ARPIT NAGAR SOHAM BUCH

( (

) )

(MBA

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DECLARATION
ARPIT NAGAR SOHAM BUCH (Student of MBA SEM - II) N. R. Institute of Business Management, Ahmadabad.
This project report entitled FOREIGN EXCHANGE A STUDY OF HEDGING TOOLS ADOPTED BY ORGANIZATIONS FACING FOREIGN EXCHANGE RISK has been submitted to Gujarat Technological University, Ahmadabad in partial fulfillment for the award of degree of Master of Business Administration. We, the undersigned hereby declare that this report has been completed by us under the supervision of Prof. SHWETA BAMBUWALA, Professor of Faculty of Management, N. R. Institute of Business Management,Ahmadabad.

The report is entirely the result of our own efforts and has not been submitted either in part or whole to any other institute or university for any degree.

Date: Place: AHMEDABAD ARPIT NAGAR

SOHAM BUCH

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CERTIFICATE

This is to certify that Mr Arpit Nagar Enrolment No. 117350592073 and Mr. Soham Buch Enrolment No. 117350592044 student of N. R. Institute of Business Management (GLSMBA) has successfully completed his Summer Project on A S T U D Y O N HEDGING TOOLS ADOPTED BY ORGANIZATIONS FACING FOREIGN EXCHANGE RISK at Arihant capital markets Pvt Ltd. in partial fulfillment of the requirements of MBA programme of Gujarat Technological University. This is his original work and has not been submitted elsewhere.

_____________________ Dr Hitesh Ruparel (Director)

_____________________ Prof. Shweta Bambuwala (Internal Guide)

Date: _________________

Place: _________________

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PREFACE
Today everywhere it is heard: India has come off age IT has put India and the Indians all over the globe. The winds of change are blowing through the corporate corridors. It is not only geeks but also Indian corporates who are looking outside India for greener pastures. Indian corporates are acquiring companies outside India. Blue chip companies are aggressively mobilizing capital from global financial markets. FIIs are pretty active in Indian bourses. Indian companies are listing themselves in NASDAQ and New York Stock Exchanges.

All these feel good factors are adequately reflecting in the countrys surging Forex Reserves. Foreign currencies are flowing in ad out of the country as matter of routine and that. Too, in such sums that was unheard of a decade ago. Companies are becoming conscious of comparative advantages and, in the process, attempting to become multilocation. It is heartening to note Indian corporate metamorphosing themselves into bundle of competitors even for multinationals. Today, no Indian company can dare envision business without foreign exchange. Suddenly, everyone has become interest in foreign exchange market. This new found enthusiasm is seeking explanations for many questions.

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ACKNOWLEDGEMENT
This is to acknowledge that we, NAGAR ARPIT P. AND BUCH SOHAM have performed the project on A STUDY ON HEDGING TOOLS ADOPTED BY ORGANIZATIONS FACING FOREIGN EXCHANGE RISK.

This project is in partial fulfillment of MASTER OF BUSINESS ADMINISTRATION [MBA year -2] of Gujarat Technological University.

We take this opportunity to express our sincere gratitude to The Gujarat Technological University that gave us a chance to brighten our academic qualification.

While submitting the project report, it is our bounded duty to offer our sincere thanks to all who have guided us in the training and preparing this report work.

We would like to express our heartiest thanks to Dr. Hitesh Ruparel, Honorable Director of NIIBM For providing infrastructure and facilities necessary to complete our project.

We are glade to express profound sentiments of gratitude to Mr. Miral Shah BDM of Arihant capital markets Ltd., Ahmadabad for given us information, valuable guidance and his precious time for our project.

We would like to thanks Prof. Shweta Bambuwala for providing us a proper guidelines on this project work.

Thanks to all who have supported us directly or indirectly in this project.

Thanks

Arpit Nagar Soham Buch

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EXECUTIVE SUMMARY

The rapid industrialization, advancement in technology and communication facilities, the availability of rapid means of transportation has all contributed towards the globalization of business across the frontiers of countries. There have been new innovations in the products developments. The government of India has also opened Indian economy. Various fiscal, trade and industrial policy decisions have been taken and new avenues provided to foreign investors like FIIs and NRIs etc for investment especially infra-structural sectors like power, and telecommunications etc. This projects attempts to study the intricacies of the Foreign Exchange Market and to study the hedging tools adopted by the organizations facing foreign exchange risk. The project starts with the introduction of the foreign exchange market. The second part of the study introduces Arihant Capital Market Ltd. The project then highlights the various hedging tools used by various business organizations facing foreign exchange risk. The major hedging tools included are forward, options, swaps and futures. They are explained by various examples with their detailed history. The details regarding various stock exchanges giving platform for such hedging tools have also been discussed in detail. This follows the analysis of the survey results.

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TABLE OF CONTENT
SR. NO.
PREFACE ACKNOWLEDGEMENT EXECUTIVE SUMMARY

PARTICULARS

PAGE NO.

1.

INTRODUCTION
1.1 1.2 1.3 1.4 1.5 WHAT IS FOREX MARKET? FOREX MARKET ADVANTAGES RISK MANAGEMENT IN FOREX FOREIGN EXCHANGE MARKET OVERVIEW PARTICIPANTS IN FOREIGN EXCHANGE 15 18 20 22 25

2.

EXCHANGE RATE SYSTEM.

2.1 2.2 2.3 2.4 GOLD STANDARD BRETTON WOOD SYSTEM. FLOATING RATE SYSTERM. PURCHASING POWER PARITY. 28 29 30 30 31 33

2.5 FUNDAMENTALS IN EXCHANGE RATE 2.6 FACTOR AFFECTINGN EXCHANGE RATES

3.

HEDGING TOOLS
3.1 FORWARD 3.2 OPTIONS 3.3 SWAPS 3.4 FUTURES 37 44 53 70

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4.

ABOUT ARIHANT CAPITAL MARKETS LTD.

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 COMPANY PROFILE PHILOSOPHY WHAT THEY ASPIRE HISTORY ASSOCIATION QUALITY POLICY CULTURE AND PEOPLE BUSINESS PRINCIPLES PRODUCTS AND SERVICES TO OFFER GROWTH AREAS 76 77 77 78 80 81 82 83 85 88

5. 6. 7.

RESEARCH METHODOLOGY ANALYESES OF QUESTIONNAIR SUGGESTIONS & RECOMMENDATION BIBLIOGRAPHY ANNEXURE

91

97

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TABLE OF CHARTS & TABLES

CHARTS

1. 2. 3. 4.

DEALINGS IN CURRENCY MARKETS AWARENESS OF HEDGING TOOLS USAGE OF HEDGING TOOLS RANKING HEDGING TOOLS IN ORDER OF PREFERENCE 4.1 FUTURES 4.2 FORWARDS 4.3 SWAPS 4.4 OPTIONS

97 98 99

100 101 102 104 105 106 107 108 109 110 111 112 113 114 115 116

5. 6.

HEDGING TOOLS USED THE MOST REASON FOR USING THE TOOL KNOWLEDGE OF CURRENCIES TRADEDN ON MCX-SX AVAILING ADVISORY SERVICE SATISFACTION FROM ADVISORY SERVICES AWARENESS ABOUT GUIDELINES OF RBI & SEBI FORWARDS WHICH TOOL SERVES PURPOSE MORE ACCURATELY

7.
8.

9.
10.

11. KNOWLEDGE OF DIFFERENCE BETWEEN FUTURES AND

12.

