is to found out the needs of its customers and fulfill

them satisfactorily.

Their responsibility is to increase the sales of the product by informing the

customers regarding the variety of products they manufacture.

THE MAIN MOTIVES BEHIND THE FUNCTIONING OF MARKETING

DEPARTMENT :

CUSTOMER SATISFACTION

The department is concerned with a building long term relationship with

the customer by understanding their needs and delivering product and services that

fulfill entire requirements.

EXPLORING NEW CUSTOMER

One of the important functions of marketing department is of find

new and prospective customer of the products.



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2. PRODUCTION DEPARTMENT :-

a) Planning of product realization

b) Customer related processes

c) Design and development

d) Purchasing

e) Production & service provision

A) Planning of product realization

This organization plans and has developed the processes needed for product

realization

Planning of product realization is consistent with the requirement of other processesof the quality management system

In planning of product realization, the organization determines the following as

appropriates

Quality objectives and requirement for the product

The need to established processes document &resource specific to the products

Required verification, validation, monitoring, inspection and the activities

specific to the product and the criteria for product acceptance

Record keeping providing evidence that the product realization meets

requirements. The output of this is in the form of bar charts, customer feeds back

and work schedules prepared before & during product realization



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B) Customer related processes(sales)

Identification of customer/ market requirement

a. Specified by customer

b. Requirements taken for granted

c. Statutory/regulatory requirement

Review of requirement related prior to acceptance/ commitment to customer-ability to

meet customer requirement

C) Design and development

Superna Chemicales product will plan and design and development of product. The

Superna Chemicales product will determine the plan during the design and development.

Supernachamicales product manager interfaces between different groups involved in design

and development to ensure effective communication and assignment of responsibility.

Design and development and input

Design and development output

Design and development review

Available information which describethe product characteristics.eg product specification.

Work instruction for actually performing specialized task for product realization

equipment/machinery required for product processing. Suitable test and measurement are

undertaken by trained and sufficiently skilled personal.At Superna Chemicales products,

company does not have any special process which called validation after the product is in use

or put to service.



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3. PURCHASE DEPARTMENT

“Purchasing is done in controlled manner to ensure that purchased products confirms to

specific requirement.”

Purchasing procedure:-

This is required for insuring that the purchase item and services confirmed to

specified requirement.

Where applicable, goods are procured fromsuppliers. Selection of new supplier

describes the additional controls required when purchasing from new suppliers who are not

approved at the time of order placing

If the product or service needs to be procured in case an emergency from a new

supplier who is not on the approved list of supplier, then the evaluation of supplier is

carried out later depending criticalness of the raw material upon successful evaluation and

minimum one satisfactory supply, the supply is approved on the basisof work instructiondescribed the criteria of evaluation and selection of supplier.

Purchase order indicates description of goods, quantity, quality, price and delivery

schedule material to be purchased. Purchase order reviewed an approved purchase officer

prior to release.



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4. FINANCE DEPARTMENT

The primary purpose of any business is to earn profits. To earn profit, the business has

to produce goods or render services. To do either, management of business must have

adequate supply of funds. It is the responsibility of the finance department to ensure

the supply of the needed funds.

Financial management is the application of planning and control to the finance

function of a business to ensure that the funds needed are raised and used effectively

for its benefits. Financial management means procurement of funds at minimum cost

and its effective use in order to maximize the wealth of shareholders.

Every organization requires funds for operation. The firm can perform successfully

only if has proper cash flow with it so that it can meet various expenses to run the

business.

FUNCTION OF FINANCE DEPARTMENT

1.INVESTMENT DECISION

2.FINANCING DECISION

3.DIVIDEND DECISION



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CHAPTER 2.

LITRRATURE REVIEW

An early study by Dufey (1972) discussed how the depreciation of a

foreign currency against a group‟s reporting currency could generate the

confrontational situation discussed in Section 2 of the present study. Because

of accounting translation practices, the depreciation of the reporting currency

of a foreign affiliate may reduce the amount of reported earnings of that

affiliate which are included in the consolidated results of the group. But, the

currency depreciation may actually improve the economic competitiveness,

and ultimate financial profitability of the affiliate. Because of the

conspicuousness of translation adjustments in consolidated earnings

statements, Dufey comments on how potentially profitable direct investment

opportunities, in countries with unstable currency histories, might well be

foregone.

