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Risk Management in FOREX in banks
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Risk Management in FOREX in banks

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This is a presentation about the project work done by me in MBA

This is a presentation about the project work done by me in MBA

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  • Indian Overseas Bank (IOB) was founded on 10 th February 1937 and has distinction of three branches at Chennai, Karaikudi and Rangoon(Myanmar) It was started with a vision to specialise in foreign exchange and overseas banking business in India. In 1969, when it was nationalised, the bank has 208 branches with aggregate deposits of Rs. 67.70 Crores and advances of Rs. 44.90 Crores.
  • In the year 1993, the bank was under partial automation. They used the ALPM (Automatic Ledger Posting Machines) in some departments of the bank. In the year 1995, the bank has started to operate with full automation In the year 2005, they have implemented networking From September 2009, this branch was allowed direct SWIFT ( Society for Worldwide Interbank Financial Telecommunication)  connectivity
  • Forwards – in detail
  • Forward sale contract: Forward sale contract is a method for hedging the exchange risk that involves an agreement between a banker and an importer to sell particular currency at a specified rate and a future time. Forward purchase contract: Forward purchase contract is a method for hedging the exchange risk that involves an agreement between a banker and an importer to sell particular currency at a specified rate and a future time. Fixed and Option Forward contract: The Forward contract under which the delivery of foreign exchange should take place on a specified future date is known as ‘Fixed Forward Contract’
  • Forward contracts ended in Premium:   In case of a Forward purchase contract, if the forward rate is more than the spot rate and in case of a Forward sale contract, if the spot rate is more than the forward rate then the contract results in a Premium.   Forward contracts ended at Discount:   In case of a Forward purchase contract, if the spot rate is more than the forward rate and in case of a Forward sale contract, if the forward rate is more than the spot rate the contract ends at a Discount.
  • The interest rate given in the NRE deposits accounts has undergone a drastic decrease and that have resulted the customers to be price conscious and they have started shifting from NRE deposits to NRE savings account. When we look into the table of NRE (savings account), though the number of accounts have increased in the last year of the study period, the total balance has shows an increasing figure. This is because in that particular year there were more withdrawals.
  • Bank could withstand their import payments through their own export proceeds… To analyze whether the imports are supported by the exports. This ratio brings out the relationship between the value of exports and the value of imports. By calculating this ratio, we can determine whether the bank’s inflow of currency can withstand the outflow of the same
  • The first step undertaken was to consolidate the total value of exports and the total value of imports for every year.   Since the bank deals with several currencies it is difficult to find this ratio for all the currencies. Hence, all the currencies are converted into the value of US Dollars using cross rates taking Indian Rupees as the base currency.   After finding the value of exports and the value of imports, we can use this formula and find the relationship between them.
  • It is a rate of exchange between a pair of currencies. For example, USD 1 = Rs. 44.40 and Euro 1 = Rs. 53.43, the cross rate will be calculated as follows: * NOTE: The above mentioned cross rates are calculated based on the average exchange rate provided by the bank.
  • While we consider the Forward contracts, it is suggested to the customers of Indian Overseas bank to enter into more Forward contracts for their transactions to hedge their risk. Even if they have any chance of the contract ending at a huge difference they can go for cancellation of the contract.   The bank need not worry about the cancellation of Forward contracts because they obtain cancellation charges. But they should be careful that the customers do not use these Forward contracts for speculation purposes.     Even if a customer is an EEFC account holder they can enter into Forward contracts because sometimes there is a chance that they may never get a good rate in future.   The customers can also see which currency gives them a better rate with the help of calculating Cross rates and enter Forward contracts in that currency.     When we compare the NRE deposits and NRE savings account, the bank can advice their customers to move to NRE savings so that they get a better returns. Thus, they can have a good relationship with their customers.   While dealing with the EXIM ratio, it is advised to the bank to enter into inter-bank Forward contracts so that their FOREX reserves are at a stable position.  