13. CONFIDENCE IN CURRENCY FUTURES

14. 15. 16. HOW FREQUENTLY DO YOU TAKE POSITION IN FUTURES AGE GROUP ANALYSIS OCCUPATIONAL ANALYSIS

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TABLES

1. 2. 3.

DEALINGS IN CURRENCY MARKETS DESCRIPTIVE STATISTIVS ON RANKING OF HEDGING TOOLS HEDGING TOOLS USED THE MOST KNOWLEDGE OF CURRENCIES TRADEDN ON MCX-SX AVAILING ADVISORY SERVICE SATISFACTION FROM ADVISORY SERVICES AWARENESS ABOUT GUIDELINES OF RBI & SEBI KNOWLEDGE OF DIFFERENCE BETWEEN FUTURES AND FORWARDS WHICH TOOL SERVES PURPOSE MORE ACCURATELY

97 104 105 107 108 109 110 111 112 113 114 115 116 117 117 118 118 121 122

4.
5.

6.
7.

8.
9.

10. CONFIDENCE IN CURRENCY FUTURES

11. 12. 13. 14. 15. 16. 17. 18. 19. FREQUENCY OF TAKING POSITION IN FUTURES AGE GROUP ANALYSIS OCCUPATIONAL ANALYSIS DESCRIPTIVE STATISTICS - DEALINGS IN CURRENCY MARKET & PREFERENCE OF HEDGING TOOL CORRELATION DEALINGS IN CURRENCY MARKET & PREFERENCE OF HEDGING TOOL CORRELATION USAGE OF HEDGING TOOLS & AWARENESS OF HEDGING TOOLS DESCRIPTIVE STATISTICS - WHICH TOOL SERVES PURPOSE MORE ACCURATELY & CONFIDENCE IN CURRENCY FUTURES CORRELATION - WHICH TOOL SERVES PURPOSE MORE ACCURATELY & CONFIDENCE IN CURRENCY FUTURES DESCRIPTIVE STATISTICS - WHICH TOOL SERVES PURPOSE MORE ACCURATELY & FREQUENCY OF TAKING POSITION IN FUTURES CORRELATION - WHICH TOOL SERVES PURPOSE MORE ACCURATELY & FREQUENCY OF TAKING POSITION IN FUTURES

20.

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1.1

WHAT IS FOREX MARKET?

The international currency market Forex is a special kind of the world financial market. Traders purpose on the Forex to get profit as the result of foreign currencies purchase and sale. The exchange rates of all currencies being in the market turnover are permanently changing under the action of the demand and supply alteration. The latter is a strong subject to the influence of any important for the human society event in the sphere of economy, politics and nature. Consequently current prices of foreign currencies, evaluated for instance in US dollars, fluctuate towards its higher and lower meanings.

Using these fluctuations in accordance with a known principle buy cheaper sell higher traders obtain gains. Forex is different in compare to all other sectors of the world financial system thanks to his heightened sensibility to a large and continuously changing number of factors, accessibility to all individual and corporative traders, exclusively high trade turnover which creates an ensured liquidity of traded currencies and the round the clock business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open. Just as on any other market the trading on Forex, along with an exclusively high potential profitability, is essentially risk - bearing one. It is possible to gain a success on it only after a certain training including a familiarization with the structure and kinds of Forex, the principles of currencies price formation, the factors affecting prices alterations and trading risks levels, sources of the information necessary to account all those factors, techniques of the analysis and prediction of the market movements as well as with the trading tools and rules.

Foreign exchange market is an over the counter market in which currencies of different countries are bought and sold against each other. Foreign Exchange is nothing but claims of the residents of a country to foreign currency payable abroad. It is a method of converting one country's currency into another. So long as there is a cross border flow of funds, the need for such conversion/exchange continues to arise.

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Forex markets are quite decentralised. Participants like market makers, brokers, corporates and individual customers are physically separated from each other. They communicate with each other via, telephone, telex, computer network, etc. It is the commercial banks that offer such conversion facility through their dealing rooms. Today, it is a giant market.

FOREX CURRENCIES
There are 7 most traded currencies in forex market. Currencies are traded in dollar amounts called "lots". One lot is equal to $1,000, which controls $100,000 in currency. This is what is known as the "margin". You can control $100,000 worth of currency for only 1,000 dollars. This is what is called "High Leverage". Currencies are always traded in pairs in the FOREX. Here are some of the common symbols used in the Forex:

USD - The US Dollar EUR - The currency of the European Union "EURO" GBP - The British Pound JPN - The Japanese Yen CHF - The Swiss Franc AUD - The Australian Dollar CAD - The Canadian Dollar A currency can never be traded by itself. So you can not ever trade a EUR by itself.

You always need to compare one currency with another currency to make a trade possible. The Euro is the dominant base currency against all other global currencies. Thus, currencies paired with the EUR will always be identified with the EUR acronym first in the sequence. The British Pound is next in the hierarchy of currency name domination and usually USD after that. (Aside from the EUR and GBP, the only case where the USD is not the base currency of a pair is with the Australian & New Zealand dollars).

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Every foreign exchange transaction is an exchange between two currencies, each denoted by a unique three-letter code. Currency pairings are expressed as two codes usually separated by a division symbol (e.g. GBP/USD), the first representing the base currency and the other the secondary currency. The base currency is the one that you are buying or selling. The exchange rate is the price of one currency in terms of another. For example GBP/USD = 1.5545 denotes that one unit of sterling (the base currency) can be exchanged for 1.5545 US dollars (the secondary currency). Pairings with the US dollar are known as the majors. The big four majors are:

EUR/USD: euro/US dollar GBP/USD: sterling/US dollar (known as cable) USD/JPY: US dollar /Japanese yen USD/CHF: US dollar/Swiss franc

Pairings of non-U.S. Dollar currencies from the aforementioned major pairings are known as crosses. EUR/GBP EUR/JPY GBP/CAD GBP/CHF AUD/CAD CHF/JPY AUD/JPY AUD/NZD CHF/NZD

EUR/CHF EUR/AUD GBP/JPY

Exotic pairings involve currencies not included in the eight major currencies. There are hundreds of currencies around the world, most of which are not easily traded on the open market. There are a few exotics some speculators will venture into; however, the spreads on these currencies tend to be very wide and the degree of risk makes them generally unattractive to most traders.

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1.2

FOREX MARKET ADVANTAGES

There are many benefits and advantages to trading Forex. Here are just a few

reasons why so many people are choosing this market as a profitable business opportunity:

1. Powerful forex leverage

In Forex trading, a small margin deposit can control a much larger total contract value. Leverage gives the trader the ability to make extraordinary profits and at the same time keep risk capital to a minimum.

2. Liquidity
Because the Forex Market is so large, it is also extremely liquid. This means that with a click of a mouse you can instantaneously buy and sell at will. You are never 'stuck' in a trade. You can even set the online trading platform to automatically close your position at your desired profit level (limit order), and/or close a trade if a trade is going against you (stop order).

3. Forex trading online is instant.

The FX market is fast. Orders are executed, filled and confirmed usually within 1-2 seconds. Since this is all done electronically with no humans involved, there is little to slow it down!

4. Zero forex commissions

Because you access the market directly through electronic online forex trading you pay zero commissions or exchange fees.

5. Limited risk
Your risk is strictly limited. You can never lose more than you have in your forex account. This means you can never have a negative equity balance. You can also define and

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limit your risk with stop-loss orders, which are guaranteed by stocks on all forex orders up to $1 million in size.

