SCB India - CBMS
Foreign Exchange Proposition for SME
Standard Chartered Bank – Here for good
Standard Chartered Group, an international financial services group offers a
variety of financial services including :
Consumer Banking,
SME Banking,
Private Banking.
Wholesale Banking,
Corporate Advisory, and
Capital Market Services,
Standard Chartered PLC, listed on the London, Hong Kong and Mumbai
stock exchanges, ranks among the top 20 companies in the FTSE-100 by
market capitalisation.
The London-headquartered Group has operated for over 150 years in some
of the world's most dynamic markets, leading the way in Asia, Africa and the
Middle East.
The Standard Chartered Group in India is represented by Standard Chartered
Bank India, India's largest international Bank.
To know more about Standard Chartered Bank India, click on
(www.standardchartered.co.in).
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In order to turn currency exchange risks into profits, it is important to
incorporate the right risk management strategies into your business plans.
Standard Chartered Bank
helps its clients engaged in
international trade (import /
export) to hedge the risk
involved with the
fluctuation of foreign
currency.
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How does currency exchange affect your businesses?
If you are in a business that trades internationally, currency exchange fluctuations will almost definitely
affect your business.
One of the major risks that an SME faces today is the risk of fluctuations in the Forex rates.
When importing products you are probably paying in the currency of the country you are importing from.
For example, if you are importing silk scarves from UK, you are paying in GBP which is fine when the GBP
is not strong.
However, when the GBP starts to gain, you end up paying a lot more to purchase goods than you were
before. In this situation, it is worthwhile to speak with a foreign exchange expert to mitigate against adverse
currency fluctuations.
Similarly, if you are an exporter, when pricing products to international customers you will be pricing in
foreign currency. However at the time of final delivery of good/payment receipt there can be fluctuation in
currency exchange rate and any negative change in the currency can affect your profit margin or may
result into losses.
Moreover in order to remain competitive and maintain your market share you may resort to cutting export
prices. Unfortunately this option will mean lower profit margins.
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Bottom Line Protection
Uncertain exchange rate changes make it incredibly difficult for financial forecasting which make
it a pretty unpredictable business and difficult to predict your future profits and losses.
How to deal with it
There are ways of minimizing losses and having more control of what happens to your bottom
line when dealing with overseas markets.
You can prepare your business for undesirable consequences through effective risk management
strategies.
This ensures your bottom line is protected from the unexpected.
Currency Hedging Products allow you to budget, protect your bottom line and fix exchange
rates for many years in advance.
As a leader in the financial markets, we deliver solutions to meet all your risk management and
protection needs.
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What is a hedge?
Hedge is an investment position taken in order to protect oneself from the risk of an
unfavourable price movement in a currency.
Why one must hedge his/her foreign currency Risk?
 To mitigate Exchange rate risk: Fluctuations in the exchange rate of currencies
give rise to exchange rate risk. As the time gap between finalizing an export/import
order and receiving/making payment against it widens, the possibility of fluctuation of
exchange rate rises. A hedge helps in protecting businesses from unfavourable
fluctuations.
 It brings certainty in business: You would know the precise exchange rate at
which your receivables/ payables will be converted.
 Helps in estimating receipts and payments, and once you are aware of one side on
the P/L you can plan the other.
 Business is immune to any further movement in currency markets, thus relieving itself
of the exercise of tracking currency markets.
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Hedging Products
Protect profits from market fluctuations via forwards, options and swaps.
Forwards
It is a contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period. If
you want to fix the exchange rate for a future date, entering into a forward contract is one of the ways to do it.
Forward Contract is used as a foreign currency hedge when a person/business 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 value date of the Forward Contract match, the investor has in effect "locked in" the exchange rate for the
transaction.
Advantages:
Helps in hedging the exchange rate risk.
Brings the certainty of converting foreign exchange at a fixed rate.
Provides for early or part settlement.
Disadvantages:
Creates an obligation to settle the contract and does not allow the buyer to make use of better market rates, if
available.
Forward Contracts allow you to Buy or Sell a fixed amount of currency from today’s date to one year in the future
at a predetermined rate of exchange.
Forwards are available in all major foreign currencies and can be designated to allow for a window
date range within which the currency can be bought or sold.
