The Indian forex market has a daily volume of approximately $5 billion and trades between 9:00 am and 5:00 pm. The main trading centers are Mumbai, Calcutta, Delhi, and Chennai. Participants include individuals, corporations, banks, the RBI, brokers, and FEDAI. The forward market is active up to 1 year. The market is dominated by a few banks and exchange controls are being liberalized.
VIP Kolkata Call Girl Serampore 👉 8250192130 Available With Room
Indian Forex Market Insights
1.
2. Indian Forex Market
Daily volume approximately $ 5 bn
Market lot $ 1.0 mln
9:00 a.m - 5:00 p.m market
Main centres - Mumbai, Calcutta, Delhi, Chennai
Real market only in USD/INR - other currency rates are
derived
Thin market
4. Indian Forex Market….
Forward market active up to 1 year
Getting more integrated with money markets
Market dominated by a few banks
Exchange controls being liberalized
Derivatives market growing, but slowly
Transaction costs high
5. Business is Risk
Business is all about taking risks
Rewards are proportional to the risks taken
To run the business right, risks need to be assessed
and managed.
6. Need for Risk Management
Increasing cross border trades & investments with large
scale
dismantling of trade barriers
Increased competition
Domestic
Overseas
Access to International markets
Increased Volatility in Currency & Interest rates in the
International markets
With liberalization, more flexibility and hedging tools made
available to corporate
7. Objectives of Risk
Management
Protect budgeted rates
Play for improving returns while
protecting budgeted rates
Profit maximization
Prepared to take on more risks to earn
exchange profits
Active Trading
8. What is Foreign Exchange
Management?
Proper management of foreign currency trade receivables, payables
and loan liabilities with the objective of optimizing rupee earnings in
the case of receivables and reducing the rupee cost in the case of
payables with budgeted rates as risk limits.
Involves selecting the right currency of invoicing or loans, where the
freedom of choice exists, prepayment/delayed payment for imports,
postponement of receivables, judicious matching of imports and
exports, proper usage of hedging instruments and facilities available
for the purpose.
Necessitated by the volatility of foreign exchange and interest rates
which impose risk as well as offer opportunities.
9. WHO NEEDS IT ?
Exporters
Importers
Corporate With Foreign Currency Loans
Foreign Institutional Investors (FIIs)
Non-Resident Indians (NRIs)
10. What is required for successful
forex management?
Requires a good understanding of hedging methods and
instruments available and the Regulations governing their
use.
Requires access to sufficient, relevant, and timely
information on the forex markets and ongoing market rates
to be able to take appropriate and timely action.
Requires a good Management Information System (MIS)
to monitor performance.
It requires sound judgment, discipline, and a helping hand
from bankers and consultants.
11. Hedging vs. Speculation
Hedging
Transaction undertaken to offset some exposure
arising out of the firm’s usual operations.
Reduces the exchange rate risk.
Speculation
Deliberate creation of a position for the purpose of
gaining from exchange rate fluctuations.
Increases the exchange rate risk
Decision not to hedge an exposure arising out of
operations is equivalent to speculation (Passive).
12. Naturally Hedged?
Having export and import positions
No need to manage?
Zero some approach
What about amount mismatch?
Tenor mismatch may expose the company to exchange risk
Sell an equivalent amount of exports each time dollars are
bought for import/loan payments
Zero sensitivity to spot
Net cash flow equals premier received
Eliminates risk of losses in a volatile environment
13. Factors affecting the
Rupee Exchange Rate
Relative Inflation
Nominal Exchange rates of major trading partners and
competitors
Budget Deficit
Current Account Deficit
Politics
Ratings
Investment outlook for India
15. Rupee Forwards
Supply : Exporters
Demand : Importers
Borrowers (ECB cover)
FCNR (B)
Demand outstrips supply
Banks and RBI can be on either side
Influenced by
Outlook on the future $/Re spot rate
Rupee interest rates vs. foreign currency interest rates to
a certain extent.
