CRM PRES_UFH_002.pptCRM PRES_UFH_002.pptCRM PRES_UFH_002.ppt

CRM PRES_UFH_002.ppt

1. CURRENCY
RISK MANAGEMENT
POLICY

18
TH
MARCH 2013

2. It’s a seamless worldwide market dealing in currencies of different
countries;
Deals with more than 150 currencies;
(involves more than 12000 currency pairs)
Largest and most liquid financial market;
Standardized Commodity i.e. Currencies;
Linked through telephone, telex, satellite communication;
Real Time Market – impact almost instant; and
Worldwide & Round the clock Market
Contd….
ATTRIBUTES OF FX MARKET

3. ATTRIBUTES OF FX MARKET
•Total market size more than 4 trillion USD / day on an average;
•About 5 % is trade related and 95 per cent is financial and
speculative;
•Official reserves of all surplus countries together are > 5 trillion;
•USD related transactions about 60 to 70 per cent;
•Spot transactions only 30 - 40% (75% in 1986);
•UK is the major geographical centre;
•USA, Japan, Singapore, follow in that order;
•USD is the most traded currency;
•Euro, Yen and GBP are the other in that order; and
•EUR/USD is the most traded currency pair.

4. FOREX EXPOSURES AT BEL
BEL has imports worth Rs. 2130 cr in FY 2011-12 through its 9 factories
For this 65% imports, there
is time lag of few months to
even a year & more between
quotation and the tender
opening /CNC.
In ERV cases, the
reimbursement is with
reference to the rate on the
tender opening or the date of
CNC. Hence, the currency
risk within this time frame is
open for BEL.

5. RISK MANAGEMENT STRATEGIES
All Currency
Risks are
Hedged
Sector 1
All Currency
Risks left Open
Sector 2
Management of
Existing Risks by
selective Hedging
Sector 3
Speculation
Sector 4
Risk Averse Enjoy Risk
Strong Cost
Containment
Motive
Weak Cost
Containment
Motive

6. “Minimum regret” portfolio hedging policy
Why is Currency Risk Mgmt Important?
Schools of Thought – 50% Hedged
Seeks to avoid:
>100% hedged when foreign currencies experience periods
of appreciation
>0% hedged when foreign currencies experience periods of
depreciation
Unhedged Fully
hedged

7. How Currency Risk Policy was formulated
•There was a CRM Policy formulated in 2008;
•This policy approved hedging based on advisory services of Banks;
•SBI Treasury agreed to give a monthly report on hedging;
•During the period 2008 to Sep 5, 2011, the exchange rates were stable;
•Between 5
th
Sep & 23
rd
Sep 11 there was a sudden depreciation which
many banks including SBI did not anticipate;
•In the subsequent Board meeting, directions were given to hire a
consultant and revamp the policy in line with the latest RBI requirement;
•Accordingly the policy was revamped and approved by the Board in the
January Board meeting.

8. OBJECTIVES OF FOREX RISK MANAGEMENT POLICY
Establish a FRAMEWORK FOR RECOGNITION of forex exposures;
Establish criteria for IDENTIFYING QUALIFYING TRANSACTIONS
for undertaking hedging transactions;
Establish LIMITS within which hedging activities are to be carried
out;
Facilitate hedging activities so as to enable the Company to REDUCE
UNCERTAINTIES on account of foreign exchange fluctuations; and
Contain the ADVERSE IMPACTS of exchange rate movements on
the FINANCIAL HEALTH of the company.

9. HIGHLIGHTS OF THE CURRENCY RISK POLICY
•In the 1
st
phase exposure from the date of obtaining the order till the
date of payment will be taken up for Risk mitigation;
•Qualifying transactions will be $ 100000 or Euro 100000 or
equivalent;
•Hedge Ratio will be progressively increased upto 50 % of the total
exposure;
•The above two culminates in selective hedging policy;
•Hedging Activity will be centralised;
•Transaction specific hedging will be taken;
•Bulk hedging based on past performance will be taken only if
required;

10. CURRENCY RISK MANAGEMENT PROCESS
• MIS data CRM 1, 2 & 3 will be collected from the Units / SBUs;
• Based on CRM 1, CRM No. will be assigned for each Customer order;
•All the exposures will be Benchmarked;
•CRM 2 data will be provided by the Units/SBUs giving the PO details
and the expected date of shipment;
•Based on CRM 2, treasury desk will monitor the movement of the
spot rates and the forward premiums to take a view on hedging;
•The exposures which are shortlisted for hedging will be put up by the
Treasury Desk to the RMC with recommendations;
•RMC will take a view based on the market and recommendations of the
Treasury Desk and recommend suitably to D(F) for approval.