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Hedging with Forward
Illustration
Forward for Exporters:
Forward for Importers:
You are to receive USD 1.0 mio by December 30, 2012
You are to remit EUR 300,000 in 3 months time
spot EUR = INR 65.0; 3 Month forward premium= INR 1.0
Spot USD/ INR is 55.0 and forward premium= INR 1.65
at spot:
forward:
USD 1.0 mio * 55.00 = INR 55.0 mio
USD 1.0 mio * 56.65 = INR 56.65 mio
By locking in the rate the, you fix the INR amount to be
received at INR 56.65 mio.
Suppose on Dec 30, spot USD is INR 56.65 then you are
indifferent and will receive the contracted INR 56.65 mio.
On the other hand if spot is @ 54.0 on Dec 30, then your
company will receive the contracted INR 56.65 mio,
thereby making a notional profit of INR 2.65 mio. On the
contrary if the spot on Dec 30 is @ 60, then your
company will have a notional loss of INR 3.35 mio
Spot at December 30, 2012
Unhedged (receipt in mio)
Forward Hedged (receipt in INR
mio)
Loss/Profit in INR mio
USD/INR
54.00
54.00
USD/INR
56.65
56.65
USD/INR
60.00
60.00
56.65
2.65
56.65
0
56.65
-3.35
at spot: EUR 300,000 * 65.0 = INR 19.5 mio
forward: EUR 300,000 * 66.0 = INR 19.8 mio
By locking in the rate you fixe the INR amount to be paid
at INR 19.8 mio.
Suppose in three months time, spot EUR is INR 66.0 then
you are indifferent and have to pay the contracted INR
19.8 mio.
On the other hand if spot is @ 68.0 the amount to be paid
would have been INR 2.04 mio i.e. a notional profit of INR
6 lakhs. On the contrary if the spot three month hence
would be @ INR 64.0 then the notional loss becomes INR
6 lakhs
EUR/INR
EUR/INR
EUR/INR
64
66
68
Unhedged (payment in mio)
19.2
19.8
20.4
Hedged (payment in INR mio)
19.8
19.8
19.8
Loss/Profit in INR mio
-0.6
0
0.6
Spot three month hence
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Hedging your risk with currency options
Currency Options
Advantages
If you want the security of a forward contract, but would also
like to benefit if exchange rates move in your favour, then a
currency option could be the right choice for you.
Unlike a forwards contract, it does not
create an obligation to settle, the buyer
can make use of better market rates when
available.
Options are foreign currency contract giving 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 a specific date (the expiration date). The price
to be paid for exercising this right is called "premium."
That means by paying a premium the buyer can stay
protected from unfavourable market movements and at the
same time make use of better market rates when available.
Options are offered in all major currencies with tenors up to
one year.
Provides protection against loss;
however the option to make use of
favourable market rate exists.
Provides the flexibility of choosing the
strike price and maturity period,
accordingly the option price can be arrived
to suit the buyers’ needs.
We offer only vanilla options wherein your obligation under the
contract extinguishes once you pay the premium.
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Hedging your risk with currency options
Illustration
Options for importers
Options for exporters
Importers have to pay in foreign currency for
their imports. As such importers buy foreign
currency and sell rupees. Hence, Importers can
book an Options contract and book the rate at
which they will buy foreign currency. On the
maturity date, importers can buy foreign currency
at the rate booked or the market, rate whichever
is lower. This is also known as a Call Option
contract.
Exporters receive payment in foreign currency.
As such exporters sell foreign currency and
buy rupees. Hence an exporter can book an
Options contract and book a rate at which they
will sell foreign currency. On the maturity date,
exporters can sell foreign currency at the rate
booked or the market rate whichever is higher.
This is also known as a Put Option contract.
For e.g. An importer books an Options contract
on 31 May, 2012, maturity date 30 September
2012 at the rate of 57.00
For e.g. An exporter books an Options contract
on 31 May 2012, maturity date 30 September
2008 at the rate of 57.00.
Scenario analysis:
Market rate on 30 September, 2012 = 57.50
The importer will convert the foreign exchange at
the rate booked by him i.e. 57.00 as that is lower
than the market rate and hence more favourable
for an importer. In case the rate is < 57.00, the
client will convert at market rate and forego the
premium paid which is the maximum possible
loss for Client.