Considerable theoretical debates exist as whether firms should hedge

the transaction exposure. But the study by DalinaDumitrescu1 supports the fact

that the hedging reduces the variability of cash flows to firm. It does not

increase the cash flows to the firm. In fact the costs of hedging may lower cash

flows of the company. The research and the study case support the idea that the

choice of the type of contractual hedge to use depend on the individual firm‟s

currency risk tolerance and its

expectation of probable changes of exchange rate over the transaction exposure

period.

1The Institute for Business Administration in Bucharest, CaleaGrivitei, 8-10 ,Bucuresti.



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“Currency Risk Management-Export Transaction”2

(1) Exchange rates of major currencies are fluctuating with change in demand

& supply position of concerned currencies.

(2) Exchange rates have capacity to translate profit from international business

transaction into loss or vice versa.

(3) Currency Risk depends upon Nature of Currency, Amount, Exposure

period and use of internal and external hedging techniques.

(4) Forward Contract instrument offered by commercial banks is used by

exporters/importers for currency risk management. It is easy to understand,

cheap and latest RBI relaxation provides opportunities to create wealth from

exchange rate movements.

(5) To cover currency risk, company has to develop information input system

as timely decisions are essential for currency risk management and for wealth

creation from exchange rate movements.

Another study by Aggarwal et al. (1978) examined the effect of FASB

No. 8 on reported financial statements of U.S. based multinational firms.

Aggarwal concluded that the „procrustean‟ accounting adjustments required by

FASB No. 8 were not likely to reflect the economic reality of the underlying

changes in exchange rates. Therefore, reported accounting figures were likely

to misrepresent the economic reality of the firm‟s exposure to exchange rate

risk, unless they were supplemented with other detailed information. This

view was supported by O‟Brien (1997) who asserted that accounting methods

might either underestimate or overestimate the true economic exposure, in

terms of changes in some microeconomic factors. These factors include such

things as the elasticity of exchange rate changes or the responsiveness of firm

level operating profits to changes in exchange rate.

2 By Professor HarkiratSingh,IIFT,NewDelhi.(http://india.smetoolkit.org/india/en/content/en/42539/Currency-Risk-Management-Export-Transaction)

http://india.smetoolkit.org/india/en/content/en/42539/Currency-Risk-Management-Export-Transaction








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An article “Strategies for Hedging FX Risk”3

The future will see more focus on areas of poor financial performance,

whereby businesses will be rated and acclaimed, or criticised on their results.

Shares will gain or lose value and profit margins will either support growth or

strangle development and progress. With either the option of employing a

sophisticated internal treasury function with the associated costs and resource

issues, or looking for professional help and efficient trading platforms, the

writer feels sure many would and should opt for the later. In many cases

businesses do neither and as such suffer the cost of mismanagement of risk.

Now is the time to look at what and who is available and to make a foreign

currency requirement pay rather than cost.

3 Mark Smith-Halverson , CorporateFX - 06 Jun

2005.(http://www.gtnews.com/article/5968.cfm)

http://www.gtnews.com/person.cfm?id=3372



http://www.gtnews.com/company.cfm?id=1859







28

CHAPTER 3

Objective of the study To study the different hedging strategy used by the SUPERNA

CHEMICALES PVT LTD.

To show the practical application of new hedging techniques available in the

market apart from forward contracts used by company.

Problem Statement

As Superna is a writing products manufacturer and its products are been

exported in foreign countries also. So here company faces the exchange risk. Through

the overall study of Superna I came to know that Superna only uses the forward

contract and current rate method as a basic hedging instrument. So my basic reason to

select this topic is to apply other hedging strategy & find out which is the best for

Superna.

BENEFIT OF THE STUDY

The main benefit of this study for SUPERNA is that they will be able

to handle their exchange risk in better way by applying these new strategies.

And if they are unaware of these hedging strategies then this study will make

them aware about it.

The main benefit of this study to me is that we will be able to apply

different Hedging Strategy practically.



