Welcome to the

world of currencies

What is a currency?

A generally acceptedmedium of exchange for goods and services, issued by a government and circulated within an economy.

World currencies

Different countries have different currencies.

What is currency exchange rate?

Each currency of a country is valued with other currency, the net ratio is called exchange rate.

Currency exchange rates

Each currency exchange rate represents a pair of currency. Examples of currency pairs:
USD/INR - US Dollar against Indian Rupee EUR/USD - Euro against US Dollar EUR/GBP - Euro against British Pound GBP/INR - British Pound against Indian Rupee

How is currency quoted?

Each currency is quoted/paired/valued with another currency.

USD/INR = 55.60

Base currency

Quote currency

Quote of USD/INR = 55.60 means for every 1 USD paid, INR 55.60 will be received. Quote of EUR/USD = 1.2745 means for every 1 Euro paid, 1.2745 USD will be received.

Understanding appreciation & depreciation of currency

How valuation of rupee changes?

$
`

Valuation changes due to

Economic forces - inflation rate, purchasing power, interest rate

Market forces - supply & demand of dollar & rupee due to economic factors

The value of a currency depends on demand and supply of currency. Demand depends on economic valuations & economic factors.

Economic forces affecting rupee

Macro economic reviews ws Monetary policy Banking policies Economic data announcements cements Global economic scenario rio Global capital flow Performance of equity/financial markets Performance of other currencies Performance of key commodities affecting trade Policy announcements affecting flows trade or capital

Do we have control on these factors???

Impact of economic news on rupee

News flow
Greek crisis Euro crisis FII outflow Rise of OIL price Overseas loan payment RBI managing strong rupee FII/FDI inflow in India Overseas borrowing Higher bank rates News: GDP will improve NRI sending money Gold rises RBI managing rupee fall

Meaning
Outflow of Greek currency & investment in USD. USD demanded in market against Euro FII sell rupee & buy USD Higher inflation - Low purchasing power, & demand for more USD, fall of rupee value against USD Payment in USD against rupee. Corp sell rupee & buy USD Demands dollars & supply rupee Inflow by FDI/FII supply of USD & demand of rupee Demands for dollars by corporate against INR Investment by FII for bank interest Foreign investors will bring money to invest USD flow Buying gold against USD. Supply of USD. Demand for dollar against rupee. Outflow of dollar

Impact on rupee
Depreciation Depreciation Depreciation Depreciation Depreciation Depreciation Appreciation Appreciation Appreciation Appreciation Appreciation Appreciation Appreciation

How is change in currency rate a financial risk?

USD-INR in last 4 years

USD-INR movement impact

Do we know what will be USD-INR rate next???

What is currency risk?

When rise or fall in value of one currency against another currency has direct or indirect impact on financial statements, it is a currency risk.

When is currency a risk?

Currency risk occurs when - transactions undertaken by entity involves international currencies. - rate of exchange has direct or indirect impact on its financial statements. Transactions may be - receivable or payable fx instruments. - purchase/sale commitments in fx. - future transactions in a foreign currency. - speculative transactions.

Who is affected by currency market?

Corporate, exporters, importers, governments, central & other banks, financial markets, individuals - travellers, students

How is exchange rate a financial risk?

Mr. ABC is an exporter and has to receive USD 5 million as payment for his exported goods next month. If today USD-INR rate is 55.60, Mr. ABC is expecting to receive INR 27.8 Crs. (5*10^6*55.60 = 27.8 Cr). By the time of payment delivery, if USD-INR moves to 57.30, Mr. ABC will receive INR 28.65 Cr. He will gain additional INR 0.85 Cr. In a situation, USD-INR changes to 53.50 at the time of delivery, Mr. ABC will receive INR 26.75 Cr. A loss of INR 1.05 Cr. In above situations, Mr. ABC will hugely gain or lose basis exchange rate movement in USD-INR, for which he has no control.

How is currency a risk more examples...

Mr. XYZ imports goods. He is expecting delivery of his contract next month and has to pay USD 10 million at the time of goods delivered. If today USD-INR rate is 55.60, XYZ has to pay INR 55.60 Cr. (10*10^6*55.60 = 55.6 Cr). By the time of payment, if USD-INR moves to 57.30, Mr. XYZ will have to pay INR 57.30 Cr. He will have to pay additional INR 1.70 Cr. In a situation, USD-INR changes to 53.50 at the time of delivery, Mr. XYZ will have to pay INR 53.50 Cr. A gain of INR 2.10 Cr. In above situations, Mr. XYZ will gain or lose basis exchange rate movement in USD-INR, for which he has no control.

