kailas superna
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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)
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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)
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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)
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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:-
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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.
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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:-
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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:-
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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:-
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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:-
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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 :-
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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:-
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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:-
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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.
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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:-
For 60 days maturity period:-
AMOUNT :-108700
Date of order Received:-07-12-2011
FORWARD CONTRACT: -
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Date of Amt Received:-08-02-2012
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:-
For 60 days maturity period:-
AMOUNT :-125500
Date of order Received:-19-12-11
Date of Amt Received:-20-02-2012
Forward contract: - US$ x 45 days forward contract rate.
= 125500$ x 52.399Rs.
= Rs6576074.5 -----------------------------
Future spot rate: - US$ x future spot rate
= 125500$ x 49.272Rs.
= Rs. 6183636 ----------------------------
Now - = 6576074.5Rs -6183636Rs
= 392438.5Rs. (PROFIT)
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5th Export Transaction of SUPERNA:-
For 60 days maturity period:-
AMOUNT :-70000
Date of order Received:-18-01-2012
Date of Amt Received:-19-03-2012
Forward contract: - US$ x 4 months forward contract rate.
= 70000$ x 50.828 Rs.
= 3557960Rs. ---------------------------------
Future spot rate: - US$ x future spot rate
= 70000$ x 50.209Rs.
= 3514630 Rs. - -------------------------------
Now - = 3557960 Rs. – 3514630Rs.
= 43330 Rs. PROFIT
6th Export Transaction of SUPERNA:-
For 60 days maturity period:-
AMOUNT :-120000
Date of order Received:-27-01-2012
Date of Amt Received:-28-03-2012
Forward contract: - US$ x 4 months forward contract rate.
= 120000$ x 49.769Rs.
= 5972280Rs. ---------------------------------
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Future spot rate: - US$ x future spot rate
= 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
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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)
4th Export Transaction of SUPERNA:-
For 60 days maturity period:-
US Borrowing
Rate
India Lending
Rate (Per annum)
Spot Rate Future Spot
Rate
3.4% 8.5% 51.96812Rs. 49.27221Rs.
Step 1:- Borrow from US:-
= 125500 (1+0.034) = 121373.31 $
Step 2:- Convert it in Rupees & invest in India:-
= 121373.31 $ x 51.96812Rs.
= 6307542.74Rs. *8.5*2/12
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= 6397109.85 Rs.
Step 3: - Repay the loan to US:-
= 125500 $ x 49.27221 Rs.
= 6183662.355 Rs.
Step 4: - Compute profit /loss:-
Therefore Profit of Rs. 213447.5(6397109.85 – 6183662.355)
5th Export Transaction of SUPERNA:-
For 60 days maturity period:-
US Borrowing
Rate
India Lending
Rate (Per annum)
Spot Rate Future Spot
Rate
3.4% 8.5% 50.40194Rs. 50.20868
Rs.
Step 1:- Borrow from US:-
= 70000 (1+0.034) = 67698.26 $
Step 2:- Convert it in Rupees & invest in India:-
= 67698.26 $ x 50.40914Rs.
= 3412611.07*8.5*2/12
=3461070.15 Rs.
Step 3: - Repay the loan to US:-
= 70000 $ x 50.20868Rs.
= 3514607.6 Rs.
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Step 4: - Compute profit /loss:-
Therefore Loss of Rs. -53537.45 (3461070.15 – 3514607.6 )
6th Export Transaction of SUPERNA:-
For 60 days maturity period:-
US Borrowing
Rate
India Lending
Rate (Per annum)
Spot Rate Future Spot
Rate
3.4% 8.5% 49.35943Rs. 50.83184
Rs.
Step 1:- Borrow from US:-
= 120000 (1+0.034) = 116054.16 $
Step 2:- Convert it in Rupees & invest in India:-
= 116054.16 $ x 49.35943Rs.
= 5728367.19*8.5*2/12
=5809710 Rs.
Step 3: - Repay the loan to US:-
= 120000$ x 50.83184Rs.
= 6099820.8Rs.
Therefore Loss of Rs. -290110.8 (5809710 – 6099820.8)
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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