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DATA COLLECTION: -

PRIMARY DATA: -

The Primary Data was collected through appointment of the

head of finance department.

SECONDARY DATA: -

The secondary data was collected frombooks, newspapers, other

publications and internet.

Through LEDGER account of the company.

Through the Sales record of the company.

Number of Transactions studied –

Number of transactions in this study is 6 export transactions of

the done in the last year (2011-2012) of Superna.



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DATA ANALYSIS

Analysis of the export transaction of SUPERNA with other hedging strategy for the

year 2010-2012 (Past data)

Actual data provided by Superna:-

Export transaction:-

Party Name:-

Country:- U.S.A

Amount:- US$ 276200Date of Order Received:- 23/11/2011

Date of Amount Received:- 24/01/2012

Credit Period:- 60 days



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4.1)

Company has done a forward contract for this particular export transaction:

Spot Rate: - 52.299 Rs. /Us$

2 month Forward Contract rate4: - 52.734Rs. /US$

Future Spot rate: - 50.027 Rs. /US$

So here the company has tried to hedge it risk by taking a forward contract. Hence the

company will receive at the maturity an amount of:-

1us$ = 52.734 Rs.

276200 $ = (?)= Rs14565130.8

Here the company will receive Rs. 14565130.8 at the maturity of the forward contract.

But as the future spot rate is always unpredictable, the actual exchange rate after 2

month was 1US$ = 50.0275 Rs.

So superna by purchasing a forward contract has made a Profit of Rs.747535.3

i.e. {FUTURE SPOT RATE – SPOT RATE} X US$

Therefore {50.0275 -52.734 } x276200 Us$

So Rs. 747535.3 (Profit)

4Foreign Exchange Dealers' Association of India (www.fedai.org.in)

FORWARD CONTRACT:-

http://www.fedai.org.in/

http://www.fedai.org.in/



32

4.2)

Sr. No. Particulars Details

1 Spot Rate (16/12/2008) 52.299 Rs. /Us$

2 Future spot rate (15/03/2009) 50.027 Rs. /US$

3 U.S. Borrowing Rate 3.4%pa

4 India Lending Rate5 8.5% pa

Now is going to receive US dollars on 23th Nov. 2011 for the export of the goods

done.

So using the Money Market Hedgesuperna will follow four simple steps to hedge

their foreign exchange risk. The steps are as follows:-

STEPS Description

1 Borrow US dollars ($).

2 Invest it in India.

3 Repay the loan amount at Maturity.

4 Compute Profit / Loss.

Step 1: -Superna will borrow some amount of US dollars which after investing it

for 2 month will become the actual he is going to receive. The formula to

find out the exact amount is: -

5Business standard News paper (Money & market) Pg no .14

MONEY MARKET HEDGE:-



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FORMULA = Future Value

(1 + r)

Where “r” is the US $ borrowing rate

= 276200US$

(1 + 0.034)

= 267117.99 $ (Borrowed From US)

Step 2: - Now superna will bring this dollars to India & invest it for 3 month in

India itself.

So, convert these US dollars in Indian rupees at the spot rate.

1US $ = 52.299 Rs.

267117.99 $ = (?)

= 13970003.76Rs.Invest it in INDIA: - 13970003.76 Rs. x 8.5% x 2/12

= 14168377.81 Rs.

Superna will receive Rs. 14168377.81 after 2 month of investment.

Step 3: - And now the company will repay the loan amount borrowed from US

from the amount that he receives from the customer.

Step 4: -To find out weathersuperna has made profit or loss the company needs to

compare it with the future spot foreign exchange rate.

i.e. 276200 $ x 50.027 Rs.

= 13817457.4Rs.

And the amount after doing money market hedge is 14168377.81 Rs.



34

So here the company makes a profit of Rs. 350920.41 Rs. (14168377.81

-13817457.4)

4.3)

Currency Risk Sharing.

Currency Collars.

Cross-Hedging.

Currency Risk Shifting.

Pricing Decision.

In this Method the Loss & the profit of the exchange rate is been equally shared by

both the parties. (i.e. By Exporter & importer).