6. Guaranteed prices and Instantaneous Fills

You get instantaneous execution and total price certainty on all orders up to $1 million in size. This allows you to trade forex with confidence off real-time, two-way quotes. And this price guarantee applies to stop-loss and limit orders as well.

7. 24-hour market
Forex is a 24-hour-a-day market that literally follows the sun around the world, from the U.S. to Australia and New Zealand to Hong Kong, the Far East, Europe and then back again to the U.S. The huge number and diversity of forex investors involved make it difficult even for governments to control the direction of the forex market. The unmatched liquidity, and around-the-clock global activity make forex the ideal market to trade.

8. Free 'demo' accounts, news, charts and analysis

Most Online Forex firms offer free 'Demo' accounts to practice trading, along with breaking Forex news and charting services. These are very valuable resources for traders who would like to hone their trading skills with 'virtual' money before opening a live trading account.

9. 'Mini' trading
One might think that getting started as a currency trader would cost a lot of money. The fact is, it doesn't. Some Forex firms now offer 'mini' trading accounts with a minimum account deposit of only $200 with no commission trading. This makes Forex much more accessible to the average individual, without large, start-up capital.

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1.3

Risk Management in Forex

Trading foreign currencies is a challenging and potentially profitable opportunity for

educated and experienced investors. However, before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose. There is considerable exposure to risk in any foreign exchange transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency. Moreover, the leveraged nature of FX trading means that any market movement will have an effect on your deposited funds proportionally equal to the leverage factor. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses. Investors may lower their exposure to risk by employing risk-reducing strategies such as 'stop-loss' or 'limit' orders. There are also risks associated with utilizing an internet-based deal execution software application including, but not limited, to the failure of hardware and software and communications difficulties. The Forex Market is the largest and most liquid financial market in the world. Since macroeconomic forces are one of the main drivers of the value of currencies in the global economy, currencies tend to have the most identifiable trend patterns. Therefore, the Forex market is a very attractive market for active traders, and presumably where they should be the most successful. However, success has been limited mainly for the following reasons: Many traders come with false expectations of the profit potential, and lack the discipline required for trading. Short term trading is not an amateur's game and is not the way most people will achieve quick riches. Simply because Forex trading may seem exotic or less ( NRIBM 2011-13 )

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familiar then traditional markets (i.e. equities, futures, etc.), it does not mean that the rules of finance and simple logic are suspended. One cannot hope to make extraordinary gains without taking extraordinary risks, and that means suffering inconsistent trading performance that often leads to large losses. Trading currencies is not easy, and many traders with years of experience still incur periodic losses. One must realize that trading takes time to master and there are absolutely no short cuts to this process. The most enticing aspect of trading Forex is the high degree of leverage used. Leverage seems very attractive to those who are expecting to turn small amounts of money into large amounts in a short period of time. However, leverage is a double-edged sword. Just because one lot ($10,000) of currency only requires $100 as a minimum margin deposit, it does not mean that a trader with $1,000 in his account should be easily able to trade 10 lots. One lot is $10,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves (get in with a position that is too big for their portfolio), and as a consequence, often end up forced to exit a position at the wrong time. For example, if your account value is $10,000 and you place a trade for 1 lot, you are in effect, leveraging yourself 10 to 1, which is a very significant level of leverage. Most professional money managers will leverage no more then 3 or 4 times. Trading in small increments with protective stops on your positions will allow one the opportunity to be successful in Forex trading.

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1.4

FOREIGN EXCHANGE MARKET OVERVIEW

In todays world no economy is self sufficient, so there is need for exchange of goods

and services amongst the different countries. So in this global village, unlike in the primitive age the exchange of goods and services is no longer carried out on barter basis. Every sovereign country in the world has a currency that is legal tender in its territory and this currency does not act as money outside its boundaries. So whenever a country buys or sells goods and services from or to another country, the residents of two countries have to exchange currencies. So we can imagine that if all countries have the same currency then there is no need for foreign exchange.

NEED FOR FOREIGN EXCHANGE

Let us consider a case where Indian company exports cotton fabrics to USA and invoices the goods in US dollar. The American importer will pay the amount in US dollar, as the same is his home currency. However the Indian exporter requires rupees means his home currency for procuring raw materials and for payment to the labor charges etc. Thus he would need exchanging US dollar for rupee. If the Indian exporters invoice their goods in rupees, then importer in USA will get his dollar converted in rupee and pay the exporter.

From the above example we can infer that in case goods are bought or sold outside the country, exchange of currency is necessary.

Sometimes it also happens that the transactions between two countries will be settled in the currency of third country. In that case both the countries that are transacting will require converting their respective currencies in the currency of third country. For that also the foreign exchange is required.

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ABOUT FOREIGN EXCHANGE MARKET

Particularly for foreign exchange market there is no market place called the foreign exchange market. It is mechanism through which one countrys currency can be exchange i.e. bought or sold for The currency of another country. The foreign exchange market does not have any geographic location.

Foreign exchange market is described as an OTC (over the counter) market as there is no physical place where the participant meets to execute the deals, as we see in the case of stock exchange. The largest foreign exchange market is in London, followed by the New York, Tokyo, Zurich and Frankfurt. The markets are situated throughout the different time zone of the globe in such a way that one market is closing the other is beginning its operation. Therefore it is stated that foreign exchange market is functioning throughout 24 hours a day.

In most market US dollar is the vehicle currency, viz., the currency sued to dominate international transaction. In India, foreign exchange has been given a statutory definition. Section 2 (b) of foreign exchange regulation ACT,1973 states:

Foreign exchange means foreign currency and includes :

All deposits, credits and balance payable in any foreign currency and any draft, travelers cheques, letter of credit and bills of exchange. Expressed or drawn in India currency but payable in any foreign currency.

Any instrument payable, at the option of drawee or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in the other.

In order to provide facilities to members of the public and foreigners visiting India, for exchange of foreign currency into Indian currency and vice-versa. RBI has granted to

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various firms and individuals, license to undertake money-changing business at seas/airport and tourism place of tourist interest in India. Besides certain authorized dealers in foreign exchange (banks) have also been permitted to open exchange bureaus.

Following are the major bifurcations:

Full fledge moneychangers they are the firms and individuals who have been authorized to take both, purchase and sale transaction with the public.

Restricted moneychanger they are shops, emporia and hotels etc. that have been authorized only to purchase foreign currency towards cost of goods supplied or services rendered by them or for conversion into rupees.

Authorized dealers they are one who can undertake all types of foreign exchange transaction. Banks are only the authorized dealers. The only exceptions are Thomas cook, western union, UAE exchange which though, and not a bank is an AD. Even among the banks RBI has categorized them as follows:

Branch A They are the branches that have nostro and vostro account. Branch B The branch that can deal in all other transaction but do not maintain nostro and vostro a/cs fall under this category. Branch C - such branches cannot do anything with forex business.

For Indian we can conclude that foreign exchange refers to foreign money, which includes notes, cheques, bills of exchange, bank balance and deposits in foreign currencies.

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1.5

PARTICIPANTS IN FOREIGN EXCHANGE MARKET

The main players in foreign exchange market are as follows:

1. CUSTOMERS

The customers who are engaged in foreign trade participate in foreign exchange market by availing of the services of banks. Exporters require converting the dollars in to rupee and imporeters require converting rupee in to the dollars, as they have to pay in dollars for the goods/services they have imported.

2. COMMERCIAL BANKS

They are most active players in the forex market. Commercial bank dealing with international transaction offer services for conversion of one currency in to another. They have wide network of branches. Typically banks buy foreign exchange from exporters and sells foreign exchange to the importers of goods. As every time the foreign exchange bought or oversold position. The balance amount is sold or bought from the market.