Some more situations Anjali Jewellers is importing 100 KG of Gold, worth INR 30 Cr from US. Ruchi Soya has entered in a contract to export Soya Oil to US worth INR 20,000 Cr next year. Indian importer ABC partners has deposited USD 5 Million as refundable guarantee deposit to tie up with US Company for 5 Years. Same ABC partners is sourcing business from US every month worth INR 25 Cr every year. Indo-Call runs 1000-seat BPO in India and US. Receives $100 per day as servicing fee. What happens if the INR depreciates against USD - rate moves from $50 to &52 in a month

And the fx risks Anjali Jewellers operating profit falls with Rs 1.2 Cr every month. Ruchi Soyas net income rises by 800 Cr a year. ABC partners will receive INR 10 Million extra on conversion of his deposit. Same ABC partners profit for the year increases to 1Cr for the year. Indo-Call receives Rs 60 Lakh additional gain each month.

Problem - currency exposure risk solution - hedging

Problem Firms involved in international transactions face a risk, an unknown gain/loss, on account of unanticipated changes in exchange rates. These transactions are quantified in terms of international exposure. Un-hedged exposures adversely affects P&L of companies and creates operational hitches like cash flow requirements etc.

We need to manage our fx exposure

Payables

Receivables

Imports Capital good imports Overseas borrowings FCCBs, ECBs Foreign deposits

Exports Engineering offshore contracts Capital flows FDI, FI Service export contracts

Solution on fx risk - hedging

Hedging is a position established in one market in an attempt to offset exposure in some opposite position in another market. The goal is to minimize one's exposure to unwanted risk. Hedging is thus taking of a position, either acquiring a cash flow or an asset or a contract(including a forward contract) that will rise(fall) in value to offset a fall(rise) in value of an existing position.

What is hedging overview & concept?

Hedging is a position established in one market in an attempt to offset exposure in some opposite position in another market. The goal is to minimize one's exposure to unwanted risk. Hedging is thus taking of a position, either acquiring a cash flow or an asset or a contract(including a forward contract) that will rise(fall) in value to offset a fall(rise) in value of an existing position.

Keeping it simple - how to hedge? Forex receivable

Short/Sell futures

Forex payable
Long/Buy futures

Cost of hedging & management of hedge

Set price for transacting a foreign currency in the future Hedge forex exposure Cost to lock in this exchange rate - margin deposits - premium related to future rate for currency - brokerage fee to obtain contract - mark to market cash flow - net settlement cash flow

Problem - currency Currency exposure Exposure risk Risk Solution - hedging Hedging Best Tool - currency Currency derivatives Derivatives

What are currency derivatives?

The term 'Derivatives' indicates it derives its value from some underlying i.e. it has no independent value. Underlying can be securities, stock market index, commodities, bullion, currency etc. Currency derivatives implies contracts where underlying would be the currency exchange rate. Examples of currency trading pairs: - USD-INR US Dollar against Indian Rupee - USD-EUR US Dollar against Euro - EUR-GBP Euro against British Pound

Currency derivatives @ ICICIdirect.com

Currency trading @ ICICIdirect.com

Products offered
- 4 currency pairs
USD-INR 6 month forward contracts available for trading GBP-INR 3 month forward contracts available for trading EUR-INR - 3 month forward contracts available for trading JPY-INR 2 month forward contracts available for trading

- Only futures - Option trading not available

Trading screens
- Online through web-trading - Call n trade facility

Currency trading @ ICICIdirect.com

Contract specifications
Underlying Trading hours (Monday to Friday) Contract size Tick size Trading period Contract months Final settlement date Last trading day Settlement Final settlement price Rate of exchange between one USD and INR 09:00 a.m. to 05:00 p.m. USD 1000 0.25 paise or INR 0.0025 Maximum expiration period of 12 months 12 near calendar months Last working day of the month Two working days prior to final settlement date Cash settled The reference rate fixed by RBI

Currency trading @ ICICIdirect.com

Contract details lot value, margins
Pair Underlying Contract Exchange example
FUTEUR-INR29-May2012 FUTGBP-INR29-May2012 FUTUSD-INR29-May2012 FUTJPY-INR 29-May2012 NSE

