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7/27/2019 Group 2 Hedging Operations Term Paper PPT V1.0
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HEDGING IN AUTOMOBILE
SECTOR
ROLL NO SPECIALIZATION NAME
PGPM912-066 IM NITHYANANDAM THIRUVENKADAM
PGPM912-093 FIN NITIN CHAWLA
PGPM912-101 FIN VIKRANT SINGH KHANKA
PGPM912-102 OM JITENDRA KANDPAL
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1
2
3
INTRODUCTION - HEDGING
4
COPPER
STEEL
FOREX
5TECHNOLOGY
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1INTRODUCTION - HEDGING
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INTRODUCTION
Hedging
Hedging is a form of risk management strategy used in limiting oroffsetting probability of loss from fluctuations in the prices ofcommodities, currencies or securities
A gain or loss in the cash position due to changes in price levels will becountered by changes in the value of a futures position.
Hedging is done based on Past Experiences and Future Market Projections
Automobile Sector
Hedging metals and currency is one of the major strategies, which globalautomobiles companies are practicing to mitigate the risk.
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MAJOR STRATEGIES
Macroeconomic analysis based on global market events andtrends to identify opportunities for investment
Discretionary (trading is carried out by investmentmanagers) and Systematic (trading is based on mathematicalmodels and executed by software)
Global Macro
Utilize market movements, trends, or inconsistencies when
picking stocks across a variety of markets Sub-strategies: emerging markets", sector funds","fundamental growth", "fundamental value"
Directional
Investment opportunities in corporate transactional eventssuch as consolidations, acquisitions, recapitalizations,bankruptcies, and liquidations
Three categories - distressed securities, risk arbitrage, special
situations
Event-driven
Take advantage of relative discrepancies in price betweensecurities
Sub-strategies include: fixed income arbitrage, equity marketneutral, convertible arbitrage
Relative value
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2COPPER
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COPPER
Fundamental Analysis
Demand Supply factors varies From
Business environment in developedeconomies to huge growth in emergingeconomies
Labor unrest to political climate
Difficult to estimate
Unable to predict the short term positions
Hence, identified certain factors but didnt
try to analyze the magnitude of impact.
Technical Analysis
Started with pure Mathematics with manypermutation and combination
Concept: Hundreds of variable have theirimpact on metal pricing and exchange rates.
Identified 4 parameters which are result ofvarious forces of these variables
a-Monthly % change in copper grade-A,cathode monthly price
b-Monthly % change in USD/Euroexchange rate (International trade)
c-Monthly % change in crude prices(Future prospects)
d-Monthly % change in NYSE (Impact ofthe various global factors)
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COPPER ANALYSIS
Analysis Methodology Published monthly data from Mar 1988 to Dec 2012
Various P &C to come-up with a strong correlation
8% of the data set removed as outliers
Analysis explanation
Very weak correlation ranging from -0.26 to 0.19, movedto parameter groups with strong correlation
Utility : Copper prices of future month and otherparameters of the same month.
Parameter Parameter Groups Correlation Coefficient
a+ Sqrt {d*d +b*(c-a)} 0.67
a+ c*(d+a)/b 0.56
a+ (c-d)/(b-a) 0.49
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COPPER ANALYSIS - CONSTRAINTS
Difficulty in estimating direction and magnitude of each parameter
Arbitrariness removed the outliers without any pattern and this limitsthe analyses application as mentioned below:
Rigorous analyses will be required each time rather than justrepeating certain set of specified actions
Explanation behind the erratic behavior of outliers
Weightage of the each parameter group is yet to be find out
Combined formula is yet to be developed on the basis of the strong relationbetween a certain factors
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3STEEL
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STEEL HEDGING STRUCTURES
Enables client to lock in a fixed price at which to buy
(client pays fixed)
No upfront premium
Client is protected from prices above the swap price
There is no benefit if prices fall below swap price
SWAP
Enables client to protect costs above the cap price
Client pays an upfront premium to purchase the
cap
When prices rise above the cap price, payments
are made to the client equal to the difference
Client retains 100% of the benefits of prices falling
below the cap level
CAP
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4FOREX
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FOREX
Type of Foreign Currencies involved:Last 3 Year Capital Investment Trend in MSIL
2008-09 2009-10 2010-11
MRs % MRs % MRs %JPY 9,407 56% 3,826 26% 8,824 40%
USD 701 4% 1,099 7% 896 4%
GBP 432 3% 95 1% 12 0%
EUR 412 2% 318 2% 419 2%
CHF 1 0% 15 0% 1 0%
INR 5,796 35% 9,418 64% 11,854 54%16,749 100% 14,771 100% 22,006 100%
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FE Variation in Recent Times
1.83
1.87
1.95
1.99
2.02
2.02
1.99
1.90
1.88
1.92
1.892.00
1.96
1.96
2.13
2.13
1.92
1.89
1.89
1.79
1.89
1.82
1.85
1.60
1.70
1.80
1.90
2.00
2.10
2.20
JPY to INR
MY 100
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Cost Calculation
MY 100 = MRs 100 / 2.13 = MRs 47 (Apr-2010)
MY 100 = MRs 100 / 1.70 = MRs 59 (Sep-2010)------------------------
- MRs 12
------------------------Pay 25 % More
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GOING FORWARD
Capital Budget Proposal Formats
All data in millions
USD GBP Euro JPYTotal
FEUSD GBP Euro JPY
Total
FEUSD GBP Euro JPY
Total
FEUSD GBP Euro JPY
Total FE
(MRs.)