As per the 1st export transaction, Superna is going to receive 276200US Dollar from

the party on 24/01/2012. Current exchange rate as on 23/11/2011 is 52.299Rs./$.

So now Superna need to hedge the risk of exchange rate fluctuation. With the help of

this Currency Risk Sharing Method Superna can hedge the risk.

First of all at the time of placing an order Superna& party will have a negotiation in

deciding a Neutral Zone. (Price Range)

Neutral Zone: - Rs 50.17/$ to Rs 53.17/$. (Decided)

And one Base Price will also be decided.

Base Price: - 51.50Rs /$.

Currency Risk Sharing:-

ALTERNATIVE HEDGING TECHNIQUES:-



35

Now if the exchange rate on the date when amount is received is:-

Below the Neutral Zone i.e. Rs 49.17/$ then the Rs. 1 (50.17 – 49.17) will be

bared by both the party equally.

= Rs. 1.00 2 = .0.50Rs.

So the exchange rate fixed will be Rs. 49.67 (49.17 + 0.50).

Above the Neutral Zone i.e. Rs. 54.17 then,

= Rs. 1.00 2 = .0.50Rs.

So the exchange rate fixed will be Rs. 54.67 (54.17 + 0.50).

And if the exchange rate falls between the Neutral Zone, thenBASE PRICE

(Rs.51.5) will be set as exchange rate.

Currency collar is almost similar to the Currency Risk Sharing. Here also both the

parties mutually negotiate & decide a Neutral Zone. No base price is been set.

Neutral Zone: - Rs 50.17/$ to Rs 53.17/$. (Decided)

Now if the exchange rate on the date when amount is received is:-

Bellow the natural zone then Rs 50.17/$ will be set as exchange rate.

Above the neutral zone then Rs 53.17/$ will be set as exchange rate.

And if the rate is between the Neutral Zone, then current exchange rate

will be taken as exchange rate.

Currency Collars:-



36

Cross Hedging is common method of transaction exposure when the currency cannot

be hedged.

Suppose Superna has receivables in US Dollars 120days from now. Because it is

worried that the Indian Rupees may appreciate against the US Dollars, Superna may

consider cross hedging.

In this method it is needed first to identify a currency that can be hedged & is highly

correlated with US Dollars.

Superna notices that the EURO has recently been moving in tandem with USD &

decides to set up a 90 days forward contract with on the euro.

If the movement in USD & Euro continues to be highly correlated relative to the

Indian Rupees, then the exchange rate between these two currencies should be

somewhat stable over time.

This type of hedge is sometimes referred to as a proxy hedge because the hedge

position is in a currency that serves as a proxy for the currency in which the company

is exposed.

In Currency risk shifting the Superna Company by negotiation with the importer

company & convince them to pay the amount of the machine exported in Indian

currency (Rupees).

So here the exchange rate risk is been shifted to importer company and Superna will

receive the exact amount of is machine in Rupees. So here there is no need to use any

other hedging strategy.

Cross-Hedging:-

Currency Risk Shifting:-



37

Now as Superna does all his transaction in USD. So he needs to convert the price of

its Machine from INR to USD. So that a fixed amount of US $ can been said to be

paid by the importer.

Suppose Superna sells one consignment in foreign country.

The price of that consignment is 5000000 Rs. So now he needs to convert it this into

USD.

Current Exchange rate is Rs. 48/ $

Forward Rate is Rs. 46.50/$.So now Superna should convert the price of its machine on the basis of the forward

rate (Rs. 46.50).

i.e.107526.88 $ (Rs. 5000000 46.50)

If Superna converts the price as per the current exchange rate then Supernao will

receive only 104166.67 $. So that will be a loss for the company of USD 3360.21.

The General rule on credit sales overseas is to convert between the

foreign currency price and the home currency price by using forward

rate not the spot rate.

Pricing Decision:-



38

CHAPTER 5

According to the data collected from Superna of the past year of export done in

different countries, We found that to hedge the risk of foreign exchange, company is

using LETTER OF CREADIT and SPOT PAYMENT as their sole instrument.