Lot

Lot size

LTP

Contract value
69665

Margin per lot

2,613.00

Margin %
3.75%

EUR-INR

Euro against INR

1000 Euro

69.665

GBP-INR

British Pound against INR

NSE

1000 GBP

86.87

86870

3,258.00

3.75%

USD-INR

US Dollar against INR

NSE

1000 USD

56.115

56115

2,526.00

4.50%

JPY-INR

Japanese Yen against INR

NSE

1000 JPY

69.643

69643

3,134.00

4.50%

Equity

Currency

Derivatives

Equity derivates vs currency derivatives

Underlying
Market indices like nifty, bank nifty Equity scrips Currency pair is used as indices like USD-INR, EUR-INR

Equity derivates vs currency derivatives Margins

Vary from 11% to 35%, and upto 60% in exception. Low margins in indices starting from 11%. Prime stock margins vary from 16% to 25%. General stocks margins start from 25% and above. 1 contract of nifty worth, Rs 2,45,000/- available at margin of Rs 26950. (4900). Margins very low. Vary from 2.75% to 4.5%. Exceptional margin applicable and extended to 1 - 2%. 1 lot position of USD-INR available at Rs 2520/-. For contracts, equivalent to nifty Rs 2,45,000/-, only Rs 11025/- is required.

Equity derivates vs currency derivatives Lot size

Lot size is based on contract value. Standard value set by NSE is Rs 2.5 Lakhs. Number of units in lot vary as per market price of scrip at the time of initiating the contract by NSE. Lot size is based on number of units of underlying in contract. Standard is 1000 Units of currency. Lot value is not the set standard.

Equity derivates vs currency derivatives Tick size

Tick size of Eq Dv is Rs 0.05 i.e. 5 Paise. Example of bid & offer
Eq Dv
Best bid price 55.95 55.90 55.85 55.80 Best offer price 56.00 56.05 56.10 56.15

Fx Dv tick size is Rs 0.0025 or 1/4th of 1Paise or 0.0025 Paise. Example of bid & offer
Fx Dv
Best bid price 55.9875 55.9850 55.9825 55.9800 55.9775 Best offer price 55.9900 55.9925 55.9950 55.9975 56.0000

Equity derivates Vs currency derivatives Exposure with Rs 1 Lakh fund

3 nifty contracts can be taken as position(avg margin 11%). 3 lots of nifty stocks (avg margin 14-15%). 2 lots of junior nifty stocks. 1 lot of fair margin stock. FX Dv is low margin & high leverage product. You can take position of 39 lots of USD-INR. You can take position of 38 lots of EUR-INR. Position value is worth Rs 21 lakhs.

Equity derivates vs currency derivatives

Exposure with Rs 1 Lakh
Insrument Nifty ITC PFC USDINR EURINR Funds Contract available size 100000 100000 100000 100000 100000 50 1000 2000 1000 1000 Price 4900 233 150 56.0000 69.6650 Contract value 245000 233000 300000 56000 69665 Margin on contract 11.00% 14.00% 19.00% 4.50% 3.75% Margin value 26950 32620 57000 2520 2612
No. of Position contracts value in on full lakhs margin

3 3 1 39 38

7.35 6.99 3.00 21.84 26.47

In Eq dv, Rs 1 Lakh can allow 3 Lots of nifty and total position value will be Rs 7.35 Lakhs (assuming nifty price at 4900 and 11% margin). In FX, Rs 1 Lakh can allow 39 lots of USD-INR and total position value will be Rs 21.84 Lakhs (assuming USD-INR pair at Rs 56 with 4.5% margin). Currency derivatives consumes lower margin & provides 3 times higher exposure than equity derivatives.

Daily currency report, provided by ICICI Securities research

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd., SEBI Regn. No. INB 230773037 (CM), SEBI Regn. No. INF 230773037 (F&O), SEBI Regn No. INE230773037 (CD), Bombay Stock Exchange Ltd., SEBI Regn. No. INB011286854 (CM), SEBI Regn No. INF010773035 (F&O). Name of the Compliance officer: Ms. Mamta Jayaram Shetty, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Kindly read the Risk Disclosure Documents carefully before investing in Equity Shares, Derivatives or other instruments traded on the Stock Exchanges. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. Investors should make independent judgment with regard suitability, profitability, and fitness of any product or service offered herein above. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.The contents of this presentation are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. While due care has been taken in preparing this presentation, I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any inaccurate, delayed or incomplete information nor for any actions taken in reliance thereon.

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