Risk Management in FOREX in banks Presentation Transcript

  • 1.  
  • 2. 1 USD = ?
  • 3. A STUDY ON FOREIGN EXCHANGE RISK MANAGEMENT TECHNIQUES OF THE CUSTOMERS Under the guidance of Dr. B. CHARUMATHI, Reader & Faculty Advisor Corporate Relations and Placements
  • 4.  
  • 5. Indian Overseas Bank
    • Founded on 10 th February 1937
    • In 1969 - the bank was nationalized
    • Now - 1845 domestic branches and 12 branches overseas.
  • 6. IOB - Pondicherry
    • Commenced in the year 1948
    • Till 1992, the bank was 100% manually operated
    • 1993 partial automation and 1995 full automation.
    • 2005, they have implemented networking
    • September 2009, this branch was allowed direct SWIFT connectivity.
  • 7.
    • To understand the Risk Management Techniques
    • To understand the risk involved in the Forward contracts
    • To analyze the trend of the NRI deposits at the Bank
    • To identify the problems associated with Pre-Shipment and Post-Shipment advances
    • To examine the relationship between the inflow and outflow of foreign currencies at the branch level.
    OBJECTIVES OF THE STUDY
  • 8. ILLUSTRATION Ordered100 tonnes of Cotton Yarn
  • 9.
    • Ordered 100 tonnes @ USD 750/ton
    • On date of order 1 USD = Rs 46.77
    • Total cost = Rs. 1,28,61,750
    • On day of payment 1 USD = Rs 47.77
    • Total cost = Rs. 1,31,36,750
    • Loss = Rs. 2,75,000
    Cont…
  • 10. INSTRUMENTS FOR HEDGING A RISK
    • Forward contract
    • Futures
    • Options
    • Swaps
  • 11. FORWARD CONTRACT
    • Forward Purchase contract
    • Forward Sale Contract
    • Fixed Forward contract
    • Option Forward contract
  • 12. FORWARD CONTRACT
    • Forward contracts ended at Premium
    • Forward contracts ended at Discount
  • 13.  
  • 14.  
  • 15.  
  • 16. NRE Deposits NRE Savings
  • 17. EXIM RATIO
    •  
    • EXIM Ratio
    • =
    • Value of Export/Value of Import
  • 18. Working of the EXIM ratio
    • Consolidation of total value of exports and imports.
    • Calculation of cross rates
    • Conversion of all the currencies into US Dollars
  • 19. Total value of exports Total value of imports YEAR/ CURRENCY USD EURO CHF GBP CAD AUD JPY Apr 06 – Mar 07 1128720 263444 28783 17494 nil nil 486114 Apr 07 - Mar 08 1207908 202590 50197.8 5247.3 1888.17 nil nil  Apr 08 – Mar 09 7276421 213781 97809 17728.5 1121.15 nil 52531306 Apr 09 – Mar 10 3178527 3638718 105391 72437.3 166.5 nil 6573036 YEAR/ CURRENCY USD EURO CHF GBP CAD AUD JPY Apr 06 – Mar 07 1986780 72513.5 nil nil nil nil Nil Apr 07 - Mar 08 2212371 154374 49909.2 2798.5 nil nil Nil Apr 08 – Mar 09 8908881 375833 124659 27580 nil 110480 1188053 Apr 09 – Mar 10 4013242 99783.6 45904.5 5121.26 nil 51100.5 Nil
  • 20. CROSS RATES
    • EURO / USD = 57.20 / 42.90
    • 1 EURO = 1.33 USD
  • 21. Value of imports [April 2007 – March 2008] Value of exports [April 2007 – March 2008 ] CURRENCY USD EUR CHF GBP CAD AUD JPY AMOUNT 2212371 154374 49909.2 2798.5 nil nil nil CROSS RATE 1 1.33 0.82 1.97 nil nil nil AMT IN USD 2212371 205317 40925.5 nil nil nil nil GRAND TOT (IN USD) 2,464,127 CURRENCY USD EUR CHF GBP CAD AUD JPY AMOUNT 1207908 202590 50197.8 5247.3 1888.17 nil nil CROSS RATE 1 1.34 0.81 1.98 0.87 nil nil AMT IN USD 1207908 271470 40660.2 10389.7 1642.71 nil nil GRAND TOT (IN USD) 1,532,070.644
  • 22. CALCULATION
    • EXIM ratio = Value of exports / Value of Imports
    • = 2464127 / 1532070.644
    • = 1.61 times
  • 23. Results for 4 years
    • April 2006 – March 2007 – 1.08 times
    • April 2007 – March 2008 – 1.61 times
    • April 2008 – March 2009 – 0.18 times
    • April 2009 – March 2010 – 0.28 times
  • 24. SUGGESTIONS - Bank
    • Bank to enter into inter-bank Forward contracts
    • Banks should check that Forward contracts are not used for speculation purposes
  • 25. SUGGESTIONS - Customers
    • Enter into more Forward contracts
    • EEFC account holders can also enter into Forward contracts
    • Calculate the amount using Cross rates and enter into Forward contracts in that currency
  • 26. BIBLIOGRAPHY
    • Foreign Exchange – By C. Jeevanandam
    • International Business – By Francis Cherunilam
    • www.iob.in
    • www.forex.com
    • http://www.forex4you.com
    • http://forex-history.net
    • http://www.x-rates.com
    • http://www.indexmundi.com
    • http://www.economywatch.com
  • 27. KARTHIGA. D MBA I YR PONDICHERRY UNIVERSITY