3. CENTRAL BANK

In all countries Central bank have been charged with the responsibility of maintaining the external value of the domestic currency. Generally this is achieved by the intervention of the bank.

4. EXCHANGE BROKERS

Forex brokers play very important role in the foreign exchange market. However the extent to which services of foreign brokers are utilized depends on the tradition and practice prevailing at a particular forex market center. In India as per FEDAI guideline the Ads are free to deal directly among themselves without going ( NRIBM 2011-13 )

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through brokers. The brokers are not among to allowed to deal in their own account allover the world and also in India.

5. OVERSEAS FOREX MARKET

Today the daily global turnover is estimated to be more than US

$ 1.5

trillion a day. The international trade however constitutes hardly 5 to 7 % of this total turnover. The rest of trading in world forex market is constituted of financial transaction and speculation. As we know that the forex market is 24-hour market, the day begins with Tokyo and thereafter Singapore opens, thereafter India, followed by Bahrain, Frankfurt, paris, London, new york, Sydney, and back to Tokyo.

6. SPECULATORS The speculators are the major players in the forex market.

Bank dealing are the major pseculators in the forex market with a view to make profit on account of favorable movement in exchange rate, take position i.e. if they feel that rate of particular currento go up in short term. They buy that currency and sell it as soon as they are able to make quick profit. Corporations particularly multinational corporation and transnational corporation having business operation beyond their national frontiers and on account of their cash flows being large and in multi currencies get in to foreign exchange exposures. With a view to make advantage of exchange rate movement in their favor they either delay covering exposures or do not cover until cash flow materialize. Individual like share dealing also undertake the activity of buying and selling of foreign exchange for booking short term profits. They also buy foreign currency stocks, bonds and other assets without covering the foreign exchange exposure risk. This also result in speculations.

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INTRODUCTION
Countries of the world have been exchanging goods and services amongst themselves. This has been going on from time immemorial. The world has come a long way from the days of barter trade. With the invention of money the figures and problems of barter trade have disappeared. The barter trade has given way ton exchanged of goods and services for currencies instead of goods and services. The rupee was historically linked with pound sterling. India was a founder member of the IMF. During the existence of the fixed exchange rate system, the intervention currency of the Reserve Bank of India (RBI) was the British pound, the RBI ensured maintenance of the exchange rate by selling and buying pound against rupees at fixed rates. The inter bank rate therefore ruled the RBI band. During the fixed exchange rate era, there was only one major change in the parity of the rupee- devaluation in June 1966. Different countries have adopted different exchange rate system at different time. The following are some of the exchange rate system followed by various countries.

2.1

THE GOLD STANDARD

Many countries have adopted gold standard as their monetary system during the last two decades of the 19th century. This system was in vogue till the outbreak of world war 1. under this system the parties of currencies were fixed in term of gold. There were two main types of gold standard:

1) gold specie standard

Gold was recognized as means of international settlement for receipts and payments amongst countries. Gold coins were an accepted mode of payment and medium of exchange in domestic market also. A country was stated to be on gold standard if the following condition were satisfied:

Monetary authority, generally the central bank of the country, guaranteed to buy and sell gold in unrestricted amounts at the fixed price.

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Melting gold including gold coins, and putting it to different uses was freely allowed. Import and export of gold was freely allowed. The total money supply in the country was determined by the quantum of gold available for monetary purpose.

2) Gold Bullion Standard

Under this system, the money in circulation was either partly of entirely paper and gold served as reserve asset for the money supply.. However, paper money could be exchanged for gold at any time. The exchange rate varied depending upon the gold content of currencies. This was also known as Mint Parity Theory of exchange rates.

The gold bullion standard prevailed from about 1870 until 1914, and intermittently thereafter until 1944. World War I brought an end to the gold standard.

2.2

BRETTON WOODS SYSTEM

During the world wars, economies of almost all the countries suffered. In ordere to correct the balance of payments disequilibrium, many countries devalued their currencies. Consequently, the international trade suffered a deathblow. In 1944, following World War II, the United States and most of its allies ratified the Bretton Woods Agreement, which set up an adjustable parity exchange-rate system under which exchange rates were fixed (Pegged) within narrow intervention limits (pegs) by the United States and foreign central banks buying and selling foreign currencies. This agreement, fostered by a new spirit of international cooperation, was in response to financial chaos that had reigned before and during the war.

In addition to setting up fixed exchange parities (par values) of currencies in relationship to gold, the agreement established the International Monetary Fund (IMF) to act as the custodian of the system.

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Under this system there were uncontrollable capital flows, which lead to major countries suspending their obligation to intervene in the market and the Bretton Wood System, with its fixed parities, was effectively buried. Thus, the world economy has been living through an era of floating exchange rates since the early 1970.

2.3

FLOATING RATE SYSTEM

In a truly floating exchange rate regime, the relative prices of currencies are decided entirely by the market forces of demand and supply. There is no attempt by the authorities to influence exchange rate. Where government interferes directly or through various monetary and fiscal measures in determining the exchange rate, it is known as managed of dirty float.

2.4

PURCHASING POWER PARITY (PPP)

Professor Gustav Cassel, a Swedish economist, introduced this system. The theory, to put in simple terms states that currencies are valued for what they can buy and the currencies have no intrinsic value attached to it. Therefore, under this theory the exchange rate was to be determined and the sole criterion being the purchasing power of the countries. As per this theory if there were no trade controls, then the balance of payments equilibrium would always be maintained. Thus if 150 INR buy a fountain pen and the samen fountain pen can be bought for USD 2, it can be inferred that since 2 USD or 150 INR can buy the same fountain pen, therefore USD 2 = INR 150.

For example India has a higher rate of inflation as compaed to country US then goods produced in India would become costlier as compared to goods produced in US. This would induce imports in India and also the goods produced in India being costlier would lose in international competition to goods produced in US. This decrease in exports of India as compared to exports from US would lead to demand for the currency of US and excess supply of currency of India. This in turn, cause currency of India to depreciate in comparison of currency of Us that is having relatively more exports.

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2.5

FUNDAMENTALS IN EXCHANGE RATE

METODS OF QOUTING RATE

Exchange rate is a rate at which one currency can be exchange in to another currency, say USD = Rs.48. This rate is the rate of conversion of US dollar in to Indian rupee and vice versa.

There are two methods of quoting exchange rates.

1) Direct methods

Foreign currency is kept constant and home currency is kept variable. In direct quotation, the principle adopted by bank is to buy at a lower price and sell at higher price.

2) In direct method:

Home currency is kept constant and foreign currency is kept variable. Here the strategy used by bank is to buy high and sell low. In India with effect from august 2, 1993 all the exchange rates are quoted in direct method.

It is customary in foreign exchange market to always quote two rates means one for buying and another rate for selling. This helps in eliminating the risk of being given bad rates i.e. if a party comes to know what the other party intends to do i.e. buy or sell, the former can take the letter for a ride.

There are two parties in an exchange deal of currencies. To initiate the deal one party asks for quote from another party and other party quotes a rate. The party asking for a quote is known as asking party and the party giving a quotes is known as quoting party.

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The advantage of twoway quote is as under

i. ii.

The market continuously makes available price for buyers or sellers Two way price limits the profit margin of the quoting bank and comparison of one quote with another quote can be done instantaneously.

iii.

As it is not necessary any player in the market to indicate whether he intends to buy or sale foreign currency, this ensures that the quoting bank cannot take advantage by manipulating the prices.

iv. v.

