Study on hedging

strategies of Indian
organizations
Organization - Axis Bank
Fa u lty G u id e :
Pro f. V rish a li B h a t By –
Anupam Chaplot
In d u stry G u id e :
M r. S a n d e sh C R
Various entities involved in
Banks Forex operations
SWOT Analysis
Objective
To learn about the major
FOREX related products
provided by Banks.
Try to find out hedging
strategies for the customers
by analyzing data from
recent past.
To study the forex strategy of
market leaders in various
sector and find out the
instrument they use for forex
risk management.
Hedging
Strategies/Instruments
Forwards
Options
Futures
Swap
Foreign debts
Forwards
Advantage: can be tailored to the specific
needs of the firm and an exact hedge can be
obtained.
Disadvantage: On the downside, these
contracts are not marketable, they can’t be
sold to another party when they are no longer
required and are binding.

Options
Advantage: limited downside risk and the
flexibility and variety of strategies possible.
Disadvantage: More expensive. The price is
therefore a disadvantage.
Swaps
Advantage: The advantages of swaps are that
firms with limited appetite for exchange rate
risk may move to a partially or completely
hedged position through the mechanism of
foreign currency swaps, while leaving the
underlying borrowing intact. Apart from
covering the exchange rate risk, swaps also
allow firms to hedge the floating interest rate
risk.
Disadvantage: Not too useful for short term.
Future
Advantage: There is a central market for futures.
Disadvantage: only standard denominations of money
can be bought instead of the exact amounts that are
bought in forward contracts.


 Standardized currency futures shall have the following

features:
a. Only USD-INR contracts are allowed to be traded.
b. The size of each contract shall be USD 1000.
c. The contracts shall be quoted and settled in Indian
Rupees.
d. The maturity of the contracts shall not exceed 12
months.
e. The settlement price shall be the Reserve Bank’s
Reference Rate on the last trading day.
Foreign Debt
 Foreign debt can be used to hedge foreign
exchange exposure.
 example: An exporter who has to receive a
fixed amount of dollars in a few months from
present.

Methodology
For the purpose of
analyzing which hedging
instrument will suit the
need of Indian
organizations better data
of last 4 years of
rupee/dollar currency
movement has been
used.
The hedging instrument
used by various
organizations have been
Firms studied
IT: Infosys, Wipro, TCS
Pharmaceutical: Ranbaxy, Dr. Reddy’s
Automobiles: Tata Motors, TVS, Bajaj Auto
Telecom service provider: Idea, Airtel
Steel Manufacturer: Tata steel, JSPL
Findings/ Results
1 month 2 month 3 month 4 month 5 month 6 month 1 year 2 year
forward 31 35 32 33 32 31 24 15
Options 16 11 13 11 11 11 12 9
  FORWARDS ( exporter )
Duratio 1 month 2 month 3 month 4 month 5 month 6 month 1 year 2 year
nSD 1.06417 1.772992 2.232811 2.58581 3.027273 3.609369 6.073091 4.054013

average 0.11234 0.203696 0.281333 0.357045 0.412093 0.44881 0.183333 -2.9075

  OPTIONS
Duratio 1 month 2 month 3 month 4 month 5 month 6 month 1 year 2 year
nSD 0.744974 1.239559 1.469036 1.516969 1.70461 1.998449 2.827656 2.023584

average 0.252979 0.255435 0.164222 0.071591 -0.02674 -0.03024 -0.66 -6.26667

  Unhedged
Duratio 1 month 2 month 3 month 4 month 5 month 6 month 1 year 2 year
nSD 1.06417 1.772992 2.232811 2.58581 3.027273 3.609369 6.073091 4.054013

average -0.04234 -0.0637 -0.07133 -0.07705 -0.06209 -0.02881 0.656667 4.5875

Infosys
Derivative foreign currency (in millions) INR (crores)
forward contract $245 1243
€ 20.00 135
£15.00 109
option contract
range barrier $113 573

TCS
Derivative foreign currency (in millions) INR (crores)
forward contract $153.50 775.71
Option
$907.60 4586.528464
£4.00 29.07
€ 5.00 33.75

WIPRO
Category Amount (in millions) Buy/Sell
Forward contracts $1,374 Sell
€ 79 Sell
£ 53 Sell
$438 Buy
¥ 23,170 Buy
Options $562 Sell
£ 54 Sell
¥ 6,130 Sell
Cross-currency interest rate swap ¥ 35,016 -
Conclusion
Currency swaps are more cost-effective for
hedging foreign debt risk, while forward
contracts are more cost-effective for hedging
foreign operations risk.
Forwards contracts can be tailored to the exact
needs of the firm and this could be the reason
for their popularity.

Conclusion(contd.)
Swap usage is a long term strategy for hedging
and suggests that the planning horizons for
these companies are longer than those of
other firms.
Most Indian IT companies have increases use
of Options instead of Forwards owing to high
market volatility.
Conclusion ( contd.)
Software firms have a limited domestic market
and rely on exports for the major part of their
revenues and hence require additional
flexibility in hedging when the volatility is
high. Another implication of this is that their
planning horizons are shorter compared to
capital intensive firms.
Most Indian firms use forwards and options to
hedge their foreign currency exposure. This
implies that these firms chose short-term
measures to hedge as opposed to foreign
debt.
Limitations
Only few firms specific to each sector has been
studied
The firms are market leaders in respective
sector, the same conclusions might not hold
true for small firms.
The data about the organizations have been
studied for small time period.
Currency Movement of just rupee/dollar has
been analyzed.
Other Observations
Coordination among the branches
Different rates across branches
Documentation ( for internal audit)


 THANK YOU