Then we tried to apply other hedging techniques on the same data to find out which

method will best suit this organization Superna. And finally what is found can be

seen in the following tables given below:-

Forward contract:-

Transaction

No.

Future Contract

Amount (Rs.)

Future spot exchange rate

Amount (Rs.)

Profit / Loss

(Rs.)

1 8115669.1 8167168.9 (51499.8)

2 14565130.8 13817457.4 747535.3

3 5664139.6 5347605.2 316534.4

4 6576074.5 6183636 392438.5

5 3557960 3514630 43330

6 5972280 6099840 (127560)

Total 44451254 43130337.5 1320916.5

From the forward contract done on above eight export transaction the over allprofit received by Superna is Rs. 1320916.5

FINDINGS :-



39

Money Market Hedge:-

Transaction

No.

Money Market

Hedge (Rs.)

Future spot exchange

rate Amount (Rs.)

Profit / Loss

(Rs.)1 7894455.97 8167141.88 (272685.91)

2 14168377.81 13817457.4 350920.41

3 5509915.6 5347584.547 162331.053

4 6397109.85 6183662.355 213447.5

5 3461070.15 3514607.6 (53537.45)

6 5809710 6099820.8 (290110.8)

Total 43240639.38 43130274.582 110364.798

Now from the Money Market Hedge method done on above eight export

transactions the over all profit received by Superna is Rs. 110364.798

Trans.

No.

Forward Contract (Rs.) Money Market Hedge (Rs.)

1 (51499.8) (272685.91)

2 747535.3 350920.41

3 316534.4 162331.053

4 392438.5 213447.5

5 43330 (53537.45)

6 (127560) (290110.8)

Total 1320916.5 110364.798

• Overall Profit Comparison table for all the three Methods:-



40

Interpretation:-So by comparison of the two method in this table we can analysis that

there is a maximum profit been achieved by applying Forward contract

method. So the SUPERNA Company should use this hedging instrument

instead of the Forward Contract and spot payment.

5.1)

By applying practically other hedging strategies in SUPERNA of

managing transaction exposure, rather than forward contract, there was

the overall profit on the two techniques. But comparatively there was

highest profit obtained on the Forward Contract. So SUPERNA should

follow Forward contract as their main risk hedging tool.

Even other Alternative hedging tools Like Currency Risk Sharing,

Currency Collars, Cross-Hedging, Currency Risk Shifting, and Pricing

Decision can also be used as an exchange risk hedging tools by the

company.

CONCLUSION:-



41

Web Sites:

www.rbi.orgwww.bseindia.comwww.nse.comwww.businessstandard.comwww.india-exports.com

www.google.comwww.forextrading.comwww.fxcm.com

Books:-

International Financial

Mamagement [Book] / auth.

Madura Jeff. - florida Atlantic

Univercity : Saurabh Printers Pvt.

Ltd., 2008. - Vol. Indian Edition.

http://www.rbi.org/

http://www.bseindia.com/

http://www.nse.com/

http://www.businessstandard.com/

http://www.india-exports.com/

http://www.google.com/

http://www.forextrading.com/

http://www.fxcm.com/

http://www.fxcm.com/

http://www.forextrading.com/

http://www.google.com/

http://www.india-exports.com/

http://www.businessstandard.com/

http://www.nse.com/

http://www.bseindia.com/

http://www.rbi.org/



42

CHAPTER 7

2nd Export Transaction of SUPERNA:-

For 60 days maturity period:-

AMOUNT :-158950

Date of order Received:- 15-11-2011

Date of Amt Received:-16-01-2012

Forward contract: - US$ x 2month forward contract rate.

= 158950$ x 51.058Rs.

=8115669.1Rs. ----------------------------- Future spot rate: - US$ x future spot rate

= 158950$ x 51.382Rs.

=8167168.9Rs. - ----------------------------

Now - = 8115669.1 Rs. – 8167168.9Rs

=51499.8Rs. (LOSS)

3rd Export Transaction of SUPERNA:-


AMOUNT :-108700

Date of order Received:-07-12-2011

FORWARD CONTRACT: -



43


Forward contract: - US$ x 2month forward contract rate.

= 108700$ x 52.108Rs.

