1. Hedging Strategy
3rd March 2019

2. 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:

3. 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

4. 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

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

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

7. 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

8. Forward contd.

9. Forward Pricing
Forward premium is interest rate differential between two currencies for respective tenor
For e.g. in case of USDINR
2Y US 2.50%
2Y India 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
Premium
Net Rate
Sometimes anomalies can be seen in market depending upon skewed demand and supply

10. 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
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: = Hence cancelation would result in a loss of (72.00 – 71.40) =60 paise
Fresh booking for 15 -July : = 71.61
Rollover is nothing but simultaneous Cancellation and Rebooking at same spot

11. 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 for 30-Apr-2019.
Today is 28-Feb The spot rate is 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 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 paise (in fact a bit lower than 40 paise to accounting for the time value between today and 30th April)

12. 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?

13. 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

14. 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

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

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

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

18. 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

19. 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

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

21. 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

22. USD IRS against 3M LIBOR Party A Receives Fixed Rate @ 2.8325%
Fixed Leg
Floating Leg
Party A Receives Fixed %
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

23. Thank You Kevin Buddhadev Adani Group Treasury 9099005299