It automatically insures that alignment of rates with market rates. Two way quotes lend depth and liquidity to the market, which is so very essential for efficient market.

` In two way quotes the first rate is the rate for buying and another for selling. We should understand here that, in India the banks, which are authorized dealer always, quote rates. So the rates quoted- buying and selling is for banks point of view only. It means that if exporters want to sell the dollars then the bank will buy the dollars from him so while calculation the first rate will be used which is

Buying rate, as the bank is buying the dollars from exporter. The same case will happen inversely with importer as he will buy dollars from the bank and bank will sell dollars to importer.

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2.6

FACTOR AFFECTINGN EXCHANGE RATES

In free market, it is the demand and supply of the currency which should determine the exchange rates but demand and supply is the dependent on many factors, which are ultimately the cause of the exchange rate fluctuation, some times wild.

The volatility of exchange rates cannot be traced to the single reason and consequently, it becomes difficult to precisely define the factors that affect exchange rates. However, the more important among them are as follows:

STRENGTH OF ECONOMY

Economic factors affecting exchange rates include hedging activities, interest rates, inflationary pressures, trade imbalance, and euro market activities. Irving fisher, an American economist, developed a theory relating exchange rates to interest rates. This proposition, known as the fisher effect, states that interest rate differentials tend to reflect exchange rate expectation.

On the other hand, the purchasing- power parity theory relates exchange rates to inflationary pressures. In its absolute version, this theory states that the equilibrium exchange rate equals the ratio of domestic to foreign prices. The relative version of the theory relates changes in the exchange rate to changes in price ratios.

POLITICAL FACTOR

The political factor influencing exchange rates include the established monetary policy along with government action on items such as the money supply, inflation, taxes, and deficit financing. Active government intervention or manipulation, such as central bank activity in the foreign currency market, also have an impact. Other political factors influencing exchange rates include the political stability of a country and its relative economic exposure

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(the perceived need for certain levels and types of imports). Finally, there is also the influence of the international monetary fund.

EXPACTATION OF THE FOREIGN EXCHANGE MARKET

Psychological factors also influence exchange rates. These factors include market anticipation, speculative pressures, and future expectations.

A few financial experts are of the opinion that in todays environment, the only trustworthy method of predicting exchange rates by gut feel. Bob Eveling, vice president of financial markets at SG, is corporate finances top foreign exchange forecaster for 1999. evelings gut feeling has, defined convention, and his method proved uncannily accurate in foreign exchange forecasting in 1998.SG ended the corporate finance forecasting year with a 2.66% error overall, the most accurate among 19 banks. The secret to evelings intuition on any currency is keeping abreast of world events. Any event,from a declaration of war to a fainting political leader, can take its toll on a currencys value. Today, instead of formal modals, most forecasters rely on an amalgam that is part economic fundamentals, part model and part judgment.

Fiscal policy Interest rates Monetary policy Balance of payment Exchange control Central bank intervention Speculation Technical factors

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HEDGING
TOOLS

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Introduction
Consider a hypothetical situation in which ABC trading co. has to import a raw material for manufacturing goods. But this raw material is required only after three months. However, in three months the price of raw material may go up or go down due to foreign exchange fluctuations and at this point of time it can not be predicted whether the price would go up or come down. Thus he is exposed to risks with fluctuations in forex rate. If he buys the goods in advance then he will incur heavy interest and storage charges. However, the availability of derivatives solves the problem of importer. He can buy currency derivatives. Now any loss due to rise in raw material price would be offset by profits on the futures contract and viceversa. Hence, the derivatives are the hedging tools that are available to companies to cover the foreign exchange exposure faced by them.

Definition of Derivatives

Derivatives are financial contracts of predetermined fixed duration, whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as : interest rate, exchange rates, commodities, and equities.

Derivatives are risk shifting instruments. Initially, they were used to reduce exposure to changes in foreign exchange rates, interest rates, or stock indexes or commonly known as risk hedging. Hedging is the most important aspect of derivatives and also its basic economic purpose. There has to be counter party to hedgers and they are speculators.

Derivatives have come into existence because of the prevalence of risk in every business. This risk could be physical, operating, investment and credit risk.

Derivatives provide a means of managing such a risk. The need to manage external risk is thus one pillar of the derivative market. Parties wishing to manage their risk are called hedgers.

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The common derivative products are forwards, options, swaps and futures.

1. Forward Contracts
Forward exchange contract is a firm and binding contract, entered into by the bank and its customers, for purchase of specified amount of foreign currency at an agreed rate of exchange for delivery and payment at a future date or period agreed upon at the time of entering into forward deal.

The bank on its part will cover itself either in the interbank market or by matching a contract to sell with a contract to buy. The contract between customer and bank is essentially written agreement and bank generally stand to make a loss if the customer defaults in fulfilling his commitment to sell foreign currency.

A foreign exchange forward contract is a contract under which the bank agrees to sell or buy a fixed amount of currency to or from the company on an agreed future date in exchange for a fixed amount of another currency. No money is exchanged until the future date.

A company will usually enter into forward contract when it knows there will be a need to buy or sell for an currency on a certain date in the future. It may believe that todays forward rate will prove to be more favourable than the spot rate prevailing on that future date. Alternatively, the company may just want to eliminate the uncertainity associated with foreign exchange rate movements.

The forward contract commits both parties to carrying out the exchange of currencies at the agreed rate, irrespective of whatever happens to the exchange rate.

The rate quoted for a forward contract is not an estimate of what the exchange rate will be on the agreed future date. It reflects the interest rate differential between the two currencies involved. The forward rate may be higher or lower than the market exchange rate on the day the contract is entered into.

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Forward rate has two components.

Spot rate Forward points

Forward points, also called as forward differentials, reflects the interest differential between the pair of currencies provided capital flow are freely allowed. This is not true in case of US $ / rupee rate as there is exchange control regulations prohibiting free movement of capital from / into India. In case of US $ / rupee it is pure demand and supply which determines forward differential.

Forward rates are quoted by indicating spot rate and premium / discount.

In direct rate,

Forward rate = spot rate + premium / - discount.

Roll over forward contracts

Rollover forward contracts are one where forward exchange contract is initially booked for the total amount of loan etc. to be re-paid. As and when installment falls due, the same is paid by the customer at the exchange rate fixed in forward exchange contract. The balance amount of the contract rolled over till the date for the next installment. The process of extension continues till the loan amount has been re-paid. But the extension is available subject to the cost being paid by the customer. Thus, under the mechanism of roll over contracts, the exchange rate protection is provided for the entire period of the contract and the customer has to bear the roll over charges. The cost of extension (rollover) is dependent upon the forward differentials prevailing on the date of extension. Thus, the customer effectively protects himself against the adverse spot exchange rates but he takes a risk on the forward differentials. (i.e. premium/discount). Although spot exchange rates and forward differentials

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are prone to fluctuations, yet the spot exchange rates being more volatile the customer gets the protection against the adverse movements of the exchange rates.

A corporate can book with the Authorised Dealer a forward cover on roll-over basis as necessitated by the maturity dates of the underlying transactions, market conditions and the need to reduce the cost to the customer.

Cancellation of Forward Contract

A corporate can freely cancel a forward contract booked if desired by it. It can again cover the exposure with the same or other Authorised Dealer. However contracts relating to nontrade transaction\imports with one leg in Indian rupees once cancelled could not be rebooked till now. This regulation was imposed to stem bolatility in the foreign exchange market, which was driving down the rupee.

Thus the whole objective behind this was to stall speculation in the currency.