11. TREASURY DESK - FUNCTIONS
Will COLLATE the FX exposure information from process units;
Will ANALYZE the exposures and provide appropriate
benchmark rates as laid down in policy;
Will FORMULATE Dealing strategies;
Ensure proper ARCHIVING AND MAINTENANCE of all
correspondence received/ sent to Banks/ counter parties related
to forex transactions;
Keep a track of M-T-M position of the exposures; and
Will be responsible for DEVELOPMENT AND SUBMISSION of
required MIS reports to the management.

12. Discuss and decide on HEDGING STRATEGIES on currency and currency
risk management;
Discuss, deliberate and if considered appropriate RECOMMEND on
proposals initiated by Corporate Treasury Desk on hedging issues for
approval of DF;
Perform QUARTERLY REVIEW of hedging activities;
In case some EXCEPTIONS are to be made to the existing procedure
because of certain constraints, RMC to INITIATE PROPOSAL stating the
reasons for exceptions and take approval of DF;
Deliberate on any Policy and SOP CHANGES and recommend for approval to
DF through ED/GM- Finance;
Report any BENCHMARK BREACHED to DF; and
Ensure that the Currency risk arising from change in business activities is
promptly ANALYZED and the Management Policy in respect of those risks is
built into the Policy Document
RMC – FUNCTIONS

13. HEDGING PRODUCTS
Forward Contracts
Fixed Date Forward
Option Date Forward
Currency Options

14. Forward Contract is a contract wherein two parties (One party
being a Authorised Dealer) agree to deliver certain amount of
foreign exchange at an agree rate either at a fixed future date or
during a fixed future period
FORWARD CONTRACT
US $
INR
Fwd. Ex.
Rate
$ Interest Rate – 0.5%
INR Interest Rate – 8.0%
FORWARD RATE IS NOT AN INDICATOR OF FUTURE SPOT RATE!!
CONCEPT

15. CURRENCY OPTION
A Currency option is a:
 financial contract,
 in which, the buyer of the option,
has the right, but not the obligation,
to buy or sell an currency,
at a pre- specified price,
on or up to a specified date.

16. FORWARD CONTRACT
Fixed Date Contracts : Delivery Date is Fixed
Option Contracts

•Where the period is not ascertainable, Contract can be booked for an
option period at the discretion of the Customer; and
•Option period shall not be more than one month

17. FORWARD CONTRACT
Scenario I : Early Delivery
Scenario II : Cancellation
Scenario III : Extension

18. Where is
Market Going?


What to
Hedge ?
How to do
accounting?
How to
Hedge ?
How much
to Hedge ?
For which
period to
Hedge ?
How to
measure
Performance ?
When to
Hedge ?
C
H
A
L
L
E
N
G
E
S

19. CHALLENGES
•Reliable MIS;
•Constant updation of the MIS with regular updates on
the shipping/payment status;
•Choosing an appropriate product & time for hedging;
•Common understanding on Roles & responsibilities; and
•Hedging through a single bank and payment through
different banks.

20. THREATS TO EFFECTIVE HEDGING
Hedging
Hedging
Hedging
Underlying
Exposure
Underlying
Exposure
Underlying
Exposure
Volume Mismatch Timing Mismatch Directional Mismatch
Hence the Objective of a Corporate Treasury is to Get these
3 Basic Parameters Right

21. Sl No Unit/ SBU CRM 1 CRM 2 CRM 3 Remarks
1 Components √ √ √
2 Military Radar √ √ √* CRM 3 LC details of all the related POs not
provided
3 Export Manufacturing √* X X CRM 1 Incomplete (Import Content + FE Rate
Considered not provided)
4 Naval Systems I √* √* √* NIL Report Given in respect of all the 3
reports
5 Naval Systems II X X X Not yet Received
6 MILCOM √ √* X CRM 2: Terms of Payment not provided
7 T & BS √ X X
8 Ghaziabad √ √* X CRM No. allotted by CTD not mentioned in
CRM 2
9 Pune √ √ √
10 Navi Mumbai √ √* X Nil report provided in CRM 2
11 Machillipattnam √ X X
12 Panchkula √ √ √
13 Kotdwara √ √* X Out of 4 contracts PO details of only 1
contract BEKT20120001 has been provided
14 Hyderabad √ √ √
15 Chennai X √ √

