sarika final report

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SUMMER PROJECT

ON

FOREIGN EXCHANGE

MANAGEMENT

SUBMITTED BY

SARIKA M. PHADTARE

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LALA LAJPATRAI INSTITUTE OF MANAGEMENT

CONTENTS

1. ACKNOWLEDGMENT04

2. EXECUTIVE SUMMARY 05

3. OBJECTIVES06

4. RESEARCH METHODOLOGY.06

5. INDUSTRY PROFILE..........07

6. COMPANY PROFILE..........08

7. COMPANY HISTORY.11

8. INTRODUCTION TO FOREIGN EXCHANGE...14

9. HISTORY OF FOREIGN EXCHANGE16

10. FOREIGN EXCHANGE MARKET.18

11. MARKET PARTICIPANTS..........21

12. FOREIGN EXCHANGR RATE25

13. MAJOR CURRENCIES.29

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14. FOREX AND ITS ROLE PLAY IN ONGC....31

15. PROCEDURE FOR PURCHASE OF FX BY ONGC........32

16. APPROVAL SHEET OF FOREX TRANSACTIONS OF ONGC.37

17. REMITTANCES REPORT....38

18. HEDGING42

19. FORWARD CONTRACTS47

20. CURRENCY FUTURES.55

21. CONCLUSION58

22. BIBLIOGRAPHY59

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ACKNOWLEDGEMENT

It is a matter of great pleasure for me to have the opportunity to do my summer project in your

highly esteemed organization. It is a great pleasure to present this report of summer training in Oil

And Natural Gas Corporation Limited .

At first, I would like to express my deep sense of gratitude to my training guide , Mr. A. C.

Andotra [DGM (F&A)] for his Valuable guidance, advice, suggestion and constant

encouragement rendered to me at every stage which helped me in completing the project work, in

time. I am falling short of words for expressing my feelings of gratitude towards him for extending

their valuable guidance about market and critical reviews of project.

I am extremely thankful to my Faculty Guide Prof. Raj Wadhwa at Lala Lajpatrai Institute Of

Management for his invaluable Guidance and Suggestions during my Training.

Finally, I am thankful to all my group members and all others who helped me directly or indirectly

towards the successful completion of this summer internship project in ONGC.

Sarika M. Phadtare

.

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EXECUTIVE SUMMARY

Foreign exchange (FX) is the process of trading the currency of one country for the currency of a

another. This process is necessary for international trade to take place in a world of differentcurrencies. The value of one currency versus another is determined by the international exchange

rate and, in most cases, is subject to fluctuations based on open trading of currency in foreign

exchange markets. Foreign exchange is the process of conversion of one currency into another

currency.Transactions conducted in the foreign exchange market determine the rates at which

currencies are exchanged for one another, which in turn determine the cost of purchasing foreign

goods and financial assets.

The main participants in foreign exchange markets are importers, exporters, commercial banks,

foreign exchange brokers and the nations central bank. Foreign exchange market is primarily an

over the counter market, the exchanges trade futures and option (more below) but most transactions

are OTC.

When demand for the currency of one country goes up in relation to that of another, the first

currency is said to be more valuable (or stronger) in terms of the second currency. Some of the

factors that increase demand for a country's currency are an increase in exports (more currency is

needed to pay for these exports), an increase in interest rates (the currency now earns more for the

holder), and anything that improves political stability (the risk of holding that currency has

decreased).

Hedging is a risk management technique, primarily done to protect the foreign exchange exposures

against the volatility of exchange rate by using derivatives like Currency Options, Currency

Futures, forward Contracts, etc. by taking off-setting positions against underlying asset. RBI does

not allow PSUs to write a currency options and to trade in oil futures market because of risk of

incurring a huge loss due to extreme volatility in the crude oil prices.

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OBJECTIVES

The main objective of the project is to understand the FOREX MARKET IN INDIA and devise a

hedging strategy for ONGC, based on the availability of various hedging tools available in the

INDIAN FOREX DERIVATIVE MARKET.

The sub-objectives are as follows:

To understand the INTERNATIONAL FOREX MARKETS.

To study FOREX MARKET IN INDIA.

To study and analyze the DERIVATIVE MARKET in INDIA with respect to the

instruments available for hedging of FOREX effectively.

To analyze the FOREX payments made by ONGC and carry out a back dated analysis to

show the net impact of hedging.

RESEARCH METHODOLOGY

For understanding the concept, procedure, operations, strategies of ONGC LTD, the followingapproach was adopted:

The foreign exchange purchase procedure of the year 2009-10 was studied.

Guidance from the senior executives was obtained in the study of the forex operations of

ONGC LTD.

Information regarding the FOREX operations of ONGC LTD was obtained from the senior

executives.

The derivative market in India was studied to analyze whether the hedging strategies can be

effective or not.

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INDUSTRY PROFILE

The Oil & Gas (Petroleum Industry) is usually divided into three major components:

UPSTREAM SECTOR

The upstream oil sector is a term commonly used to refer to the searching for and the recovery and

production of crude oil and natural gas. This sector is also known as the Exploration and

Production (E&P) Sector.

The upstream sector includes the searching for potential underground or underwater oil & gas

fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the

crude oil and/ or raw natural gas to the surface.

MIDSTREAM SECTOR

The midstream industry processes, stores, markets and transport commodities such as crude oil,

natural gas, natural gas liquids (NGLs mainly ethane, propane and butane) and sulphur. Midstream

operations are included under the downstream category.

DOWNSTREAM SECTOR

The downstream oil sector is a term commonly used to refer to the refining of crude oil and the

selling and distribution of natural gas and products derived from crude oil. Such products include

Liquefied petroleum gas (LPG), gasoline or petrol, jet fuel, diesel oil, and other fuel oils.

The downstream sector includes oil refineries, petrochemical plants, petroleum products

distribution, retail outlets and natural gas distribution companies. The downstream industry touchesconsumers through thousands of products such as gasoline, diesel, jet fuel, heating oil, asphalt,

lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas

and propane.

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COMPANY PROFILE

ONGC is Asias best Oil & Gas company, as per a recent survey conducted by US-based magazine

Global Finance. Ranks as the 2nd biggest E&P company (and 1st in terms of profits), as per the

Platts Energy Business Technology (EBT) Survey 2004 . Ranks 24th among Global Energy

Companies by Market Capitalization in PFC Energy 50 (December 2004). [ONGC was ranked 17th

till March 2004, before the shares prices dropped marginally for external reasons.

It Is placed at the top of all Indian Corporate listed in Forbes 400 Global Corporate (rank 133rd)

and Financial Times Global 500 (rank 326th), by Market Capitalization.

It Is recognized as the Most Valuable Indian Corporate, by Market Capitalization, Net Worth and

Net Profits, in current listings of Economic Times 500 (4th time in a row), Business Today 500,Business Baron 500 and Business Week.

It Has created the highest-ever Market Value-Added (MVA) of Rs. 24,258 Crore and the fourth-

highest Economic Value-Added (EVA) of Rs. 596 Crore, as assessed in the 5th Business Today-

Stern Stewart study (April 2003), ahead of private sector leaders like Reliance and Infosys. ONGC

is the only Public Sector Enterprise to achieve a positive MV A as well as EVA.

It Is targeting to have all its installations (offshore and onshore) accredited (certified) by March

2005. This will make ONGC the only company in the world in this regard.

Owns and operates more than 11000 kilometers of pipelines in India, including nearly 3200

kilometers of sub-sea pipelines. No other company in India operates even 50 per cent of this route

length.

It has paid the highest-ever dividend in the Indian corporate history. Its 10 per cent equity sale

(India's highest-ever equity offer) received unprecedented Global Investor recognition. This was a

landmark in Indian equity market, establishing beyond doubt, the respect ONGC's professionalmanagement commands among the global investor community. According to a report published in

'The Asian Wall Street Journal (Hongkong)', ONGC's Public Issue brought in 20 Foreign

Institutional Investors (FIls) to India, as (it was reported), 'they could not ignore the company

representing India's energy security'.