But now the RBI has lifted the 4-year-old ban on companies re-booking the forward transactions for imports and non-traded transactions. It has been decided to extend the freedom of re-booking the import forward contract up to 100% of un-hedged exposures

Falling due within one year, subject to a cap of $ 100 Mio in a financial year per corporate.

The removal of this ban would give freedom to corporate Treasurers who sould be in apposition to reduce their foreign exchange risks by canceling their existing forweard transactions and re-booking them at better rates. Thus this in not liberalization, but it is restoration of the status quo ante.

Also the Details of cancelled forward contracts are no more required to be reported to the RBI.

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The following are the guidelines that have to be followee in case of cancellation of a forward contract.

1.)

In case of cancellation of a contract by the client (the request should be made on or

before the maturity date) the Authorised Dealer shall recover/pay the, as the case may be, the difference between the contracted rate and the rate at which the cancellation is effected. The recovery/payment of exchange difference on canceling the contract may be up front or back ended in the discretion of banks.

2.)

Rate at which the cancellation is to be effected :

Purchase contracts shall be cancelled at the contracting Authorised Dealers spot T.T. selling rate current on the date of cancellation. Sale contract shall be cancelled at the contracting Authorised Dealers spot T.T. selling rate current on the date of cancellation. Where the contract is cancelled before maturity, the appropriate forward T.T. rate shall be applied.

3.)

Exchange difference not exceeding Rs. 100 is being ignored by the contracting Bank.

4.)

In the absence of any instructions from the client, the contracts, which have matured,

shall be automatically cancelled on 15th day falls on a Saturday or holiday, the contract shall be cancelled on the next succeeding working day.

In case of cancellation of the contract

1.)

Swap, cost if any shall be paid by the client under advice to him.

2.)

When the contract is cancelled after the due date, the client is not entitled to the

exchange difference, if any in his favor, since the contract is cancelled on account of his default. He shall however, be liable to pay the exchange difference, against him. ( NRIBM 2011-13 )

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Early Delivery

Suppose an Exporter receives an Export order worth USD 500000 on 30/06/2000 and expects shipment of goods to take place on 30/09/2000. On 30/06/200 he sells USD 500000 value 30/09/2000 to cover his FX exposure.

Due to certain developments, internal or external, the exporter now is in a position to ship the goods on 30/08/2000. He agrees this change with his foreign importer and documents it. The problem arises with the Bank as the exporter has already obtained cover for 30/09/2000. He now has to amend the contract with the bank, whereby he would give early delivery of USD 500000 to the bank for value 30/08/2000. i.e. the new date of shipment.

However, when he sold USD value 30/09/2000, the bank did the same in the market, to cover its own risk. But because of early delivery by the customer, the bank is left with a long mismatch of funds 30/08/2000 against 30/09/2000, i.e. + USD 500000 value 30/08/2000 (customer deal amended) against the deal the bank did in the inter bank market to cover its original risk USD value 30/09/2000 to cover this mismatch the bank would make use of an FX swap.

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The swap will be

1.)

Sell USD 500000 value 30/08/2000.

2.)

Buy USD 500000 value 30/09/2000

The opposite would be true in case of an importer receiving documents earlier than the original due date. If originally the importer had bought USD value 30/09/2000 on opening of the L/C and now expects receipt of documents on 30/08/2000, the importer would need to take early delivery of USD from the bank. The Bank is left with a short mismatch of funds 30/08/2000 against 30/09/2000. i.e. USD 500000 value (customer deal amended) against the deal the bank did in the inter bank market to cover its original risk + USD 500000

To cover this mismatch the vank would make use of an FX swap, which will be ;

1. Buy USD value 30/08/2000. 2. Sell USD value 30/09/2000.

The swap necessitated because of early delivery may have a swap cost or a swap difference that will have to be charged / paid by the customer. The decision of early delivery should be taken as soon as it becomes known, failing which an FX risk is created. This means that the resultant swap can be spot versus forward (where early delivery cover is left till the very end) or forward versus forward. There is every likelihood that the origial cover ratre will be quite different from the maket rates when early delivery is requested. The difference in rates will create a cash outlay for the bank. The interest cost or gain on the cost outlay will be charged / paid to the customer.

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Substitution of Orders

The substitution of forward contracts is allowed. In case shipment under a particular import or export order in respect of which forward cover has been booked does not take place.

The corporate can be permitted to substitute another order under the same forward contract, provided that the proof of the genuineness of the transaction is given.

Advantages of using forward contracts:

They are useful for budgeting, as the rate at which the company will buy or sell is fixed in advance. There is no up-front premium to pay whn using forward contracts. The contract can be drawn up so that the exchange takes place on any agreed working day.

Disadvantages of forward contracts:

They are legally binding agreements that must be honoured regardless of the exchange rate prevailing on the actual forward contract date. They may not be suitable where there is uncertainty about future cash flows. For example, if a company tenders for a contract and the tender is unsuccessful, all obligations under the Forward Contract must still be honoured.

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2. OPTIONS
An option is a Contractual agreement that gives the option buyer the right, but not the obligation, to purchase (in the case of a call option) or to sell (in the case of put option) a specified instrument at a specified price at any time of the option buyers choosing by or before a fixed date in the future. Upon exercise of the right by the option holder, and option seller is obliged to deliver the specified instrument at a specified price.

The option is sold by the seller (writer) To the buyer (holder) In return for a payment (premium) Option lasts for a certain period of time the right expires at its maturity

Options are of two kinds

1.) 2.)

Put Options Call Options

PUT OPTIONS

The buyer (holder) has the right, but not an obligation, to sell the underlying asset to the seller (writer) of the option.

CALL OPTIONS

The buyer (holder) has the right, but not the obligation to buy the underlying asset from the seller (writer) of the option.

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STRIKE PRICE

Strike price is the price at which calls & puts are to be exercised (or walked away from)

AMERICAN & EUROPEAN OPTIONS

American Options

The buyer has the right (but no obligation) to exercise the option at any time between purchase of the option and its maturity.

European Options

The buyer has the right (but no obligations) to exercise the option at maturity only.

UNDERLYING ASSETS :

Physical commodities, agriculture products like wheat, plus metal, oil. Currencies. Stock (Equities)

INTRINSIC VALUE:

It is the value or the amount by which the contract is in the option.

When the strike price is better than the spot price from the buyers perspective.

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IN, OUT, AT THE MONEY:

In-the-money:

An option whose strike price is more favorable than the current market exchange rate is said to be in the money option. Immediate exercise of such option results in an exchange profit.

Out-of-the-money:

If the strike price of the option contract is less favorable than the current market exchange rate, the option contract is said to be out-of-the-money to its market price.

At-the-money:

If the market exchange rate and strike prices are identical then the option is called to be atthe-money option. In the above example, if the market price is 1 = US $ 1.5000, the option contract is said to be at the money to its market place.

Summary

Prices Spot>Strike Spot=Strike Spot<Strike in-the-money at-the-money

Calls out-of-the-money at-the-money in-the-money

Puts

out-of-the-money

Naked Options:

A naked option is where the option position stands alone, it is not used in the conjunction with cash marked position in the underlying asset, or another potion position.

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Pay-off for a naked long call:

A long call, i.e. the purchaser of a call (option), is an option to buy the underlying asset at the strike price. This is a strategy to take advantage of any increase in the price of the underlying asset.

CURRENCY OPTIONS

A currency option is a contract that gives the holder the right (but not the obligation) to buy or sell a fixed amount of a currency at a given rate on or before a certain date. The agreed exchange rate is known as the strike rate or exercise rate.

