Case Studies:

Scenario 1

An SME gets an order of $500000 when the spot was 46.00 and he is expecting a payment of the same in 3 months. In order to avoid currency risk, the MD of the company immediately books 100% of the position in the forwards market with premium of 50 paise netting him 46.50.

Due to unforeseen circumstances the payment is expected to be delayed by at least a month and the rupee quote went from 46.00 to 52.00 levels. Because of the same the corporate had to book a loss of 5.50 rupees per dollar.

Why covering 100% on a transaction is not always a wise thing to do?

Scenario 2

A corporate sells $2 Mio in the long forward range of 8 months when the spot was 46 with the expectation that Rupee is likely to appreciate now. But when the spot hits 48.00 the corporate sells $2 Mio over and above his order, to minimize the MTM loss and to average it out. But now the spot is 53.00 and the corporate is now less on his limits plus the banks are now asking for more security.

Why averaging out is not always a good idea?

Scenario 3

An importer avails Buyer’s Credit of $1 Mio for 3 months when the spot was 46.50 with the expectation that when the rupee will appreciate by Re.1, they will hedge their position. But the rupee moved in the opposite direction to 50 plus levels.

Why not having a risk management policy is a deflator to the P/L account.

Scenario 4

A company having Imports as well as Exports of $ 20 Mio, from which Exports are $ 12 Mio while the rest are Imports. When the rupee started depreciating from 45 to 48 - 49 levels his booked exports are now in MTM losses. And since the company is not comfortable paying premium for covering Imports their Import exposures are also in loss.

In case of both Imports and Exports why hedging only export, not import is always be an ideal strategy.

Scenario 5

A corporate having Export business, selling at 90days credit to his buyer and production of goods takes another 90 days. Therefore, he receives final remittance 180 days after confirmation of order.

What structured export finance products can one avail from banks in order to reduce interest cost and foreign currency fluctuation?

FAQs:

1. What are value dates?

Ans: A value date is a day on which the transaction takes place. For foreign currency transaction it takes T+2 days to settle the transaction. We have Four type of rates available with banks : Spot rate, Cash, Tom and Forward rate: Cash/Spot rate: Value todayTom/Spot rate: Value TomorrowSpot rate: Value at T+2Forward rate: Value beyond T+2 days

2. What are Nostro and Vostro accounts?

Ans: A Nostro account is an account held in a foreign country by a domestic bank, denominated in the currency of that country. A Vostro account is a local currency account maintained by a local bank for foreign bank. Nostro and Vostro accounts are used to facilitate settlement of foreign exchange and trade transactions.

3. What is an EEFC A/c?

Ans: Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with a bank. It is a facility provided to exporters, to credit 100 per cent of their foreign exchange earnings to the account, so that the account holders do not have to convert foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs. No interest is payable on EEFC accounts

4. What are the permissible Credits and Debit into this account?

Permissible Credits Inward remittance through normal banking channels Advance remittance received by an exporter Payment received for export of goods and services from India Professional earnings like consultancy fees, etc

Permissible Debits Payment outside India towards a permissible current account transaction Payment of customs duty etc.

5. How are forward premiums/discounts determined?

Ans: Forward premiums and discounts is an interest rate differential between two currency. If the difference between forward exchange rate and spot exchange rate of one currency is a positive value, it is known as forward premium and if it is a negative value it is known as forward discount. In other words if the spot ‘futures exchange rate’ is higher than the spot exchange rate then it is known as forward premium and if it is lower than spot exchange rate then it is known as forward discount.

6. What determines forward premiums for the dollar against the rupee?

Ans: In USD/INR market forward premiums determined by two factors a. Interest rate differential and Demand and supply of currencies due to partial convertibility of rupee and immature money market in India.

7. What is a foreign exchange contract

Ans : An agreement made to convert one currency into another currency at a specific rate on a specific date. Forward contracts are used to lock in exchange rates (a forward rate) for a specific future date, or for a range of dates. Forward contracts are often used as a tool to eliminate the impact of adverse currency moments. A forward rate is calculated by taking the spot rate and adding or subtracting forward points. Forward rates are determined by the interest rate differential between the countries of the two currencies which are being exchanged.