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The Market Capitalization of the ONGC Group (ONGC & MRPL) constitutes 10 per cent of the

total market capitalization on the Bombay Stock Exchange (BSE). ONGC has an equity weightage

of 5 per cent in Sensex; 15 per cent in the Nifty (the only Indian corporate with a two-digit

presence there); ONGC commands a 7 per cent weightage in the Morgan Stanley Capital

International (MSCI) Index.

The growth in ONGC's Market Capitalization (from Rs. 18,500 Crore before May 2001 to Rs.

1,25,000 Crore in January 2004) is unprecedented and except Wipro (who had a higher market

capitalization temporarily), no other Indian company (either in public or private sector) has seen

such a phenomenal growth.

ONGC has come a long way from the day (a few years back) when India and ONGC did not figure

on the global oil and gas map. Today, ONGC Group has 14 properties in 10 foreign countries.Going by the investments (Committed: USD 2.708 billion, and Actual: USD 1.919 billion), ONGC

is the biggest Indian Multinational Corporation (MNC).

ONGC ended the sectoral regime in the Indian hydrocarbon industry and benchmarked the

globally- established integrated business model; it took up 71.6 per cent equity in the Mangalore

Refinery & Petrochemicals Limited (MRPL), and also took up a 23 per cent stake in the 364-km-

long Mangalore-Hasan-Bangalore product Pipeline, connecting the refinery to the Karnataka

hinterland. By turning around MRPL in 368 days, ONGC has set standards of public sector companies reviving joint (or private) sector companies, proving that in business, professionalism

matters, not ownership.

The Indian petroleum industry is one of the oldest in the world, with oil being struck at Makum

near Margherita in Assam in 1867 nine years after Col. Drakes discovery in Titusville. The

industry has come a long way since then. For nearly fifty years after independence, the oil sector in

India has seen the growth of giant national oil companies in a sheltered environment.

A process of transition of the sector has begun since the mid-nineties, from a state of complete

protection to the phase of open competition. The years since independence have however, seen the

rapid growth of upstream and downstream oil sectors. The sector in recent years has been

characterized by rising consumption of oil products.

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ONGC Vision & Mission

To be a world-class Oil and Gas Company integrated in energy business with dominant Indian

leadership and global presence.

World Class

Dedicated to excellence by leveraging competitive advantages in R&D and technology

with involved people.

Imbibe high standards of business ethics and organizational values.

Abiding commitment to safety, health and environment to enrich quality of community

life.

Foster a culture of trust, openness and mutual concern to make working a stimulating

and challenging experience for our people.

Strive for customer delight through quality products and services.

Integrated In Energy Business

Focus on domestic and international oil and gas exploration and production business

opportunities.

Provide value linkages in other sectors of energy business.

Create growth opportunities and maximize shareholder value.

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ONGC HISTORY

Foundation

In August 1956 Oil and Natural Gas Commission was formed. Raised from mere directorate statusto Commission, it has enhanced powers. In 1959, these powers were further enhanced by

converting the commission into a statutory body by an act of Indian parliament. Major functions of

ONGC accorded to this provision were to plan, promote, organize and implement programs for the

development of petroleum resources and the production and sale of petroleum and its products.

1960-1990ONGC since 1959 has made its presence noted in most parts of India and in overseas territories.

ONGC found new resources in Assam and also established the new oil province in Cambay basin

(Gujarat). In 1970 with the discovery of Bombay high (now known as Mumbai High), ONGC went

offshore. Most important contribution of ONGC, however, is its self-reliance and development of

core competence in exploration and production activities at a global competitive level.

Post 1990

Post 1990, the liberalized economic policy was brought into effect; subsequently partial

disinvestments of government equity in PSUs were sought. As a result, ONGC was reorganized as

a limited Company and after conversion of business of the erstwhile Oil & Natural Gas

Commission to that of Oil & Natural Gas Corporation Ltd in 1993, 2% of shares through

competitive bidding were disinvested. Further expansion of equity was done by 2% share offering

to ONGC employees. Another big leap was taken in March 1999, when ONGC, OIL (Oil India

Corporation) and GAIL (Gas Authority of India Ltd.) agreed to have cross holding in each others

stocks.

Consequently Government sold off 10% of its share holding in ONGC to IOC and 2.5% to GAIL.

With this the Government holding in ONGC came down to 84.11%. In 2002-03 ONGC took over

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Mangalore Refinery and Petrochemicals Ltd (MRPL) from Birla Group and announced its entrance

into retailing business. ONGC also went into global fields, through its subsidiary ONGC Videsh

Ltd (OVL). ONGC has major investments in Vietnam, Sakhalin and Sudan.

Oil and Natural Gas Corporation (ONGC) incorporated on June 23, 1993, is an Indian PublicSector petroleum Company. It is a Fortune Global 500 Company. It is highest profit making

corporation in India. It was set up as a commission on August 14, 1956. Indian Government holds

74.14% equity stake in this Company.

ONGC Today

ONGC ranks as the Numero Uno Oil & Gas Exploration & Production (E&P) Company in the

world, as per Platts 250 Global Energy Companies List for the year 2008 based on assets, revenues,

profits and return on invested capital (ROIC)

ONGC ranks 20th among the Global publicly-listed Energy companies as per PFC Energy

50 (Jan 2008).

ONGC is the only Company from India in the Fortune Magazines list of the Worlds Most

Admired Companies 2007.

Occupies 152nd rank in Forbes Global 2000 2009 list (up 46 notches than last year) of

the elite companies across the world; based on sales, profits, assets and market valuation

during the last fiscal. In terms of profits, ONGC maintains its top rank from India.

ONGC ranked 335th position as per Fortune Global 500 - 2008 list; up from 369th rank last

year, based on revenues, profits, assets and shareholders equity. ONGC maintains top rank

in terms of profits among seven companies from India in the list.

Indias Most Valuable Public Sector Enterprise

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Ranked as the most respected Public Enterprise in India in 2007 Business World Survey,

with 19th position in the league of the most-respected Indian Corporate(s).

Rated Excellent in MOU Performance Rating for 2006-07 by the Department of Public

Enterprises, Ministry of Heavy Industries in Public Enterprises, GOI.

Golden Peacock Global Award 2007 for Excellence in Corporate Governance 2007, for

the 3rd consecutive time, conferred by World Council for Corporate Governance.

Bagged the coveted winners trophy of the maiden Earth Care Award for excellence in

climate change mitigation and adoption under the category of GHG mitigation in the

small/medium and large enterprises.

Conferred with Infraline Energy Excellence Award for its services to the Nation in Oil &

Gas Exploration and Production category.

Bestowed with Amity Award for Excellence in Cost Management.

Sourcing Equity Oil Abroad

ONGCs overseas arm ONGC Videsh Limited (OVL) continued to maintain robust growth during

2007-08. It acquired 11 E&P Projects in 6 countries during the year.

The company now has participation in 44 projects in 18 countries. Out of 44 Projects, OVL is

operator in 18 projects and joint operator in 2 projects in 11 countries. Block BC-10 in Brazil is

currently under development with production expected to being in 2009-10, Block A-1 and A-3 in

Myanmar, North Ramadan Block and NEMED in Egypt and Farsi Offshore Block in Iran have

discoveries and appraisal work is being carried out. The remaining projects are in exploration

phase.

ONGCs strategic objective of sourcing 20 million tonnes of equity oil abroad per year is likely to

be fulfilled well before 2020.

INTRODUCTION TO FOREIGN EXCHANGE

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Any type of financial instrument that is used to make payments between countries is considered

foreign exchange. The list of instruments includes electronic transactions, paper currency, checks,

and signed, written orders called bills of exchange.