Scenario analysis:
Market rate on 30 September, 2012 = 56.50
The exporter will convert the foreign exchange
at the rate booked by him i.e. 57.00 as that is
higher than the market rate and hence more
favourable for an exporter. In case the rate is >
57.00, the client will convert at market rate and
forego the premium paid which is the
maximum possible loss for Client.
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Cross Currency Swap (“CCS”)
•
A Cross Currency swap (CCS) is a contractual arrangement between two counter-parties who agree to exchange
principal and interest payments in one currency for another currency on a defined principal amount for a fixed period of
time.
•
CCS allows you to switch an asset or liability from one currency to another and benefit from lower interest rate .
•
Principal and coupon/interest payments in one currency can be swapped into fixed or floating coupon payments in
another currency.
•
Features
−
Series of FX forwards
−
Convert liability in one currency to another currency (e.g., from INR floating to USD fixed)
−
Exchange of principal at Deal Spot Rate
−
Does not create an underlying borrowing or lending
−
The gain/loss out of such swaps would depend on the actual movement of interest rates /spot rates vis-a-vis the view
Normally a CCS is used by a borrower to access a non-domestic debt market, and to hedge their borrowings back into their
home currency.
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Hedging your risk with SWAPS
Indicative Terms
Swap Schematic Representation
INR
USD Payment
INR Payment
Customer
INR payment
USD
INR Notional
100 Mio
USD Notional
2.00 Mio
USD INR Spot Ref
50.00
Maturity
Spot over 7 years
SCB Pays on INR Notional
INR 12.25% p.a Monthly, Act/365
Customer pays on USD
Notional
USD 7.25% p.a , Monthly . Act/360
Principal Exchange
As per schedule
Lender
Risks
Returns/Rationale

Fixed Carry leading to reduction in interest rate cost

Rupee Depreciation above break even rate on settlement dates
(savings of 5% annually in the example mentioned above)

Rationale
Rupee to appreciate against Dollar
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Hedging your risk with SWAPS - Scenario analysis
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Hedging your risk with SWAPS
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Our unique proposition
 Our expert can assist you in managing
foreign exchange exposure with a variety
of strategic hedging solutions.
Dedicated
Dealer
Product
Specialist
 Comprehensive product suite:
 Cash, Tom, Spot deals
 Forward contracts
 Options
 Swaps
 Foreign Exchange Hedging
Client
Strategies
 Each hedging solution is catered to your
specific business plan and strategy.
Customize
Solutions
Online
platform
Providing innovative solutions to protect your business
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SCB Treasury Solutions for SME – Here for good
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Wealth Management Accolades
Client centric solutions are a key element of our award winning financial
markets capability. We provide a comprehensive range of solutions from
simple strategies to more sophisticated solutions best suited to meet your
business needs.
Capitalise on our various foreign exchange solutions to meet your growing
business needs, protecting it and increasing your profit.
Get in touch with us at :
Location
Contact Point
Contact Details
Mumbai
Amitava Sen Gupta
022 61158849
Hemant Khar
022 61158850
Hemant Ranade
022 67355305
Neha Bhatia
011 49861080
Kushal Agrawal
09654621621
Chennai
Sundaresh Natarajan
044 25349926
Bangalore
B.M.Harsha
09945977007
Kolkata
Abhishek Anand
09674039555
Delhi
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Thank you
Disclaimer
Global disclaimer for Market Commentary:
This document is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not
subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not represent the views of Standard Chartered Bank, particularly those of
the Global Research function.
Standard Chartered Bank is incorporated in England and Wales with limited liability by Royal Charter 1853, Reference number ZC 18. The Principal Office of the Company is situated in
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afforded to Professional Clients in the DIFC
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Opinions, projections and estimates are solely those of SCB at the date of this document and subject to change without notice. Past performance is not indicative of future results and
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Copyright: Standard Chartered Bank 2012. Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced with permission of an
authorised signatory of, Standard Chartered Bank. Copyright in materials created by third parties and the rights under copyright of such parties are hereby acknowledged. Copyright in
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not be reproduced or used except for business purposes on behalf of Standard Chartered Bank or save with the express prior written consent of an authorised signatory of Standard
Chartered Bank. All rights reserved. © Standard Chartered Bank 2012.
The Commentary reflects the views of the Wealth Management Group of Standard Chartered Bank.
THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT.
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