1 Engineering - - - 1 1 95
2 Assembly - - - 1 0 1,188 697
3 Press Shop 4 4,368 2,602 365 203 5 939 730 0 204 Weld 1,797 998 747 415 415 231 512 284
5 Supply chain 9 151 505 299 166 13 581 3 119
6 Machines 198 110 55 31 45 25 95 53
7 Paint 1 0 1,493 889 0 0 349 223 0 330 185 1,060 589
Grand Total 15 - 0 8,007 5,104 0 - 0 1,815 1,037 18 - 0 1,729 1,752 4 - 1 2,855 1,858
Q3
S. No. Dept
Q4Q1 Q2
BASIS: All data in corresponding currencies
All data in Millions
Currency/Quarter Q1 Q2 Q3 Q4
USD 15 0 18 4
GBP - - - -
Euro 0 0 0 1
JPY 8,007 1,815 1,729 2,855
Total (MRs.) 5,104 1,037 1,752 1,858
- - - -
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FOREX Support required from Users
Accurate Estimationof Foreign Currencies required for next FY.
Accurate break up of Currency wise & Quarter wise Cash Flowfor next FY.
Accurate Data Entry of FE break up in On-line System
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5TECHNOLOGY
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TECHNOLOGY AND PROCESS
The flow of information between the front office and the back
office is critical to any hedge fund.
Disparate systems for trading and accounting are a real source
of such risk and platforms which reference a single book of
records for trading, positions and P&L can keep this risk to a
minimum.
The high levels of market volatility highlight the need for real-
time reporting.
Systems must be able to support streaming data to display the
impact of trade executions on a funds risk.
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TECHNOLOGY PLATFORM BUSINESS
OBJECTIVES
Trader position look-up for appropriate allocation of trades to multipleprime broker accounts.
Consolidated reporting tools to present data from across the multipleprime brokers.
Prime broker connectivity, a secure and encrypted process in which totransmit trade and position data in the format prescribed by eachprime broker.
Exception-based reconciliation of the funds own records of trading
activity with those kept by its multiple prime brokers and third partyadministrator.
Ability to accrue for the various styles of product financing employed bythe prime brokers.
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TECHNOLOGY CONSIDERATIONS
Security is fundamental when considering a funds technology
setup and network infrastructure. A multi-tiered security approach is essential to protecting the
critical information
1. Infrastructure andSecurity
Internet service
Phone and voicemail
Market data services.
2. Telecommunications
Back up all essential documents and data offsite in an electronicformat at least daily, if not in near-real time.
Able to access critical information and applications in a remotemanner even during outage
3. Data Protection
Host hardware and software in an offsite facility, which providesnecessary bandwidth and increased protection
Advantages: disaster recovery, business continuity planning,
security and flexibility
4. Collocation
Email and IM data should be saved in WORM format for theamount of time prescribed by law.
Records need to be indexed in searchable files to aid in providingonly the information that is requested.
5. Archiving
Hedge funds whose very existence depends on managing risk in volatile markets
need to know, in the event of disruption that it is business as usual
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OPTIMIZATION COST SAVINGS
Cost SavingStrategy
Virtualization
SmartPurchasing
Market
data
BrokerExecution
Costs
Disaster
Recovery
Telecommunication
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With the growing uncertainty in the global business
environment, Hedging as become as an importantrisk mitigation strategy as part of the operations.
THANK YOU
CONCLUSION
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