Foreign exchange is essential to coordinate global business. Foreign exchange management isassociated with currency transactions designed to meet and receive overseas payments. Beyond

these transactions, foreign exchange management requires you to understand the relevant factors

that influence currency values. From that point, you may execute the proper strategy to manage

risks and improve potential earnings.

Foreign exchange management begins with trading currencies to exchange goods and services

overseas. International businesses convert overseas profits back into their domestic currency to

spend at home. Meanwhile, consumers exchange domestic currency for foreign banknotes to buyoverseas goods. These transactions occur within the foreign exchange markets, where networks of

private individuals, banks and organized financial exchanges provide the infrastructure to trade

international banknotes.

Foreign exchange occurs at rates that are associated with currency valuations. Foreign exchange

rates describe the amount of one currency that must be given up to receive one unit of another

currency. Foreign exchange rates parallel the political and economic environment of a particular

country. For example, domestic foreign exchange rates appreciate when the economy is strong and

the currency is in high demand to buy the nation's stocks and real estate. Conversely, currency

values fall amidst political and social instability. Foreigners generally liquidate business assets in

war-torn nations that struggle with development.

Effective foreign exchange management requires you to preserve purchasing power by staying

current on any events affecting rates and operating accordingly. You will exploit the buying power

of high exchange rates to acquire overseas goods. Alternatively, low exchange rates are an

opportunity to boost overseas sales, as your wares become relatively cheaper overseas.

Government officials manage foreign exchange reserves to influence the domestic economy. On

the national level, low exchange rates are ideal for exporters, while strong currency valuations

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benefit consumers with increased purchasing power for imports. Treasury leadership may spend

domestic currency to buy large amounts of foreign exchange, which effectively devalues the home

currency. As of April 2010, China has purchased more than $900 billion in U.S. Treasuries, which

devalues its yuan and supports its export economy.

Foreign exchange risks describe lost profits and purchasing power related to adverse currency

movements. Canadian businessmen that hold reserves of Japanese yen suffer when the yen falls.

Alternatively, Canadian exporters lose out on sales when Canadian dollars strengthen and make

their goods more expensive for foreign buyers.

Foreign exchange risk management calls for diversification. Large corporations expand multi-

nationally to balance currency risks. For example, elevated energy costs benefit resource-rich

nations and currencies, while industrialized energy importers are subject to recession and inflation.

Caterpillar is a multi-national corporation whose profits in oil-rich Russia may exceed any lostsales in America at that point. Smaller investors, however, that lack the finances to set up multi-

national enterprises can diversify accordingly with global mutual funds.

HISTORY OF FOREIGN EXCHANGE

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Initially, the value of goods was expressed in terms of other goods, i.e. an economy based on barter

between individual market participants. The obvious limitations of such a system encouraged

establishing more generally accepted means of exchange at a fairly early stage in history, to set a

common benchmark of value. In different economies, everything from teeth to feathers to pretty

stones has served this purpose, but soon metals, in particular gold and silver, established

themselves as an accepted means of payment as well as a reliable storage of value.

Originally, coins were simply minted from the preferred metal, but in stable political regimes the

introduction of a paper form of governmental IOUs (I owe you) gained acceptance during the

Middle Ages. Such IOUs, often introduced more successfully through force than persuasion were

the basis of modern currencies.

Before World War I, most central banks supported their currencies with convertibility to gold.

Although paper money could always be exchanged for gold, in reality this did not occur often,

fostering the sometimes disastrous notion that there was not necessarily a need for full cover in the

central reserves of the government.

At times, the ballooning supply of paper money without gold cover led to devastating inflation and

resulting political instability. To protect local national interests, foreign exchange controls were

increasingly introduced to prevent market forces from punishing monetary irresponsibility.

In the latter stages of World War II, the Bretton Woods agreement was reached on the initiative of

the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes suggestion

for a new world reserve currency in favour of a system built on the US dollar. Other international

institutions such as the IMF, the World Bank and GATT (General Agreement on Tariffs and Trade)

were created in the same period as the emerging victors of WW2 searched for a way to avoid the

destabilising monetary crises which led to the war. The Bretton Woods agreement resulted in a

system of fixed exchange rates that partly reinstated the gold standard, fixing the US dollar atUSD35/oz and fixing the other main currencies to the dollar - and was intended to be permanent.

The Bretton Woods system came under increasing pressure as national economies moved in

different directions during the sixties. A number of realignments kept the system alive for a long

time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's

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suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole

international currency at a time when it was under severe pressure from increasing US budget and

trade deficits.

The following decades have seen foreign exchange trading develop into the largest global market by far. Restrictions on capital flows have been removed in most countries, leaving the market

forces free to adjust foreign exchange rates according to their perceived values.

But the idea of fixed exchange rates has by no means died. The EEC (European Economic

Community) introduced a new system of fixed exchange rates in 1979, the European Monetary

System. This attempt to fix exchange rates met with near extinction in 1992-93, when pent-up

economic pressures forced devaluations of a number of weak European currencies. Nevertheless,

the quest for currency stability has continued in Europe with the renewed attempt to not only fix

currencies but actually replace many of them with the Euro in 2001.

The lack of sustainability in fixed foreign exchange rates gained new relevance with the events in

South East Asia in the latter part of 1997, where currency after currency was devalued against the

US dollar, leaving other fixed exchange rates, in particular in South America, looking very

vulnerable.

But while commercial companies have had to face a much more volatile currency environment in

recent years, investors and financial institutions have found a new playground. The size of foreign

exchange markets now dwarfs any other investment market by a large factor. It is estimated that

more than USD 3,000 billion is traded every day, far more than the world's stock and bond markets

combined.

FOREIGN EXCHANGE MARKET

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The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for

another. It is by far the largest market in the world, in terms of cash value traded, and includes

trading between large banks, central banks, currency speculators, multinational corporations,

governments, and other financial markets and institutions. Retail traders (small speculators) are a

small part of this market. They may only participate indirectly through brokers or banks and may

be targets of forex scams .

To invest in other countries or to buy foreign products, firms and individuals may first need to

acquire the currency of the country with which they intend to deal with. In addition, exporters may

demand to be paid for their goods and services either in their own currency or in U.S. dollars,

which are accepted worldwide.

The Foreign Exchange Market, or "Forex" market, is where the majority of buying and selling of world currencies takes place. The Forex market is by far the largest financial market in the world

with trading volumes surpassing USD 1.5 trillion on some days. The very large commercial banks

are the major traders in this market

The five major centers of Forex trading are based in London, New York, Zurich, Frankfurt and

Tokyo.

The Forex market itself consists of a worldwide network of primarily interbank traders connected

by telephone lines and computers. FX traders constantly negotiate prices between one another and

the resulting market bid/ask price for a particular currency is then fed into computers and displayed

on official quote screens. Forex exchange rates quoted between banks are referred to as Interbank

Rates. There is no single unified foreign exchange market. Due to the over-the-counter (OTC)

nature of currency markets, there are rather a number of interconnected marketplaces, where

different currency instruments are traded. This implies that there is no such thing as a single dollar

rate - but rather a number of different rates (prices), depending on what bank or market maker is

trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs.

The main trading centers are in London, New York , and Tokyo , but banks throughout the world

participate. As the Asian trading session ends, the European session begins, then the US session,

and then the Asian begin in their turns. Traders can react to news when it breaks, rather than

waiting for the market to open.

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There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations

are usually caused by actual monetary flows as well as by expectations of changes in monetary

flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or

surpluses, and other macroeconomic conditions. Major news is released publicly, often on

scheduled dates, so many people have access to the same news at the same time. However, the

large banks have an important advantage; they can see their customers order flow. Trading legend

Richard Dennis has accused central bankers of leaking information to hedge funds.

