Speculation
OR
Risk Management
– Current dilemma
Current state of the Market in
India
Earlier many players took a hit due to cross currency
volatility
Many facing challenging times yet again due to $/Re.
volatility
Demand for complicated products has vanished
Fear Psychosis has taken over decision making
Increased demand for plain vanilla products
Less aversion to premium paid protection
Emphasis on products which freeze costs in home
currency
M-T-M Limits on HEDGES .
Limit breached
enter counter trade
Hedging – Earlier and Now
EARLIER
Goal clear– Buy /Sell to protect Margin
Run the hedge for full life cycle of underlying trade
NOW
Addition of new elements makes it more complicated
Translation risk
BOARD
Trade
ANALYSTS
market forces
In very few circumstances can one achieve both
Market risk
translation risk
Hedge trigger
New life cycle of a trade
Unhedged period
Hedged period
OR
One Exposure
Multiple entries & exits
(hedges)
What about hidden m-t-m`s ?
Presently o/s forwards / derivatives in forex or interest rates
are a subject of close scrutiny due to their m-t-m impact .
Hedge programs are being questioned despite they achieving
the desired benchmarks
The general feeling is that anything you do which overlays on
the underlying , creates a –ve m-t-m
The Nature of underlying deal however gets ignored .
E.g long term -- freight , raw material contracts
Aug 6 `08
For Calendar `09
For Calendar `10
C4TC
$119500
$81500
P4TC
$56500
$41500
C4TC
$16875
$21000
P4TC
$13375
$15000
C4TC
$32000
$30500
P4TC
$16500
$16500
Nov 24`08
For Calendar `09
For Calendar `10
Feb 05`09
For Rest of `09
For Calendar `10
How would you react if your company had a similar
case of Forex forward cover ??
M-T-M Vs. View
Market participants are Either over-obsessed with
M-T-M`s
OR
Over Zealous about their views
May 2008
5yr MIFOR 5.5%
USD-INR
42 .(INR had bounced from 39.50)
INR Borrowing costs 12-13%
Yet very few converted USD loans to INR
Reason: Everything under sun was pointing to USDINR @ 35 in 2-5 years. ---- m-t-m concerns
Oct`08 – Feb`09
5yr MIFOR 5.5%
USD-INR
50 .
INR Borrowing costs 12-13%
Sudden increase in activity .Banks flooded with calls
for quotes
Reason: Pressure groups
Interesting conflict
USD-INR at 50
a cause of concern.
uncovered long term liabilities
View uncertain . Market gossip of 54-55 .
Dollar loans are still welcome
Current Challenges
Business Forecasts – Plan vs. Actual variation
Availability of new funds
Extension of existing credit lines
Hedging costs have gone up
Effects
Pre-defined hedges turn into Speculative trades
Non-utilization of forwards have a cash-flow impact
Business units demand the “prevailing market rate “.
Risk management has turned into cash-balancing
activity
Basic principles tend to be overlooked in pursuit of
multiple goals
Way ahead…………
Clearly define the objectives and then outline
strategies
Define the benchmarks
Decide on “as-is-where-is” basis
Do re-visit the strategies but not the objective itself
Have a longer term horizon
Make use of global turmoil
Structured products with plain vanilla
Donald Rumsfeld
“I would not say that the future is necessarily less
predictable than the past. I think the past was not
predictable when it started.”
………........... Thanks for your time
Prateesh Sane
Senior Manager-Forex
JSW Steel Ltd.