22. THANK
YOU

23. USD-INR FORWARD CONTRACT MATURITY:
FIXED DATE
Forward Premiums
March: 0.10 / 0.12
April: 0.40 / 0.42
May: 0.70 / 0.72
June: 1.08 / 1.10
July: 1.38 / 1.40
Aug: 1.64 / 1.66
EXAMPLE
Today : 18
th
Mar, 2013
Maturity Date : 31
st
Mar,
2013
Spot : 54.72/73
Forward Premium : 0.10/0.12
Net Rate :
54.82/54.85*

24. USD-INR FORWARD CONTRACT MATURITY:
OPTION PERIOD
Today : 18
th
March, 2013
Maturity : 1
st
Apr – 30
th
Apr, 2013
Spot : Rs. 54.73
Fwd. Premium : Premium for END of April 13 (Rs
0.42)
Net Rate : Rs. 55.15

25. SCENARIO-I: FORWARD CONTRACT (EARLY DELIVERY)
USD-INR Forward contract booked on 1
st
Jan 2013
Maturity Date: 31
st
Mar, 13;
Contracted rate: 57.70, including premium
Early delivery on 15
th
Mar, 2013
Prevailing Rates on day of early delivery :
Spot: 59.00 Forward Premium (Mar end): 0.15/0.16
Transaction occurs at the contracted rate
Forward Premium (15 Paise) to the Company is
refunded from the date of early delivery to original
maturity date. In addition cash inflow / outflow is
adjusted for funds outlay cost, if any.

26. SCENARIO –II FORWARD CONTRACT: CANCELLATION
EARLIER TO MATURITY
FC booked on 01.01.13 for maturity 31.03.2013 @ 57.70
Canc. Date : 15.03.13
Spot on 15.03.13 : 59.00 (Premium for Feb end:
0.15)
Net rate (Cancellation) : 59.15
Cash Inflow on a/c of cancellation: (59.15-57.70) = 1.45 /Dollar
ON MATURITY
FC booked on 01.01.2013 for maturity 31.03.13 @57.70
Canc. Date : 31.03.13
Spot on 28.02.13 : 58.05
Cash / Spot : 0.03
Net Rate : 58.02
Cash inflow on a/c of cancellation: (58.02-57.70)= 0.32/ Dollar

27. SCENARIO-III FORWARD CONTRACT: ROLLOVER
(Spot Rate> Contracted Rate)
Essentially a Simultaneous Cancellation of existing contract and
booking a new one
FC booked on 01.01.13 for maturity 31.03.2013 @57.70; Rollover
Date: 31.03.13 for new maturity: 30.04.13
Spot : 58.7900/8000, Fwd for Apr 13 : 30/31, C/s: 0.01/0.02
Cancellation Rate: 58.79 – 0.02 = 58.77
Cash inflow on a/c of cancellation :
(57.70 – 58.77) = 1.07 /Dollar
Rebooking the Fwd contract: 58.79 + 0.31 = 59.10
Net effect: (59.10 -1.07)= 58.03 which is more by 0.33 Paise
(represents the forward premium for the extended period)
YOU ARE EFFECTIVELY STUCK AT THE SAME RATE
(except to the extent of Cash Spot)

28. SCENARIO-III FORWARD CONTRACT: ROLLOVER
(Spot Rate< Contracted Rate)
Essentially a Simultaneous Cancellation of existing contract and
booking a new one
FC booked on 01.01.13 for maturity 31.03.2013 @57.70; Rollover
Date: 31.03.13 for new maturity: 30.04.13
Spot : 56.7900/8000, Fwd for Apr 13 : 30/31, C/s: 0.01/0.02
Cancellation Rate: 56.79-0.02 = 56.77
Cash outflow on a/c of cancellation : (57.70 – 56.77) = 0.93 /Dollar
Rebooking the Fwd contract: 56.79 + 0.31 = 57.10
Net effect: (57.10 + 0.93) = 58.03 which is more by 0.33 paise
(represents the forward premium for the extended period)
YOU ARE EFFECTIVELY STUCK AT THE SAME RATE
(except to the extent of Cash Spot)