Currencies are traded against one another. Each pair of currencies thus constitutes an individual

product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter

code of the currency into which the price of one unit of XXX currency is expressed. For instance,

EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar

MARKET SIZE AND LIQUIDITY

The foreign exchange market is unique because of :

Its trading volume

The extreme liquidity of the market The large number of, and variety of, traders in the market

Its geographical dispersion

Its long trading hours - 24 hours a day ( except on weekends )

The variety of factors that affect exchange rates

TYPES OF FOREIGN EXCHANGE MARKETS

Spot market

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Spot market transactions involve immediate delivery and payment at the current exchange rate

(spot rate ).

Futures market

Futures market transactions involve future payment and delivery at an agreed exchange rate ( future

rate ). Futures contracts are standardized. They are identical, with fixed amounts, fixed maturity

dates, and fixed exchange rates.

Forward market

Forward market transactions involve future payment and delivery at an agreed exchange rate

(forward rate ). Forward contracts are specific (non-standardized). They are tailored to users'specific needs.

MARKET PARTICIPANTS

The difference of the Forex and stock market is in the levels of access that is the integral part of the

Forex market. The highest level is designed for the inter-bank market (the participants are large

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banks). The bid/ask spreads of this level are commonly not available to those traders outside this

level. There is a certain trend, the lower the level of access the bigger the bid/ask spread (it can

vary from 0-1 to 1-2 pips for most traded currencies). The main factor determining the amount of

the spread is the volume. In case trader is able to provide many transactions for large sums then the

spread of bid and ask price will be as low as possible. Such spread is considered to be a better one.

As for the levels of access themselves the determining factor here is so called size of the line, i.e.

the amount of money you deal with. The share of the inter-bank market is about 53% of all deals.

After the inter-bank market there go other not so big large investment banks, international

corporations hedging risks and paying employees, other hedging funds and several large retail forex

traders. According to experts such bodies as pension and mutual funds, insurance companies are the

important part of the Forex market and all financial markets. Moreover another important

participants of the Forex market are the hedge funds and Central banks of different countries.

Banks

The most part of the every day speculative trading and commercial turnover relates to the inter-

bank market as big and well-known banks can trade large sums of money every day. Sometimes the

customers make these deals but usually so-called proprietary desks acting on behalf of the banks

make them.

Forex brokers were the main driving force of the market in the past that assisted inter-bank trading

and searched for appropriate counterpart to this or that buyer or seller. Nowadays the great part of

this business is done by the electronic systems. Now traders simply listen what is happening at the

inter-bank trading but the turnover today is significantly lower then in a recent years.

Commercial companies

A certain part of the inter-bank market relates to the work oh those companies that need foreign

currency to make a certain payment. Such companies are not the constant players of the market and

do not trade really large amounts of currency like banks do. However the currencys exchange rate

in a long prospective is affected by the trade flows. Sometimes commercial companies cover large

positions that are not known by the rest of market participants and thus having significant impact

onto the market.

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Central banks

Another important players at the Forex are the Central banks of the different countries. Their

purpose of taking part at the trades is to take control over such factors as supply of the money,

inflation level and interest rates. Central banks sometimes use their reserves of the foreign currency

to make the market more stable. According to Milton Friedman there is the most appropriate way

of stabilizing the market for the Central banks by buying at low exchange rates and sell at high

exchange rates. On the other hand we cannot be sure that this way will be a really effective one, as

the Central banks cannot become a bankrupt in case they incur a great losses and it is not clear

whether they are profitable or not.

Only the talks about possible Central banks intervention may lead to currency stabilization,

however the real banking intervention is also often used commonly in those countries with the so

called dirty float regime of the currency. The aims Central banks have are not reached all the time,

as the rest of the market assets are much bigger. And several similar situations have already

occurred 1992-1993 European Exchange Rate Mechanism crisis and later several crunches in the

Southeast Asia.

Investment management firms

Another participants of the Forex market are the investment management firms, like pension funds.

Their aim in playing at the Forex is to ease deals in foreign securities. Let consider the example,

investment management firms with an international equity portfolio participate in foreign

currencies trades with an aim to pay for the foreign equities buying. The deals conducted at the

Forex are not considered to be speculative or profitable ones.

However sometimes such firms have speculative specialist currency overlay operations that trade

the currency to get profit and limit the risks. At the same time there are not too much such firms,

therefore those existing manage quite big amount of money and can get great profits.

Hedge funds

After the 1996 the hedge funds are considered to be quite aggressive at currency speculation. These

funds deal with billions of dollars and so they are capable to have an appropriate reaction on any

intervention of the Central bank with an aim to support the currency.

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Retail forex brokers

Forex market is also a place of work for such traders as retail forex brokers. Usually there are 2

types of them: those brokers offering speculative trading and those providing physical delivery of

the assets.

Forex brokers are also called market makers who are dealing with quite small part of the whole

forex (about $25-50 billion a day). There are also retail traders who can only deal via retail brokers

or banks

Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign

exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion

daily, which is about 2% of the whole market. CNN also quotes an official of the National Futures

Association "Retail forex trading has increased dramatically over the past few years. Unfortunately,the amount of forex fraud has also increased dramatically."

All firms offering foreign exchange trading online are either are market makers or facilitate the

placing of trades with market makers.

Many retail FX market makers claim to "offset" clients' trades on the interbank market (that is, with

other larger market makers), e.g. after buying from the client, they sell to a bank. Nevertheless, the

large majority of retail currency speculators are novices and who lose money, so that the market

makers would be giving up large profits by offsetting. Offsetting does occur, but only when the

market maker judges its clients' net position as being very risky.

The dealing desk operates much like the currency exchange counter at a bank. Interbank exchange

rates, which are displayed at the dealing desk, are adjusted to incorporate spreads (so that the

market maker will make a profit) before they are displayed to retail customers. Prices shown by the

market maker do not necessarily reflect interbank market rates. Arbitrage opportunities may exist,

but retail market makers are efficient at removing arbitrageurs from their systems or limiting their

trades.

A limited number of retail forex brokers offer consumers direct access to the interbank forex

market. But most do not because of the limited number of clearing banks willing to process small

orders. More importantly, the dealing desk model can be far more profitable, as a large portion of

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retail traders' losses are directly turned into market maker profits. While the income of a market

maker that offsets trades or a broker that facilitates transactions is limited to transaction fees

(commissions), dealing desk brokers can generate income in a variety of ways because they not

only control the trading process, they also control pricing which they can skew at any time to

maximize profits.

The rules of the game in trading FX are highly disadvantageous for retail speculators. Most retail

speculators in FX lack trading experience and capital (account minimums at some firms are as low

as 250-500 USD). Large minimum position sizes, which on most retail platforms ranges from

$10,000 to $100,000, force small traders to take imprudently large positions using extremely high

leverage. Professional forex traders rarely use more than 10:1 leverage, yet many retail Forex firms

default client accounts to 100:1 or even 200:1, without disclosing that this is highly unusual for

currency traders. This drastically increases the risk of a margin call (which, if the speculator's trade

is not offset, is pure profit for the market maker.

SPECULATORS

Another class of market participants involved with foreign exchange-related transactions is

speculators. Rather than hedging against movement in exchange rates or exchanging currency to

fund international transactions, speculators attempt to make money by taking advantage of

fluctuating exchange-rate levels.

FOREIGN EXCHANGE RATE

An exchange rate is the current market price for which one currency can be exchanged for another.

It is the value of a foreign nations currency in terms of the home nations currency.Exchange rates

change every day. This is because currencies are traded on an open market, and the demand for

them varies based on what is happening in that country. The interest rate paid by a countrys

central bank is a big factor, since a higher interest rate makes that currency more valuable.

