Hedging Strategy 3rd March 2019

Corporate Treasury Overview seeks to protect co.'s value from financial risks Financial Risk Manager Treasury is no more “one terminal and a clerk” function Interest Rates, FX rates, liquidity, Credit, Commodity Risk Management Core focus areas vary depending on nature of business Responsible for implementing agreed corporate policy Cash & Liquidity management Forex, Commodities, Credit, Interest Rate Risk Management Banking Relationship Management Treasury Reporting & Compliance Management Key responsibilities of Group Treasury include:

Risk Management Process Exposure Identification & Quantification O&M Exposure CAPEX Exposure Risk Quantification Strateging Hedge Strategy Daily Monitoring Macro Research Execution Execute Hedges as per Hedge Strategy Protect Benchmark Rate Processing Deal Entry in SAP Confirmation & Authorization Tagging Hedges to Exposures Cash flow intimation to BUs Reporting Monitoring RMP & Compliance Transaction MIS MTM - Hedges & Exposures Performance Reporting to Management Automation

Exposure Identification O&M Exposure Capex Exposure + Exposure arise mainly on account of Trade Transactions Import or Export of mainly raw materials Short Term in Nature (esp. Less than 1 Year) Exposure arise mainly on account of Borrowing & Trade Transactions Import or Export of mainly capital goods ECB, FCL etc Long term in nature. Maturity more than 1 year

Risk Management How much to hedge RMP When to Hedge Hedge Strategy How to Hedge Product Selection Execution & Reporting

Risk Management Products Major Products for Risk Management Forwards Options Buy Call / Sell Call Buy Put / Sell Put Swaps

Forward Most simplistic product of hedge OTC product Broken amount & Broken period can be hedged Hedging cost will be discount of premium of forward premium depending upon currency to hedge Fixed pay off profile Forward Discount / Premium Interest Rate differential between two currencies under consideration Higher yielding currency will be in discount and lower yielding currency will be in premium

Forward contd.

Forward Pricing Forward premium is interest rate differential between two currencies for respective tenor For e.g. in case of USDINR 2Y US Treasury @ 2.50% 2Y India Gsec @ 6.70% 2Y USDINR Forward Premium for Buying USDINR 4.2% If some customer wants to buy USDINR forward for 2 years, bank will quote him USDINR Spot 72.00 Premium 6.17 Net Rate 78.17 Sometimes anomalies can be seen in market depending upon skewed demand and supply

Forward – Cancellation / Rollover Cancelation of a forward - equivalent of doing the opposite transaction - Cancelation can result in a gain or loss Cancelation is typically done, when the underlying transaction delivery date shifts - date mismatch results in cash flow implications Rollover is extension of maturity of the forward contract into the future - economically equivalent to cancelation and rebooking Example: Forward contract entered into to buy 1 million USO/INR at 30-June-2019 at 72.00. Underlying delivery date shifts to 15-July-2019. Today is 03rd March 2019. Current spot: 70.50/51, forward premium for 30-June-2019: 90 paise. Forward premium for 15-July-2019: 110 paise Forward rate for 30-June: 70.50+0.9 = 71.40. Hence cancelation would result in a loss of (72.00 – 71.40) =60 paise Fresh booking for 15 -July - 2019: 70.51+1.1 = 71.61 Rollover is nothing but simultaneous Cancellation and Rebooking at same spot

Forward Contract – Early Utilization If the delivery date shits forward - regulations allow for utilization of forward contracts earlier than the original maturity date Example Original contract: Sold USD/INR at 72.50 for 30-Apr-2019. Today is 28-Feb-2019. The spot rate is 70.90 and forward premium for 30-Apr-2019 is 40 paise. Cash receipts are expected today and hence want to utilize the contract. Built into the 72.50 rate was a forward premium till 30th April. Hence if that contract is utilized today - the forward premium from today till 30th April needs to be paid back Hence early utilization rate for the receipts would be 72.50 - 40 paise (in fact a bit lower than 40 paise to accounting for the time value between today and 30th April)

Forward Pricing E.g. Spot USD/JPY rate is 120. JPY 3M interest rate is 8% USD 3M interest rate is 12% What should be the USD/JPY 3 – month forward rate? Will the Yen be at premium or discount How much is annualized premium or discount?

Futures Futures is nothing but a Standardized Forward Exchange Traded Broken amount and Broken period is not possible Settle through exchange Better price discovery as compared to forward All other features similar to Forward

Options Buying option will give buyer the right Selling option will create an obligation for seller Call & Put Plain vanilla Call & Put will be mixed to form different strategy suitable to the view Price of Option depends on: Strike of Option Maturity of the Option Price Volatility of Underlying

Option Strategy 1 – Plain Vanilla Call Buy Call Upside Full Protected – Downside Full Participation Its like buying an Insurance

Option Strategy 2 – Call Spread Buy Call – Sell Call Limited Upside Protection – Downside Full Participation After Sell Call Level Exposure will be Open

Option Strategy 3 – Seagull Buy Call – Sell Call – Sell Put Limited Upside Protection – Downside Full Participation After Sell Call Level Exposure will be Open

Swaps Swaps can be used for hedging of Currency swap variations Currency Risk Interest Rate Risk Currency swap variations Consider a 3m LIBOR linked External Commercial Borrowing in USO Currency swap can convert the interest rate payments and/or the principal from one currency into another, say in this case, from USD to INR In India, the common terminology is to call such swap converting both interest and principal payments of the ECB into INR {thus creating the INR equivalent borrowing) is a cross currency swap (CCS) Swap where only the interest payments are hedged into INR is called a coupon only swap (COS) Swap where only the principal payments are converted is called a principal only swap (POS) So it can easily be seen that CCS is just a combination of COS and POS For swaps involving INR, MIFOR rate is the relevant INR rate - the MIFOR swap directly gives the equivalent !NR cost of hedging a LIBOR based borrowing

Currency Swap & Interest Rate Swap Currency Swap are broadly three types Floating to fixed Cross Currency Swap Fixed to Fixed Cross Currency Swap Coupon Only Swap The swap involves payments by one counterparty in one currency and other counterparty in other currency such that the present value of both the payment stream is equal Interest Rate Swap (IRS) Fixed to Float Interest Rate Swap and vice versa Interest swaps are quoted against LIBOR as the floating rate benchmark (EURIBOR in case of EUR swaps) An IRS is equivalent to series of FRA A single FR A is the expected LIBOR rate during the relevant period - an IRS being the series of FRAs basically reflects the average expected LIBOR during entire period of the swap

Swap Terminology Notional Principal Fixed Rate Floating Rate Trade Date, Effective Date, Reset Dates & Payment Dates Fixed and Floating Payment Day count Convention

Motivations underlying Swaps To hedge currency risk associated with borrowing To hedge interest rate risk associated with borrowing To overcome difficulties posed by market in term of access, liquidity etc – CAD, GBP disbursment

USD IRS against 3M LIBOR Party A Receives Fixed Rate @ 2.8325% Fixed Leg Floating Leg Party A Receives Fixed Rate @ 2.8325% Semi-Annual 30/360 Payment Dates: 19th Jan and Jul of Every year till 19th Jan 2022 Party B Receives Floating Rate (3M USD LIBOR) Quarterly Act/360 Payment Dates: 19th of Jan, Apr, Jul & Oct of Each Year till 19th Jan 2022 Trade Date : 01 Jun 2018 Effective Date : 05 Jun 2018 Maturity Date : 19 Jan 2022

Thank You Kevin Buddhadev Adani Group Treasury 9099005299