8. What are export finance facility available to exporter

Ans: Export can avail following working capital finance

At Pre-shipment stage:

Packing Credit in Rupee and Packing Credit in Foreign Currency

At Post shipment stage:

Export Bill Discounting in Rupee and

Export Bill Discounting in Foreign currency

9. What are Import finance facility available to Importer?

Ans Export can avail following working capital finance

Non funded Working Capital finance: Letter of credit and Bank Guarantee

Trade Credits : Buyer Credit and Supplier Credit

10. Can forward contracts be cancelled and rebooked freely in India?

Ans: Under contracted exposures, forward contracts, booked to hedge export/ import exposures were allowed to be cancelled and rebooked. W.e.f 15th, Dec. 2011 as per new RBI circular the above facility has been withdrawn. Forward contracts booked of the underlying exposure, once cancelled, cannot be rebooked. Under probable exposures based, forward contracts booked by both exporters and importers will be on fully deliverable basis. In case of cancellations, exchange gain, if any, should not be passed on to the customer

11. Why the US dollar is appreciating in spite of crucial US data surfacing weak?

Ans: Being a strong global power and having the status of being a global currency with full convertibility and highest liquidity, the Greenback enjoys the title of being referred to as the “safe haven”. Therefore, in tumultuous times investors and traders are comfortable parking their monies in this asset class.

12. In spite of a weakness in the rupee as per your view why the rupee has open stronger in the morning?

Ans: Many factors affect the opening rate of the currency for e.g. the closing of the US markets and the opening in Asian markets. If the markets trade substantially higher than previous closing, traders and investors expect the rupee to open strong against its

counterparts. It does not change the underlying fundamentals of India or the rupee though. Also some orders kept pre market may cause adversity.

13. I have an import exposure arising in six months, what should I do according to you?

Ans: The costing of your company is important and if it is below current market price, then cover 40-50 % of import exposure. In the current scenario of a weaker Rupee, one should look to cover on every dip.

14. Should I take long term covers in the current scenario?

Ans: Advisable to do so when premiums are good and costing is taken under consideration. Although, booking long forwards at higher rates and cancelling at lower levels yields no gains as per latest RBI policy.

15. I have export exposure in this and next month what should I do?

Ans: According to Risk Management policy, one must be covering 50 – 60% of generated exposures and seek expert advice for the same.

16. Why rupee is depreciating in spite of an appreciation in the stock markets?

Ans: Because of the presence of Derivatives in the markets. E.g. short covering doesn’t require rupee to be purchased in the markets. Dollar demand from Oil, Gold and other importer would also cause rupee to depreciate despite positive stock markets.

17. What is PCFC?

Ans: Pre Shipment Credit in Foreign Currency. It is a treasury product made available by the Government of India to the Exporters to give them a boost to their business wherein they can borrow money from banks for working capital at LIBOR related rates in foreign currency like USD, EUR, GBP & JPY

18. How can I use PCFC as an instrument for hedging?

Ans: PCFC liability can be paid off by converting pre shipment credit into post shipment credit in foreign currency and Post shipment credit needs be liquidated out of the export proceeds of the relevant shipment. So exporter isn’t exposed to currency risk as dollar liability is being squared off by dollar receivable.

19. Can I take Buyer’s credit when rupee has depreciated? Currently the rate is unfavorable for me as an importer

Ans: Buyer’s Credit is an interest rate arbitrage instrument to Importer and availing it would defer import payment. In current market, Rupee may touch to 55 levels also. One is suggested to cover 25 – 30 % of the same on every dip.

20. I have exposure in Euro. Currently Euro has depreciated and Dollar has appreciated against the INR and globally. Can I convert EUR to USD and then when USD/INR favorable can convert USD to INR?

Ans: Yes, one can do the above transaction through 2 legs. First convert Euros into Dollars when EUR/USD is trading at higher levels. Then take the dollars and convert to rupees through USD/INR quote when Rupee depreciates against the USD.

21. What is the interrelationship between gold and oil as well as an inter relation between gold and USD?

Ans: Economic is in slowdown oil price goes down and gold and USD is in demand to due safe haven assets.

22. Why should I maintain a stop loss when you are predicting a particular level?

Ans: We don’t put client’s portfolio at risk. The markets are volatile, especially in the current scenario and predictions change quickly. The stop loss strategy is best risk management tool in the financial markets.

23. When to take and when not to take long term covers and why? What is the relevance of this strategy for importers?

Ans When Rupee is in appreciating mode and long term forward annualized premium quoting at higher you can go for long term covers. So preutilise long term covers whenever rupee appreciates sharply.