Inflation is also taken into account, since high inflation in a country makes that currency worth less

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the longer it is held. Finally, a countrys financial stability will also impact a currency over time,

since investors want to be sure they will get paid back

An Exchange Rate is the rate at which one nation's currency can be exchanged for that of another.

Exchange rates impact, and are impacted by, international trade, in a free-market system that helpsto maintain a balance of trade and balance of capital . For example, a skewed change rate can

make a company's exports cheaper than their foreign counterparts, but for a country to achieve this

artificially they must sell their own currency by borrowing against the nation's wealth to purchase

another nation's currency. If exports or all capital are in high demand, a country's currency will rise

in value because of the demand for that currency to pay for exported goods, services, and capital.

Investors are impacted in two ways:

1. Businesses that rely on exports can find their products suddenly competitive - or

prohibitively expensive - in overseas markets as exchange rates fluctuate. Similarly,

companies that rely on imports can see the costs of these imports rise and fall with the

exchange rate. For companies impacted by changes in U.S. Dollar exchange rates, see The

Dollar .

2. Exchange rates directly affect the realized return on an investment portfolio with

overseas holdings. If you own stock in a foreign company and the local currency goes up

10%, the value of your investment goes up 10% even if the stock price doesn't change atall.

The exchange rate between two countries' currencies depends upon many factors, including the

Balance of Trade or Balance of Capital and the prevailing real interest rate in country as

well as inflation .

Imports and Exports are the main drivers of the balances of trade and capital. If the country imports

more than it exports, it has to be supplied with capital from abroad.

Relative interest rates greatly impact the exchange rate between any two countries. Typically as the

central bank of a country makes a change in that country's interest rates, investors and trader will

see the value of that country's currency - in relationship to other countries - change. An example of

this is as the US Federal Reserve lowered interest rates in the fall of 2007, the value of the US

dollar fell both in anticipation and in response. When the public perception starts to change to the

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point of view that maybe "The Fed" will stop lowering rates or even increase rates, typically you

will see the US Dollar stabilize or rise.

Exchange Rates are very important for any country as they determine the level of imports and

exports. If a domestic currency appreciates with respect to a foreign currency, imported goods will be cheaper in the domestic market and local companies would find that their foreign competitor's

goods become more attractive to customers. If the country has a strong currency then its goods

become more expensive in the international market, which results in lost competitiveness. This is

the reason that China, despite much pressure from the United States, is not letting its Yuan

appreciate.

Exchange rate movements can have a significant impact on a company's returns. Multinational

companies may see significant shifts in their profitability, as foreign exchange ("FX" "forex") rates

may make locally held currency more valuable. Even local companies can be affected, as changing

FX rates may substantially alter their material costs, or affect their ability to sell their goods in

foreign countries at competitive prices.

FLUCTUATIONS IN EXCHANGE RATES

A market based exchange rate will change whenever the values of either of the two component

currencies change. A currency will tend to become more valuable whenever demand for it is greater

than the available supply. It will become less valuable whenever demand is less than available

supply (this does not mean people no longer want money, it just means they prefer holding their

wealth in some other form, possibly another currency).

Increased demand for a currency is due to either an increased transaction demand for money, or an

increased speculative demand for money. The transaction demand for money is highly correlated to

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the country's level of business activity, gross domestic product (GDP), and employment levels. The

more people there are out of work, the less the public as a whole will spend on goods and services.

Central banks typically have little difficulty adjusting the available money supply to accommodate

changes in the demand for money due to business transactions.

The speculative demand for money is much harder for a central bank to accommodate but they try

to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is

the interest rate) is high enough. The higher a country's interest rates, the greater the demand for

that currency. It has been argued that currency speculation can undermine real economic growth, in

particular since large currency speculators may deliberately create downward pressure on a

currency in order to force that central bank to sell their currency to keep it stable (once this

happens, the speculator can buy the currency back from the bank at a lower price, close out their

position, and thereby take a profit).

In choosing what type of asset to hold, people are also concerned that the asset will retain its value

in the future. Most people will not be interested in a currency if they think it will devalue. A

currency will tend to lose value, relative to other currencies, if the country's level of inflation is

relatively higher, if the country's level of output is expected to decline, or if a country is troubled by

political unc ertainty. For example, when Russian President Vladimir Putin dismissed his

Government on February 24, 2004, the price of the ruble dropped. When China announced plansfor its first manned space mission, synthetic futures on Chinese yuan jumped (since China's

currency is officially pegged, synthetic markets have emerged that can behave as if the yuan was

floating).

Like the stock exchange, money can be made or lost on the foreign exchange market by investors

and speculators buying and selling at the right times. Currencies can be traded at spot and foreign

exchange options markets. The spot market represents current exchange rates, whereas options are

derivatives of exchange rates.

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MAJOR CURRENCIES

U.S. DOLLAR

The United States dollar is the world's main currency an universal measure to evaluate any other

currency traded on Forex. All currencies are generally quoted in U.S. dollar terms. Under

conditions of international economic and political unrest, the U.S. dollar is the main safe-haven

currency, which was proven particularly well during the Southeast Asian crisis of 1997-1998.As itwas indicated, the U.S. dollar became the leading currency toward the end of the Second World

War along the Breton Woods Accord, as the other currencies were virtually pegged against it. The

introduction of the euro in 1999 reduced the dollar's importance only marginally. The other major

currencies traded against the U.S. dollar are the euro, Japanese yen, British pound, and Swiss franc.

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Eurozone Euro

The euro was designed to become the premier currency in trading by simply being quoted in

American terms. Like the U.S. dollar, the euro has a strong international presence stemming from

members of the European Monetary Union. The currency remains lagued by unequal growth, high

unemployment, and government resistance to structural changes. The pair was also weighed in

1999 and 2000 by outflows from foreign investors, particularly Japanese, who were forced to

liquidate their losing investments in euro-denominated assets. Moreover, European money

managers rebalanced their portfolios and reduced their euro exposure as their needs for hedging

currency risk in Europe declined.

Japanese Yen

The Japanese yen is the third most traded currency in the world; it has a much smaller international

presence than the U.S. dollar or the euro. The yen is very liquid around the world, practically

around the clock. The natural demand to trade the yen concentrated mostly among the Japanese

keiretsu, the economic and financial conglomerates. The yen is much more sensitive to the fortunes

of the Nikkei index, the Japanese stock market, and the real estate market.

British Pound Sterling

Until the end of World War II, the pound was the currency of reference. The currency is heavily

traded against the euro and the U.S. dollar, but has a spotty presence against other currencies. Prior

to the introduction of the euro, both the pound benefited from any doubts about the currency

convergence. After the introduction of the euro, Bank of England is attempting to bring the high

U.K. rates closer to the lower rates in the euro zone.

Swiss franc

The Swiss franc is the only currency of a major European country that belongs neither to the

European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively

small, the Swiss franc is one of the four major currencies, closely resembling the strength and

quality of the Swiss economy and finance. Switzerland has a very close economic relationship with

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Germany, and thus to the euro zone. Therefore, in terms of political uncertainty in the East, the

Swiss franc is favored generally over the euro. Typically, it is believed that the Swiss franc is a

stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely resembles

the patterns of the euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss franc

can be more volatile than the euro.

