Options, Futures & Swaps Case Presentation

1. TEXTILES
Group 9
UM15060 Vachanaditya
UM15008 Ankit Thakur
UM15027 Kunal Talwar
UM15036 Priya Ranjan
UM15045 Seema Nayak
UM15059 Upgeet Singh
UM15159 Princy Garg
Question 4: What was the reality of 2007-8?

2. OVERVIEW:
Textile Industry
 Traditionally an Export oriented
Industry
 Accounted for 14% of industrial
production
 Accounted for 14% of total exports of
goods
 In 2008-09
Total Sales: US $ 33.4 Billion
Exports: US $ 21.6 Billion
 Mature Industry, hence low margins (
3% to 12%)
TT Textile
 The flagship company of TT Group
 Vertically integrated company with
presence in the entire cotton chain,
from fibre to knitted fabric and
garments
 75% revenue came from exports
 Life of typical export transaction for
the company was approximately 3
months
 Enjoyed a margin of 5% to 6%

3. NEED FOR HEDGING IN TEXTILE
INDUSTRY :
Indian scenario
• TT Textile Roughly had an exposure of US$ 25 Mn
• In late 2006,Rupee appreciation and Dollar depreciation
increased currency pressure in Indian textile industry
• Bankers were forecasting the rupee to appreciate to
INR35 from INR 45/$
• Rupee’s appreciation was driven by foreign
portfolio investment flows to India rather than global
thus causing Indian exports to lose out to competition
• Importing countries did not experience similar currency
appreciation
• For low margin industry like textiles, this threatened the
viability of exporters

4. The main instruments available for hedging of currency risk exposure were:
1. Exchange traded currency derivatives
a)Forward Contract: INR-USD forwards
Contracted Agreement specifying an amount of currency to be
delivered at an exchange rate decided on the date of
contract.
b)Currency Options:
A contract that gives the owner the right, but not the obligation, to take(call option)
or deliver(Put option) a specified amount of currency as an exchange rate decided at
the date of purchase.
2. Over the counter Currency Derivatives
a)Outright Forwards
Currency forward contract traded between two private parties instead of going to the
exchange
b)Forex Swap
Simultaneous purchase and sale of identical amounts of one currency for another
with two different value dates (normally spot to forward)
INSTRUMENTS AVAILABLE FOR HEDGING

5. • In late 2006, Indian Rupee was rapidly appreciating and dollar
was depreciating with bankers forecasting that the
appreciation could reach unprecedented level of 35/ US $
• Indian textile was reeling under severe currency pressure and
was looking for solutions in order to stay afloat.
• The textile companies could either boost sales in domestic
market or hedge against upward movement of currency.
• TT textile when for currency swap option in order to limit
exposure to fluctuations of US $.The swap was on US dollar
and Swiss francs as these two currencies traditionally had
stable exchange rates and US dollar had never gone below
1.09 CHF
• To be on the safer side, TT textiles went for a swap deal at
strike rate of CHF 1.04/$ with notional principal amount
totalling INR 225 million.
Pre Recession Scenario

6. • TT textiles entered into swap contract with ABC bank.
• TT would provide ABC with Rs.225 million and ABC would
povide CHF6306554.84 to TT.
• Since at the spot rate INR225 million = CHF 6306554.84
therefore no real money was excahnged and hence the
priniciple was called the notional principle.
• TT was providing a rupee loan and getting a CHF loan.
Since, the interest on a rupee loan is more than the
interest on CHF loan, TT would receive a net interest of
1.77% on Rs.225 million paid semiannually and not pay
any interest on the CHF loan.
The Swap

7. • At maturity ABC would pay back Rs.225 million
and TT would pay back CHF 6306554.84
• Hence TT would have to pay in rupees
6306554.84 x (
𝐼𝑁𝑅
$
𝐶𝐻𝐹
$
)
• Therefore if the INR/$ rate increases ie. INR
depriciates , TT would have to pay more
• Alternatively if the CHF/$ rate decreases ie CHF
appreciates then TT would have to pay more.
The Swap Contd.

8. • INR/$
• As mentioned before if the INR/$ increases then we
incur losses.
• According to option, If INR/$ rate increases greater
then 46.25 we have the option buy dollars at
46.25(long call)
• However, if it falls to 45 we have the obligation to
buy at 45 (short put)
Option Characteristics

9. • CHF/$
• If the rate falls below 1.04 then TT will have to payout of
CHF 6,306,554.84 at spot prices.
• If the rate is between 1.04 and 1.27 then TT has the right
to sell CHF 6,306,554.84 at 1.27.
• If the rate of is above 1.27 on maturity thrn TT has the
obligation to sell at CHF 6,306,554.84 at 1.27.
• Hence between 1.04 and 1.27 TT has protection and can
trade CHF at 1.27
• However below 1.04 it has to trade at spot prices and
above 1.27 it cannot take advantage of the higher
exchange rate
Option Characteristics Contd.

10. 2007- 2008 SCENARIO
2007
The INR appreciated against the
US dollar from 45/US$ to
39.6/US$ as Net FII inflow shot
up to US $ 20.3 billion. Exporters
lost out to competition due to the
rupee’s appreciation.
2008
Rupee drastically depreciated
due to massive FII outflows
triggered by a global financial
meltdown. The economic
recession in importing countries
along with decrease in domestic
demand added to the woes of
these exporters.
Indian Scenario
No increase in export subsidies
in textile to help exporters unlike
other countries.
Withdrawal of export incentives
at signs of rupee depreciation.

11. IMPACT ON TT TEXTILES
• Received first
cheque of INR 2
million from ABC
Bank.
• Belief that rupee
will get stronger
became firmer.
• Though US had
started showing
signs of
recession, it was
strongly believed
that US was
decoupled from
India.
2007
•Crash of Indian
stock market.
•Exchange rate
creep up to 41
INR/US$ and then
to 50 INR/US$.
•Corporations
stopped selling and
went on over
hedging their
futures.
•High notional
losses on derivative
products.
2008 (India)
• No signs of
recession.
• Swiss Franc
(CHF) started
becoming
stronger than
US$.
• CHF/US$ rate
breached the
1.09 mark and
crossed 1.04 as
specified in swap
deal of TT
Textiles.
• Continued
downward trend
below 1.
2008
(Europe)
•IF Exchange rate touched
.93 projected losses were
estimated to be INR 45
million, and with further
decrease expected to cross
55-6 million.
•Decline in sales lead TT
Textiles to demand increase
in credit limit above INR4.5
crore already grated by
ABC.
•ABC bank argues to
decrease the existing limit
instead of increasing it.
Losses for TT
Textiles

12. • In early 2009, the US dollar gained momentum and started
reversing from .96 CHF/$ to reach 1.17 CHF/$ level.
• Jain decided to carrying out reverse transaction at 1.17 CHF/$
which meant that if the rates fell below TT textile would
cover the existing position at lower rate say 1.12CHF/$ and
make some money during that period.
• The swap deal however however carried a clause that made
TT textile liable to losses if CHF/US $ exchange rate touched
the 1.04 CHF/US $ mark at maturity
• Jain had two options :Either continue with the swap deal of
CHF/ US$, which was due to expire in October 2009 or exit it
at this favourable juncture and put an end to any uncertainty.
Post Recession Scenario(2009)