RBI operations
18. Full hedge (100% cover )
Certainty of cash flows
Costing protected
Little management time and effort required
Opportunity loss
Too conservative a strategy
No hedge (0% cover )
Destabilization of cash flows
Costing rate could be threatened
Potential for windfall profits/huge losses
Little management time and effort required
Most speculative strategy
19. Partial hedge (fixed ratio)
Not the optimal strategy
Selective hedge
Covering when rates are attractive or when
rates are expected to move adversely
Discretionary management
Requires more management time and effort
Optimal strategy
Recommended strategy
Most popular strategy among the world’s
corporate treasurers
20. Trading
Frequent bookings and cancellations of both $/Re
and cross currencies
Requires more management time and effort
Works well for companies with the ability to absorb
more risks and invest time and money in the
infrastructure and control systems required for this
activity
Not riskier than the zero percent cover strategy
23. Pricing
Factor the cost of hedging in the price, if you can
Choice of invoicing currency
Home currency - Buyer has a risk and may not be able to
cover it
Dollar - Buyer (outside the U.S) has a risk and may
not agree unless that is the currency of the trade
Non-Dollar - Additional risk for the Indian corporate
$/Re - systematic risk and
“cross currency” unsystematic risk
Exports in strong currency and Imports in weak currency
Examine the currency offers from foreign sellers for arbitrage
gains
24. Netting and Offsetting
Netting receivables with payables in each currency and managing
risk on the net exposures.
Offsetting one currency exposure with another closely related
currency.
Leading and Lagging
Advance payables and postpone receivables in strong currencies
& vice versa.
Extending credit period for exports/ preponing import payments
when the rupee is expected to weaken sharply or when the
forward premium is very high - play on interest differentials and
forward premiums.
Arranging L/C financing (Supplier Credit) when the rupee is
stable and forward premiums are very low.
25. Asset and Liability Management
Borrow in a currency in which you have assets or
receivables or in your competitor’s currency
28. Exchange Rate Quotations
Direct Q uote Indirect Q uote
Variable Unit Home Currency Foreign Currency
Direct Quote
Buy Low and Sell High
Buy Dollar at 45.29 and Sell Dollar at 45.30.
Indirect Quote
Buy High and Sell Low
Buy Dollars 2.2080 against Rs.100
Sell Dollars 2.2075 against Rs.100
29. Purchase and Sale
Transaction
Spot Dollar / Rupee : 45.29 – 45.30
From Banker’s point of view
Purchase - Bank acquires foreign currency and parts with
home currency at 45.29
Sale - Bank parts with foreign currency and acquires home
currency at 45.30
From Customer’s point of view
Purchase - Customer acquires foreign currency and parts
with home currency at 45.30
Sale - Customer parts with foreign currency and acquires
home currency at 45.29
31. Delivery - Value Dates
Cash/Ready - Settlement today
Tom - Settlement on the next working day
Spot - Settlement on the 2nd working day
Forward - Settlement any date beyond spot
32. Forward Forex Contracts
Contract to sell or buy a currency at a rate agreed today;
for delivery at a pre-determined future date or time period
Difference between the spot and the forward rate is
called, forward points, swap points, or forward margin.
Outright forward rate = spot rate + forward points
33. Interest Parity Principle
Between two freely convertible currencies, the
difference between the spot rate and the forward rate is
determined by the interest rate differential between the
two currencies.