Australian Dollar

The Australian dollar is the currency of the Commonwealth of Australia , including Christmas

Island , Cocos (Keeling) Islands , and Norfolk Island , as well as the independent Pacific Island state s

of Kiribati , Nauru and Tuvalu . Within Australia it is almost always abbreviated with the dollar sign

($), with A$ or AU$ sometimes used informally to distinguish it from other dollar -denominated

currencies. It is subdivided into 100 cents .The Australian dollar is currently the fifth-most-tradedcurrency in the world foreign exchange markets behind the US dollar , the euro , the yen and the

pound sterling .The Australian dollar is popular with currency traders due to comparatively high

interest rates in Australia, the relative freedom of the foreign exchange market from government

intervention, the general stability of Australia's economy and political system, and the prevailing

view that the Australian dollar offers diversification benefits in a portfolio containing the major

world currencies, especially because of its greater exposure to Asian economies and the

commodities cycle

FOREX AND ITS ROLE PLAY IN ONGC

FOREX risk is one the major risks faced by most of the corporates. There is always an element of

risks inherent in their transactions, as the exposure to the exchange risk volatility in the market can

have significant impact on the returns. In India more than 90% of the trading is done in USD. The

FOREX payments made in ONGC are done on TOM basis. ONGC imports crude oil and

instruments such as pipelines, drill machines for its offshore operations. It exports Natural gas,

Naphtha products, C2-C3, LSHS, aviation Turbine Fuel. That is why ONGC is required to purchase

foreign exchange for remittance to the contractors and suppliers wherever such contract agreements

are denominated in foreign currency. The Forex purchase is also resorted for servicing the foreign

currency loans availed by ONGC for its operations in the past. The Forex purchase transactions are

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carried out predominantly from MRBC (Mumbai Regional Business Centre) including entire debt

servicing of the ONGC loans portfolio.

PROCEDURE FOR PURCHASE OF FOREIGN

EXCHANGE BY ONGC

ONGC is required to purchase foreign exchange for remittance to the contractors and suppliers

wherever such contract agreements are denominated in foreign currency. The forex purchase is

also resorted for servicing the foreign currency loans availed by ONGC for its operations in the past. The forex purchase transactions are carried out predominantly from MRBC (Mumbai

Regional Business Centre) including entire debt servicing of the ONGC loans portfolio. The

aggregate value of forex purchases made by MRBC during the period 01.04.98 to 31.10.2000 has

been of the order of Rs. 11,078,66 crores equivalent, including Debt servicing of Rs. 5,788,13

crores.

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The procedure regarding purchase of forex, which was reviewed by, the board and its slient

features are as follows: -

Forex will be purchased only from Scheduled Banks or Public Sector Financial Institutions

approved by RBI as Authorized Dealers of Foreign Exchange.

FOREX REMITTANCES ARE CLASSIFIED INTO 3 BROAD CATEGORIES-

(a) Remittance equal or ABOVE USD 1 Million equivalent (Category A).

(b) Remittance equal to ABOVE USD 1, 00, 000 equivalent but BELOW USD 1

Million (Category B).

(c) Remittances BELOW USD 1,00,000 equivalent (Category C)

For all categories, competitive quotes shall be invited at least from 4 Authorized dealers.

A panel of such Authorized Dealers shall be drawn by respective work centres by adopting a

transparent short-listing procedure and roster system would be followed for inviting quotes from

the panel of banks, who would be placed under suitable categories.

The invitees will comprise of SBI, the previous successful bidder in the respective category, and

other dealers by rotation. SBI (being the main banker of ONGC) would always be involved for

such competitive quotes. Whenever justified by operational exigencies, forex remittances may be

effected on single quotation basis through SBI with the approval of Head of Finance and for

reasons to be recorded in writing.

All forex purchase transactions would be carried out through the centralized Cash and Bank section

at each work center who would be responsible for proper maintenance of records as well as the

quotes approved for carrying out the transaction.

A system of approval of all high value cases (above USD 100,000) at the level of at least E-7 shall

be followed for calling of the quotes as well as for approval of the transactions carried out.

Considering the fact that the forex market is quite volatile and moves fast, the quotes may be

obtained over phone. However, to avoid any disputes at a later stage, two officers would be

involved in collection of quotes and should sign the register so maintained for keeping the record of

purchases.

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In case of MRBC, where forex remittances are very large, electronic method of obtaining quotes

would be desirable.

Authorization levels for dealing in Foreign Exchange shall be approved by Director (Finance) who

may also sub-delegate his powers to appropriate level officers at the work centers for practicaloperational reasons.

Director (finance) is also authorized by the Board to modify/amend the procedure from time as may

be considered appropriate for operational reasons.

FUNCTIONING OF THE APPROVED PROCEDURE

The approved procedure for purchase of forex was advised to all Work centres with authorizations

from Director (Finance) in favour of nominated Principal Officers (Principal Officer is the senior

most functional executive at each work centre for operating of the bank account) to identify and

nominate concerned F & A Officers and carry out actual transactions relating to purchase of foreign

exchange as per the approved procedure. The Reuters screen has also been installed at the Forex

management cell, MRBC with a view to monitor movement of the exchange rate and accordingly

approach the market for actual requirements. The Reuters screen provides online status about

ongoing traders in the forex market as well as the indicative rates at which the Banks / Authorised

Dealers are buying and selling the currency.

As regards other normal FE requirements, there is a distinct merit from national perspective in RBI

advice to avoid competitive quotes. Further, protection from Rupee depreciation due to window

shopping, is also in commercial interests of ONGC. All the same it may not be advisable to

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altogether dispense with the existing practice which provides better transparency regarding

functioning of the system. A practical approach would be to go by the middle course whereby the

company may continue to have competitive quotes in majority of the cases (upto USD 5 Million)

and follow modified approaches for bigger remittances.

The suggested procedure is as follows :

REMITTANCES UPTO USD 5 MILLION (CATEGORY I ) :

For transactions up to USD 5 Million, competitive quotes may be invited from 2 3 Banks, instead

of 4 Banks for the normal requirements. A panel of Banks is to be drawn by the work centre for this

purpose

REMITTANCES OVER USD 5 MILLION UPTO USD 15 MILLION

(CATEGORY II) :

In the Indian forex markets, the inter-bank quotes are typically for transaction sizes of USD 1

Million. In case of larger transactions say over USD 5 Million, a strategic approach needs to be

adopted. Corporate typically fill the large order in small quantities over the available time. In this

strategy, the deal is carried out by splitting the transaction in smaller trenches (typically not more

than USD 5 Million each) over the time available. As an alternative strategy, a number of banks are

simultaneously approached and the deal is concluded at rates available at that time.

As the levels in market are known to all participants due to screen based information systems, the

rates are likely to be quite close and any differences may be ironed out to the extent practicable by

discussion. In such an event a large ticket deal is put through quickly before the news of such

transaction spreads. The market generally moves after deal is put through when the counter party

banks approach the market for cover. Here speed of execution is of essence. The alternative

strategy however requires a number of dealers operating at one time. Secondly, such alternative

strategy is more successful when the counter party does not know the side company wants to deal

in. Thus there would be two way quotes (bid and ask rates) in such cases. In case of companies like

ONGC who are only buyers of foreign Exchange, the side of ONGC is known to the market and

even asking for two way quote is not much of help.

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Thus in case of ONGC, the preferred approach is considered to be splitting the remittance

and asking competitive quotes from 2-3 Banks is considered desirable for medium to large

transactions sizes (say USD 5-15 million). This strategy is similar to that adopted for remittances

up to USD 5 million with the difference that the requirement is proposed to be split into smaller

sized tranches.

REMITTANCES OVER USD 15MILLION AND UPTO USD 50 MILLION (CATEGORY

III) :

When the size tend to be larger than USD 15 million, the approach of filling the demand through

competitive bids in smaller tranches is not considered very effective. This is because of the fact that

if the same corporate (ONGC) keeps revising the market, the market takes it as a signal of very

large demand which pushes up the market.

Hence it is strategically considered a better option, to put through transactions over USD 15 million

through a bank on a single quote basis taking Reuters or similar information system ask levels as

the reference.

For the purpose of transactions above USD 15 million, a panel of top 10 Banks including

SBI is to be drawn from amongst the Banks who have done maximum Business with ONGC during

the last 12 months. The panel is to be updated on a rollover basis every quarter using the

transactions during the immediately preceding 12 months.