An option is usually purchased for an up front payment known as a premium. The option then gives the company the flexibility to buy or sell at the rate agreed in the contract, or to buy or sell at market rates if they are more favorable, i.e. not to exercise the option.

How are Currency Options are different from Forward Contracts?

A Forward Contract is a legal commitment to buy or sell a fixed amount of a currency at a fixed rate on a given future date. A Currency Option, on the other hand, offers protection against unfavorable changes in exchange raters without sacrificing the chance of benefiting from more favorable rates.

Types of Options :

A Call Option is an option to buy a fixed amount of currency. A Put Option is an option to sell a fixed amount of currency.

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Both types of options are available in two styles :

1. The American style option is an option that can be exercised at any time before its expiry date. 2. The European style option is an option that can only be exercised at the specific expiry date of the option.

Option premiums :

By buying an option, a company acquires greater flexibility and at the same time receives protection against unfavorable changes in exchange rates. The protection is paid for in the form of a premium.

MAKING THE MOST OF OPTIONS

Options are particularly flexible:

The buyer can choose any strike rate and any end date. The management of an option position can be made even more flexible with the following techniques :

Selling back an option

The bank will at any time quote a price at which it is prepared to buy back an option it has sold. The valued of the option can be paid directly to the holder or can be incorporated in the rate on any new spot or forward deals done at the time.

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Extending or shortening an option

The expiry date on an option can be changed, usually with payment of premium, either by the company to the bank (for an extension) or by the bank to the company (for shortening). A payment of premium can be avoided by adjusting the strike rate when the expiry date is altered.

Changing other features of an option

In principle, any feature of an option may be changed at any tiem (strike rate, option amount), with a resulting payment of premium in one direction or the other.

Uses of Options

On account of market volatility, if one is not very sure of the rates, option contract is useful to limit losses and gives access to unlimited profit potential. In calm markets, writing of options is a profitable business with relatively low risk. Options contracts are ideal when tendering for a business contract where the outcome is uncertain. Options are useful in carrying out ongoing transactions where exposures are uncertain in terms of timings amounts etc. Option provides the best tool to hedge balance sheet translation exposure. Options are useful for hedging foreign currency loan exposures.

OPTIONS- Indian Scene

In the past, Indian market other than currency market has experienced derivative instruments in the form of futures, etc. The process of globalisation and integration of Indian Financial sector with the global economy has opened up vast potential of the world

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currency markets in the business, expecially the matured, highly liquid and competitive markets of currency options. The successful management of stability of rupee exchange rate against the US dollar dampened the sentiments of volatility of $/rupee rate. Stability of exchange rate stimulates growth of international trade in good/services, investment flows etc. The volatility and vulnerability of rupee against the currencies other than the US dollar is beyond management in terms of exchange rate stability of rupee.

Considering this aspect and also the maturity of the world currency options market, the RBI introduced the cross currency options with effect from January 1994 in terms of its AD.

The main features are:

At present Indian residents can buy cross currency options only to hedge their foreign exchange exposures in non-US dollar currencies. Corporate can buy but cannot write options.

Due to certain structural deficiencies of the Financial markets in India; the RBI has not permitted rupee-based currency options. Options are allowed to be bought by clients only to cover their genuine exposures. Banks selling currency options have to hedge themselves immediately on back-to-back basis. The managing committee of FEDAI adopted, with certain modifications, International Currency Options Master(ICOM) agreement of British Bankers Association, London for cross currency options market in India.

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The cross currency options market is still in an infancy stage in India and the initial euphoria over cross currency subsided on account of the following factors.

The RBI introduced cross currency options in non US dollar currencies for covering genuine exposures of the corporate. Nearly 60 to 70% of the corporate exposures are denominated in the US dollar. As a result major of the corporate exposures did not require currency options as a hedging tool. Reluctance of the corporates to part with the front-end fee as the price for purchase of an option contract. The premium or price of the currency option contract is higher than the expectation of the corporates about the volatility of currency movements. Rigidities attached to the cross currency option contract deals. Absence of long term rupee yield curve, structural deficiencies of the financial market. The most important problem is the absence of rupee based currency options.

The above factors have certainly shunted the growth of cross currency options as a first derivative product on the Indian Foreign Exchange market.

Earlier Indian corporate clients had only two options to manage foreign exchange risk.

To do nothing till the maturity of the transactions of To book a forward contract and settle the transaction at contracted date of maturity of the contract.

However, today corporate have additional tool at their disposal in the form of cross currency option for managing their currency exposures.

Introduction of cross currency options is a certain raiser and its subsequent development application in the currency market will bring in onslaught of complex derivative products for both the corporates as well as the bankers.

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Thus the general rule for hedging exposures with options is that with hindsigtht one can deduce that there was always a better strategy. The question to be asked is what the risk is and does the option premium justify it ? Beside, always look at an option as an insurance policy, it never qualifies as a good investment but always provides protection against the unknown.

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3. SWAPS
WHY DID SWAPS EMERGE?

In the late 1970s, the first currency swap was engineered to circumvent the currency control imposed in the UK. A tax was levied on overseas investments to discourage capital outflows. Therefore, a British company could not transfer funds overseas in order to expand its foreign operations without paying sizeable penalty. Moreover, this British company had to take an additional currency risks arising from servicing a sterling debt with foreign currency cash flows. To overcome such a predicament, back-to-back loans were used to exchange debts in different currencies. For example, a British company wanting to raise capital in the Frace would raise the capital in the UK and exchange its obligations with a French company, which was in a reciprocal position. Though this type of arrangement was providing relief from existing protections, one could imagine, the task of locating companies with matching needs was quite difficult in as much as the cost of such transactions was high. In addition, back-toback loans

required drafting multiple loan agreements to strate respective loan obligations with clarity. However this type of arrangement leads to development of more sophisticated swap market of today.

WHAT ARE SWAPS?

A contract between two parties, referred to as counter parties, to exchange two streams of payments for agreed period of time. The payments, commonly called legs or sides, are calculated based on the underlying notional using applicable rates. Swaps contracts also include other provisional specified by the counter parties. Swaps are not debt instrument to raise capital, but a tool used for financial management. Swaps are arranged in many different currencies and different periods of time. US $ swaps are most common followed by Japanese yen, sterling and Deutsche marks. The length of past swaps transacted has ranged from 2 to 25 years.

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PRESENT SCENARIO IN THE INDIAN MARKET

Genesis of the Interest Rate Swaps in India

Interest rates in India have been RBI determined for decades now. In the past five years, we have seen this situation changing. Gradually, India is moving towards a market determined interest rate regime. RBI is gradually freeing interest rates, and this has forced banks to manage risks on their own. Moreover, the Indian companies were used to the earlier easy go approach and surety in interest rates that they can borrow on. But now, corporate have a plethora of rates at which they can borrow. They have the option of loans linked to fixed or floating rates. Thus, Indian companies have to be se efficient with regards to management fo financial uncertainities, like s are elsewhere in the world. With all this deregulation and integration with global practices, there was a felt needs for Instruments to hedge against various risks. Derivatives for the money market were the next logical step in the process. This is exactly what RBI has done.

The RBI Governors Statement on Mid Term Review of Monetary and Credit Policy for 1998-99 announced on October 30, 1998, indicated that to further deepening the money market and to enable banks, primary dealers (PDs) and all India financial instituti9ons (FIs) to hedge interest risks, the RBI had decided to create an environment that would favor the introduction of Interest Rate Swaps.