Spot : 1 EUR = 1.2535 USD
6m Interest Rates : USD 1.2 % ; EUR 2.10 %
6m Forward 1 EUR = 1.2480 USD
Spot Rate * Interest Rate Differential * Forward Period
=
100 * No. Of days in the year
=
1.2535*(2.10- 1.2)*6
100*12
= 0.00564
34. Interest Parity Principle….
To Verify
Borrow 1.2535 USD at 1.2 % Int. payable 0.007521
Sell 1.2535 USD against EUR Spot
Invest 1 EUR at 2.10 % Int. receivable 0.0105
To eliminate arbitrage today’s 6m forward should be such
that
USD 1.26102 = EUR 1.0105
1 EUR = (1.261021/1.0105) = USD 1.247917
35. Interest Parity Principle….
Currency with low interest rate will be at a premium
Currency with high interest rate will be at a discount
Forward rate is no indication of future spot rate
36. Calculation of
Annualized Premiums
Spot $/Re = Rs.45.29
3M - Fwd.Premium = Rs. 0.12
Annualized Premium : Premium * 100 * 365
Spot * n
n = Premium period in days
0.12 * 100 * 365
45.29 * 90
Result : 1.0745 %
37. Short Rates
Value Today
Spot USD/INR 45.29 45.30
Cash / Spot .01 .02
Cash USD/INR 45.27 45.29
Value TOM
Spot USD/INR 45.29 45.30
TOM / Next .005 .01
TOM USD/INR 45.28 45.2950
39. Euro Exports for 22/03/04, Spot date 24/03/04
USD/INR = 45.29 + 0.06 (0.04+0.0283) = 45.35 (A)
$/Re premium up to 28/02/04 (0.04) + premium for 22 days in March
= (0.08-0.04) * 22/31= (0.0283)
EUR/USD = 1.2535 - 0.0017 (11+ 6) = 1.2518 (B)
EUR/USD discount up to 06/03/04 (11) + discount for 18 more days in
March
= (21-11) * 18/30 = (6)
EUR/INR = A* B = 56.7691 - Bank’s margin
40. Option Forwards – Time Options
USD/INR EUR/USD
Spot Rate 45.29 45.30 1.2535 1.2540
28-Feb 0.04 0.05 1M -11 -9
31-Mar 0.08 0.09 2M -21 -20
30-Apr 0.12 0.13 3M -31 -30
31 May 0.15 0.16 4M -41 -40
USD Imports for April 2nd half
USD/INR = 45.30 + 0.13 + Bank’s Margin
Premium charged up to 30/04/04
USD Exports for April 2nd half
USD/INR = 45.29 + 0.10 - Bank’s Margin
Premium provided up to 15/04/04 = 0.08 + (0.12-
0.08)* 15/30
42. Export bill with 60 days usance from the B/L date (28/02//04)
The exporter, while negotiating, will receive premium till 30/04/04.
Forward rate = 45.29 + 0.12 = 45.41
Export bill with 60 days usance from sight, discounted on
1/03/04
The exporter, while negotiating, will receive premium for the usance
period + 20 days of transit period, i.e. till 20/05/04
Forward rate = 45.29 + 0.14 = 45.43
43. Merchant Rates
USD/INR EUR/USD
Spot Rate 45.29 45.30 1.2535 1.2540
28-Feb 0.04 0.05 1M -11 -9
31-Mar 0.08 0.09 2M -21 -20
30-Apr 0.12 0.13 3M -31 -30
31 May 0.15 0.16 4M -41 -40
Date of Export order -- 1/02/04
Date of shipment – 31/03/04
Date of booking forward - 4/2/04
Forward contract rate for a 60 days usance from B/L. The exporter
while booking a forward contract will receive premium from the date
of booking forward, till the earliest due date i.e. 31/05/04. Thus,
forward rate will be equal to 45.29 + 0.15 = 45.44
44. Cancellation
Difference between the contract rate and ruling
cash/spot/forward rate for the account of the
customer
Cancellation at reverse TT/forward rate
Exports at TT/forward selling rate
Imports at TT/forward buying rate
Automatic cancellation after 15 days
-Banks will recover cost but gains will not be passed
on
-Inform before due date
Cancel import contract for last day and export for
first day in the case of option forward contracts
45. Cancellation
• On 1st Jan, an exporter sold $100000 for 31st March delivery @
45.50
I Contract cancelled 2 months before maturity
On 31/1, with the 2 month forward rate from cancellation date to
31st Mar at say 45.55, the cancellation loss of Rs.5,000 i.e.
(45.55-45.50)*100,000) will be recovered from the customer.
II Automatic cancellation on the 15th day from the
date of maturity - 15.04.2002 @ 45.35
In this case, the cancellation gain, will not be passed on to the
customer but the loss will of course be recovered
46. Splitting non-dollar exposures
Import of Yen 100,000,000.
Spot $1 = Rs. 45.30 $1= Yen105.55
Fwd Pt. = Rs. 0.10 - Yen 0.20
Mar Outright Rs.45.40 Yen105.35
Yen/Re import rate prevailing Rs.42.92.
View :Good level to cover $/Yen leg as it could fall to 104.00 by maturity.
But expect the $/Re leg to remain steady. So, cover only $/Yen.
On maturity, $/Re remains at 45.30 and $/Yen falls to 104.00.
Case I : Covered both legs on day1(45.40/105.35)*100
- Effective rate - Rs.43.09.
Case II : Covered both legs on maturity (45.30/104)*100
- Effective rate - Rs.43.55.
Case III: Covered $/Yen leg only (45.30/105.55)*100
- Effective rate - Rs.42.92.
47. Third Currency Cover
Exporter who has $ exports can sell dollars against rupee or any other
permitted third currency.
Example
Currently 1 EUR = $1.2535
View: He expects the $ to trade steady Vs. the rupee. However, he
expects the Euro to strengthen in the next 3 months.
He can buy Euro 100,000 @ 1.2535 against $
His current position is long EUR 100,000 against INR.
At the end of 3 months, 1EUR= $ 1.2750
He can now unwind his long EUR position i.e. sell the 100,000 EUR
and buy the Dollars - he will receive $127,500
Gain: $2,150 (127,500-125,350)