REMITTANCES OVER USD 50 MILLION:

If the total foreign currency payment is above USD Fifty Million Foreign exchange coverage is

carried out in smaller lots over a number of days through short dated forwards. The foreign

exchange remittance or part thereof could be awarded to a single bank (such as SBI or 2-3 banks).

Director (Finance) will be kept apprised of the methodology.

Tom rates are obtained in one to two rounds from the banks telephonically by at least two

designated officers. These are recorded in the daily booking sheet. Further, the Reuters ask rates are

obtained, simultaneous to obtaining rates from the banks, from the Reuters software by adjusting

the relevant discount / premium to arrive at the tom rates.

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These are also documented in the daily booking sheet. Once the bank tom rates are obtained, a

comparative analysis is done and the bank offering the lowest rate is selected. This rate is also

compared with the Reuters tom rate for the purpose of drawing a reference to the international

rates. The respective bank is then telephonically informed about the acceptance of the offer.

APPROVAL SHEET OF FOREX TRANSACTIONS OF ONGC

The following table highlights the transaction of ONGC as on 3 rd August 2009

MR/F&A/FxMC/Appr/09-10 3-Aug-09 The following payment vouchers have been received for payment which are proposedto be booked on 3-Aug-09 The details of the vouchers with the name of theparties, TT/DD, currency, amount and due dates are given hereunder :

Beneficiaries Mode Gr Ccy AmountVoucher

DateDueDate

ReceivedDate

LOT 1

1 BGEPIL TT JV USD3,859,540.

00 31/7/2009 Due 31/7/2009

3,859,540.

00LOT 2

2 Cairn Energy TT JV USD491,283.

00 31/7/2009 Due 31/7/2009

3 BGEPIL TT HP USD2,094,997.

74 31/7/2009 Due 31/7/2009

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4eProductionSolutions TT NA USD

7,995.56 31/7/2009 Due 31/8/2009

2,594,276.

30

5David BrownGear Systems TT NA GBP

22,685.30 30/7/2009 Due 31/8/2009

6 Clyde Union TT BA GBP 58,303.00 31/7/2009 Due 31/8/2009

80,988.

30Eqvl.USDforSl.No.

5,6 = USD135,452.93 (1 GBP =

###### USD)

2,729,729.

23

TOTAL USD

6,589,269.

23

All paymentsare to be madefor value TOM

i.e. 4-Aug-09

-As the total is between USD 5.00 and 15.00 million it falls under Category II of the Board approval dated Dec 16 2000. Itis hence proposed that the amounts

be booked in 2 lots.

REMITTANCES REPORT

The remittances report describes the total inflows and outflows for that particular month. It also

includes the list o empanelled banks, bankwise summary which highlights no of bids sought and

successful. It also includes the currencywise distribution for that particular month.

List of remittances made during the month : August 2009

Sl.No

Date of Booking

Valuedate

No. of quotesobtaine

d

Name of theQualifying bank Curr

Exchange rateoffered by

Amount inforeign

Currency

Amount in

INR(Rs.

Incrore

s)

Remarks(to

specifiyspot/tom/forward)

Qualifying Bank SBI

1 31/07/2009 03/08/2009 3 State Bank of India EUR 67.92

0967.920

9 ##########7.4

3 TOM

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2 31/07/2009 03/08/2009 3 State Bank of India USD48.08

9048.089

0 371,096.771.7

8 TOM


6547.686

5 ##########18.4

0 TOM


1347.691

3 ##########12.3

7 TOM

5 03/08/2009 04/08/2009 3 State Bank of India GBP 80.2645 80.2645 80,988.30 0.65 TOM

6 04/08/2009 05/08/2009 1 Citibank USD47.61

00 ##########34.8

9 TOM

7 04/08/2009 05/08/2009 1 HDFC USD47.62

50 ##########25.9

0 TOM

8 04/08/2009 05/08/2009 1Standard CharteredBank USD

47.6200 ##########

26.90 TOM

9 10/08/2009 10/08/2009 1 State Bank of India GBP79.73

9479.739

4 8,867.000.0

7Cash adjagainst rec


2547.802

5 ##########193.2



6547.766

5 ##########22.3

6 TOM

12 10/08/2009 11/08/2009 3 Yes Bank GBP79.45

87 ##########13.2

3 TOM


7468.347

4 ##########10.8

8 TOM


6248.336

2 317,164.561.5

3 TOM


6248.336

2 ##########28.6

0 TOM

16 12/08/2009 13/08/2009 1 Corporation Bank USD48.33

35 ##########26.8

1 TOM

17 12/08/2009 13/08/2009 1 UTI Bank GBP79.45

00 31,829.750.2

5 TOM

18 12/08/2009 13/08/2009 1 UTI Bank USD48.34

20 ##########24.8

2 TOM


4048.074

0 ##########13.1

2 TOM

20 13/08/2009 14/08/2009 3 Corporation Bank USD48.07

50 ##########23.3

1 TOM

21 17/08/2009 18/08/2009 3 ICICI Bank USD48.85

65 ##########22.2

7 TOM

22 17/08/2009 18/08/2009 3 IDBI Bank USD48.92

00 ##########13.4

5 TOM

23 17/08/2009 18/08/2009 3 IDBI Bank EUR 68.75

71 60,662.460.4

2 TOM


0048.670

0 ##########6.1



5869.315

8 714,954.904.9



0048.670

0 ##########94.1



5869.315

8 466,804.183.2



5048.725

0 ##########101.6


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5469.345

4 26,377.420.1


30 21/08/2009 24/08/2009 3 ING Vysya Bank USD48.60

75 ##########21.5

2 TOM

31 21/08/2009 24/08/2009 3 State Bank of India GBP80.45

2080.452

0 15,517.250.1

2 TOM

32 21/08/2009 24/08/2009 3 State Bank of India EUR 69.6117 69.6117 298,451.72 2.08 TOM


1548.611

5 ##########14.3

4 TOM


1548.611

5 ##########16.1

6 TOM

35 25/08/2009 26/08/2009 1 IDBI Bank USD48.77

00 ##########32.9

8 TOM

36 25/08/2009 26/08/2009 1 Indusind Bank USD48.76

45 ##########33.4

8 TOM

37 25/08/2009 26/08/2009 1 Bank of India USD48.76

25 ##########33.1

1 TOM


1548.851

5 ##########13.1

8 TOM


69.8674 767,482.44 5.36 TOM


0048.910

0 ##########24.4

0 TOM


4048.914

0 ##########17.5

7 TOM


0048.730

0 806,014.163.9

3 TOM

43 28/08/2009 31/08/2009 3Standard CharteredBank USD

48.7175 ##########

16.37 TOM

44 28/08/2009 31/08/2009 3Standard CharteredBank JPY

0.5185 ##########

1.80 TOM

Total

Remittances969.4

0 Crores

The above table illustrates the outward remittances of August 2009.

Value date indicates the date on which payments were made. For TOM, the value date is one

ahead of the date of booking. For cash basis the value date is same as date of booking whereas

in case of SPOT, the value date is date of booking plus two.

No of Quotes obtained- number of banks called for booking a single lot payment.

For example-

In case of LSC payments, only one bank is called, since the payment is routed through SBI.

For Category III transactions, no competitive bids are accepted. Thus only single quote is obtained

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one bank is called for a single lot transaction so as to avoid artificial demand of foreign currency.

Whenever there is an inflow, the transaction takes place on CASH basis i.e the amount is adjusted

against receipts. The outflows are adjusted against inflows and the payment is routed through SBI.