= 5664139.6 Rs. -----------------------------

Future spot rate: - US$ x future spot rate

= 108700$ x 49.196Rs.

=5347605.2 Rs. - ----------------------------

Now - = 5664139.6 Rs. – 5347605.2Rs

= 316534.4(PROFIT)

4th Export Transaction of SUPERNA:-


AMOUNT :-125500



Forward contract: - US$ x 45 days forward contract rate.

= 125500$ x 52.399Rs.

= Rs6576074.5 -----------------------------


= 125500$ x 49.272Rs.

= Rs. 6183636 ----------------------------

Now - = 6576074.5Rs -6183636Rs

= 392438.5Rs. (PROFIT)



44



AMOUNT :-70000



Forward contract: - US$ x 4 months forward contract rate.

= 70000$ x 50.828 Rs.

= 3557960Rs. ---------------------------------


= 70000$ x 50.209Rs.

= 3514630 Rs. - -------------------------------

Now - = 3557960 Rs. – 3514630Rs.

= 43330 Rs. PROFIT



AMOUNT :-120000



Forward contract: - US$ x 4 months forward contract rate.

= 120000$ x 49.769Rs.

= 5972280Rs. ---------------------------------



45


= 120000$ x 50.832Rs.

= 6099840Rs. - -------------------------------

Now - = 5972280 Rs. – 6099840Rs.

= 127560 RS LOSS

Transaction

No.

Future Contract

Amount (Rs.)

Future spot exchange

rate Amount (Rs.)

Profit / Loss

(Rs.)

2 8115669.1 8167168.9 51499.8

3 5664139.6 5347605.2 316534.4

4 6576074.5 6183636 392438.5

5 3557960 3514630 43330

6 5972280 6099840 127560

TOTAL





47

Step 1:- Borrow from US:-

= 108700 (1+0.034) = 105125.725 $

Step 2:- Convert it in Rupees & invest in India:-

= 105125.725$ x 51.67879Rs.

= 5432770.266 Rs.*8.5%*2/12

= Rs.5509915.6

Step 3: - Repay the loan to US:-

= 108700 $ x 49.19581Rs.

= 5347584.547Rs.

Step 4: - Compute profit /loss:-

Therefore profit of Rs. 162331.053 (5509915.6 – 5347584.547)



US Borrowing

Rate

India Lending

Rate (Per annum)

Spot Rate Future Spot

Rate

3.4% 8.5% 51.96812Rs. 49.27221Rs.


= 125500 (1+0.034) = 121373.31 $


= 121373.31 $ x 51.96812Rs.

= 6307542.74Rs. *8.5*2/12



48

= 6397109.85 Rs.


= 125500 $ x 49.27221 Rs.

= 6183662.355 Rs.


Therefore Profit of Rs. 213447.5(6397109.85 – 6183662.355)



US Borrowing

Rate

India Lending

Rate (Per annum)


Rate

3.4% 8.5% 50.40194Rs. 50.20868

Rs.


= 70000 (1+0.034) = 67698.26 $


= 67698.26 $ x 50.40914Rs.

= 3412611.07*8.5*2/12

=3461070.15 Rs.


= 70000 $ x 50.20868Rs.

= 3514607.6 Rs.



49


Therefore Loss of Rs. -53537.45 (3461070.15 – 3514607.6 )



US Borrowing

Rate

India Lending

Rate (Per annum)


Rate

3.4% 8.5% 49.35943Rs. 50.83184

Rs.


= 120000 (1+0.034) = 116054.16 $


= 116054.16 $ x 49.35943Rs.

= 5728367.19*8.5*2/12

=5809710 Rs.


= 120000$ x 50.83184Rs.

= 6099820.8Rs.

Therefore Loss of Rs. -290110.8 (5809710 – 6099820.8)



TransactionNo.

Money MarketHedge (Rs.)

Future spot exchangerate Amount (Rs.)

Profit / Loss(Rs.)

2 7894455.97 8167141.88 272685.91

3 5509915.6 5347584.547 162331.053

4 6397109.85 6183662.355 213447.5

5 3461070.15 3514607.6 53537.45

6 5809710 6099820.8 290110.8

Documents

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