List of inward remittances made during the month : August 2009

Sl.No

Date of Realisation

Valuedate

No. of quotes

obtained

Name of thequalifying

bankCurr

Exchange rateoffered by Amount

in foreignCurrency

Amountin

INR(Rs.In

crores)

ReceivedFrom

Remarks(to

specifiyspot/tom

/forward)

Qualifying

bankSBI

1 10/08/2009 05/08/2009 1

State Bank of

India USD 47.8025 47.8025 ####### ###### SHELL INT CASH

2 10/08/2009 07/08/2009 1State Bank of India USD 47.8025 47.8025 ####### ######

GLENCOR E INT CASH

3 20/8/2009 19/08/2009 1State Bank of India USD 48.6700 48.6700 ####### ######

S.K ENERGY CASH

4 21/08/2009 20/08/2009 1State Bank of India USD

48.7250

48.7250 ####### ######

VITOLASIA CASH

TotalReceipts ######

TotalReceipts

405.42 crores

The above table highlights the inward remittances of August 2009. A total receipt for the month of

July is Rs 405.42 crores. ONGC sells naphtha products and receives USD from companies like

SHELL INTERNATIONAL, GLENCORE INTERNATIONAL,S.K.ENERGY and VITOLASIA.

The transaction of inflows is done through State Bank of India only. The transaction is done on

Cash basis. The value date indicates the date on which the export credit was received. All the

inflow transactions of ONGC are done with SBI. Thus the LSC payments which is routed

through SBI is made out of the export credit through SBI on cash value. This would allow ONGC

to save the BID/ASK spread on both the deals. The remaining outflow is done on TOM basis.

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The above graph highlights the trend of cash inflows, outflows and for the year 2009-10

HEDGING

Hedging means reducing or controlling risk. This is done by taking a position in the futures market

that is opposite to the one in the physical market with the objective of reducing or limiting risks

associated with price changes.

Hedging is a two-step process. A gain or loss in the cash position due to changes in price levels will

be countered by changes in the value of a futures position. For instance, a wheat farmer can sell

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wheat futures to protect the value of his crop prior to harvest. If there is a fall in price, the loss in

the cash market position will be countered by a gain in futures position.

In this type of transaction, the hedger tries to fix the price at a certain level with the objective of

ensuring certainty in the cost of production or revenue of sale.

The futures market also has substantial participation by speculators who take positions based on the

price movement and bet upon it. Also, there are arbitrageurs who use this market to pocket profits

whenever there are inefficiencies in the prices. However, they ensure that the prices of spot and

futures remain correlated.

A buying hedge is also called a long hedge. Buying hedge means buying a futures contract to hedge

a cash position. Dealers, consumers, fabricators, etc, who have taken or intend to take an exposurein the physical market and want to lock- in prices, use the buying hedge strategy.

Benefits of buying hedge strategy:

To replace inventory at a lower prevailing cost. To protect uncovered forward sale of finished products.

The purpose of entering into a buying hedge is to protect the buyer against price increase of a

commodity in the spot market that has already been sold at a specific price but not purchased asyet. It is very common among exporters and importers to sell commodities at an agreed-upon price

for forward delivery. If the commodity is not yet in possession, the forward delivery is considered

uncovered.

Long hedgers are traders and processors who have made formal commitments to deliver a specified

quantity of raw material or processed goods at a later date, at a price currently agreed upon and

who do not have the stocks of the raw material necessary to fulfill their forward commitment.

A selling hedge is also called a short hedge. Selling hedge means selling a futures contract to

hedge.

Uses of selling hedge strategy.

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To cover the price of finished products. To protect inventory not covered by forward sales. To cover the prices of estimated production of finished products.

Short hedgers are merchants and processors who acquire inventories of the commodity in the spotmarket and who simultaneously sell an equivalent amount or less in the futures market. The

hedgers in this case are said to be long in their spot transactions and short in the futures

transactions.

Usually, in the business of buying or selling a commodity, the spot price is different from the price

quoted in the futures market. The futures price is the spot price adjusted for costs like freight,

handling, storage and quality, along with the impact of supply and demand factors.

The price difference between the spot and futures keeps on changing regularly. This price

difference (spot - futures price) is known as the basis and the risk arising out of the difference is

defined as basis risk. A situation in which the difference between spot and futures prices reduces

(either negative or positive) is defined as narrowing of the basis.

A narrowing of the basis benefits the short hedger and a widening of the basis benefits the long

hedger in a market characterized by contango - when futures price is higher than spot price. In a

market characterized by backwardation - when futures quote at a discount to spot price - a

narrowing of the basis benefits the long hedger and a widening of the basis benefits the short

hedger.

However, if the difference between spot and futures prices increases (either on negative or positive

side) it is defined as widening of the basis. The impact of this movement is opposite to that as in the

case of narrowing. Exchange rates are considered by corporate as a crucial important factor

affecting their profitability. This is because exchange rate fluctuations directly impact the sales

revenue of firms exporting goods and services. Future payments in a foreign currency carry the risk

that the foreign currency will depreciate in value before the foreign currency payment is received

and is exchanged into Indian rupees. Thus exchange risk is the effect that unexpected exchange rate

changes have on the value of the firm. In order to minimize the losses due to exchange rate

fluctuations, hedging is a tool which is used to manage foreign exchange risk.

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ONGC is exposed to this foreign exchange risk because of their daily transactions in multiple

foreign currencies. Hence I have tried to work on devising a hedging strategy for ONGC.

HEDGING TECHNIQUES

The following are some of the most common types of foreign currency hedging vehicles used in

today's markets as a foreign currency hedge. Currency risks could be hedged mainly through

forwards, futures and options.

SPOT CONTRACTS

A foreign currency contract to buy or sell at the current foreign currency rate, requiring settlement

within two days. As a foreign currency hedging vehicle, due to the short-term settlement date, spot

contracts are not appropriate for many foreign currency hedging and trading strategies.

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FORWARD CONTRACTS

A foreign currency contract to buy or sell a foreign currency at a fixed rate for delivery on a

specified future date or period. Foreign currency forward contracts are used as a foreign currency

hedge when an investor has an obligation to either make or take a foreign currency payment at

some point in the future. If the date of the foreign currency payment and the last trading date of the

foreign currency forwards contract are matched up, the investor has in effect "locked in" the

exchange rate payment amount.

FUTURES CONTRACTS

A futures contract is similar to the forward contract but is more liquid because it is traded in an

organized exchange i.e. the futures market. Depreciation of a currency can be hedged by selling

futures and appreciation can be hedged by buying futures.

Futures require a small initial outlay (a proportion of the value of the future) with which significant

amounts of money can be gained or lost with the actual forwards price fluctuations.

CURRENCY OPTIONS

A financial foreign currency contract giving the buyer the right, but not the obligation, to purchase

or sell a specific foreign currency contract (the underlying) at a specific price (the strike price) on

or before a specific date (the expiration date). The amount the foreign currency option buyer pays

to the foreign currency option seller for the foreign currency option contract rights is called the

option "premium." A foreign currency option can be used as a foreign currency hedge for an open

position in the foreign currency spot market. Foreign currency options can also be used in

combination with other foreign currency spot and options contracts to create more complex foreign

currency hedging strategies. There are many different foreign currency option strategies available

to both commercial and retail investors.

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An FX call Option is a tool which simply allows you the right but not the obligation to buy

currency at a specific rate. For example, You may buy $2m USD per annum to pay for stock

bought from a Chinese supplier. You may protect your USD rate by purchasing a Call Option at

1.62 (GBP:USD). This means if the rate falls below 1.62 you are protected at 1.62, if the rate

improves above 1.62 you can also benefit from the market upside.

An FX Put option is a tool which simply gives you the right but not the obligation to sell a

currency at a specific rate. For example, You may sell your products in Europe and receive 2m

Euro per annum. A Put FX Option at 1.10 (GBP:EURO) would allow you to guarantee the income

value when repatriating these EUROs back to sterling. If the rate worsens (as an exporter) above

1.10 you are protected. If the market rate improves above 1.10 you can also benefit from the

upside.

FORWARD CONTRACTS

A forward contract is an agreement between two parties to buy or sell (obligation) a commodity or

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