Accordingly, on July 7, 1999 RBI issued final guidelines to introduce IRS and Forward Rate Agreements (FRAs). The players are allowed to practice IRS/FRAs as product for their own balance sheet management and for market making purposes.

The RBI has been criticized for being hasty in introducing such interest rate derivatives. It was said that our debt market is not mature enough to incorporate and deal with such products. Though the Indian debt market has not been properly developed, blaming the RBI move does not seem to be proper because there products will have to be introduced sooner or later and the present time appears to be as good a time as any other. Moreover, this move may also help in quickening the development of a mature debt and money market.

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The legal framework: RBI Guidelines (summary)

A brief summary of RBI guidelines regarding IRS issued on July 7, 1999 follows :

Interest rate swap refers to a financial contract between two parties exchanging a stream of interest payments for a notional principal amount on multiple occasions during a specified period. Forward rate agreement (FRA) is being defined as the same on settlement date for a specified period from start date to maturity date.

The players:

Scheduled commercial banks excluding regional rural banks, primary dealers (PDs) and all India financial institutions have been allowed to undertake IRS as a product of their own asset liability management and market-making purposes.

Types:

Banks/PDs/FIs undertake different types of plain vanilla FRAs/IRS for interest rate risks arising on account of landings or borrowings made at fixed or variable interest rates. However, swaps having explicit/implicit option features like caps, floors or collars are not permitted.

Benchmark Rate:

The players can use any domestic money or debt market rates as reference rate for entering into FRA/IRS, provided methodology of computing the rate is objective, transparent and mutually acceptable to counter parties. The reason stated for the same is that the benchmark rate is expected to evolve on its own in the market.

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Size of the notional principal amount :

There will be no limit on the maximum or minimum size of the notional principal amount of FRA/IRS or the tenor of the IRS/FRAs. Regarding the exposure limits the banks; FIs and PDs have to arrive at the credit equivalent amount for the purpose of reckoning exposure to counter party.

Exposure:

The exposure should be within the sublimits and the participants concerned should fix this for the FRAs/IRS to corporate/FIs, banks/PDs. In case of the banks and the FIs, the credit exposure should be within the single/group borrower limits as prescribed by the RBI.

Facilitators

The problem of locating potential counter parties was solved through dealers and brokers. A swap dealer takes on one side of the transaction as counter party. Dealers work for investment, commercial or merchant banks. By positioning the Swap, dealers earn bid-ask spread for the service. In other words, the swap dealer earns the difference between the amount received from a party and the amount paid to the other party. In an ideal situation, the dealer would offset his risks by matching one step with another to streamline his payments. If the dealer were a counter party paying fixed rate payments and receiving floating rate payments, he would prefer to be a counter party receiving fixed payments and paying floating rate payments in another swap. A perfectly netted position as just described is not necessary. Dealers have the flexibility to cover their exposure by matching multiple parties and by using other tools such as fitires to cover an exposed position until the book is complete.

Swap Market Participations

Since swaps are privately negotiated products, there is no restriction on who can use the market : however, parties with low credit quality have difficulty entering the market. This is due to fact that they cannot be matched with counter parties who are willing to take on their

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risks. In the U.S. many parties require their counter parties to have minimum assets of $ 10 million. This requirement has become a standardized representation of eligible swap participants .

The following list includes a Sample of Swaps Market Participants :

1. Multinational Companies.

Shell, IBM, Ronda, Unilever, Procter & Gamble, Pepsi Co.

2. Banks

Banks participate in the swap market either as an intermediary for two or more parties or as counter party for their own financial management.

3. Sovereign and public sector institutions

Japan, Republic of Italy, Electricity de France, Sallie Mae (U.S. Student Loan Marketing Association).

4. Super nationals

World Bank, European Investment Bank, Asian Development Bank.

5. Money Managers

Insurance companies, Pension funds.

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Secondary Factors in the Development of the Swap Market

As international barriers to financial markets began to disappear, swap dealers were able to switch between different indexes and different markets. By arbitraging capital and credit markets, they were able to borrow at the best index available and then swap to the desired index.

Heavy borrowing by the US government and government agencies in the 80s played a major role in the development of the swap market. Borrowing at the floating rates and swapping to the fixed rates met the needs of the corporations and in effect added to the depth and the liquidity of the swap market.

Taking a view on the future direction of the interest rates, swaps can be proved to very attractive instruments, and under a variety of yield curve conditions, they are among the cheapest to transact. Speculative trading of the swaps added enormously to the depth and liquidity of the market.

Foreign Exchange Swap

Swaps are derivatives that involve a private agreement between two parties to exchange cash flows in the future according to a prearranged formula. The underlying instruments are liabilities or assets with interest expenses or incomes. Swaps can be broadly classified into two types Interest Rate Swaps and Currency Swaps. The first recorded swaps were negotiated in 1981. Since then, the markets have grown very rapidly.

A basic foreign exchange swap is the simultaneous purchase and sale of one currency for another, where the two contracts have different dates (different positions of same or different amount on different dates).

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Cash Management Swap

It is used to realize efficient cash management or to adjust the maturity dates of existing forward contracts.

Handling Surplus and Deficit Cash Positions

The international scope of business conducted by financial and non-financial organization will often require the management of cash flows in more than one currency. From time to time, an entity will find itself with surplus cash balance in one currency and deficit balances in another currency.

Swapping Forward Contracts Forward at Historical Rates.

Corporations often face considerable uncertainty in timing and /of amount when forecasting currency cash flows. Forward contracts that were dealt to hedge such flows may mature on a date that does not match the actual cash flow. In such cases, the maturity of the original forward contract crates cash flows for which there is no immediate offset.

Once again, the cash manager can borrow to fund the deficit, invest the surplus, or execute a cash management swap. Another method to deal with this type of situation is to swap contracts at historical rates. The new forward contract consists of the maturing forward rate adjusted by the current points and a working capital interest factor.

Historical rate rollovers have the same basic economic as market rate saps. The also eliminate the need for any cash settlements on the original maturity date and avoid the accounting problems frequently associated with the FX gain/loss account. On small forward contractrs, the actual dollar amount of the net settlement ma be small, and cost of settling may be excessive given the amount involved. In other cases, an entity may not have the cash to settle on the swap but still want the swap done.

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As a general comment, usage of historical rate swaps varies from market to market, but this type of swap is not a heavily traded transaction. One of the major reasons is its susceptibility to abuse.

There are basically two types of swap transactions :

Interest Rate Swap Currency Swap

1. INTEREST RATE SWAPS

The most common type of interest rate swaps are plain vanilla IRS. Here, one party A, agrees to pay to the other party B, cash flows equal to interest at a predetermined fixed rate on a notional principal for a number ofyears. Simultaneously, A agrees to pay party B cash flows equal to interest at a floating rate on the same notional principal for the same period of time. The currencies of the two sets of interest cash flows are the same. Moreover, only the difference in the interest

payments is paid/received; the principal is used only to calculate the interest amounts and is never exchanged.

It is an arrangement whereby one party exchanges one set of interest payment for another e.g. fixed or floating.

An exchange between two parties of interest obligations (payment of interest) in the same currency on an agreed amount of notional principal for an agreed period of time.

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Types of IRS

We have discussed the plain vanilla swaps till now. These swaps can be subdivided into swaps made directly between two parties or with an exchange. Moreover, they can be classified on the basis of the floating reference rate used, which may be LIBOR, CP rate, TBill rate, etc. Apart from plain vanilla IRS discussed above, there are several other types of swaps.

Basis Swaps:

Where both the legs are floating interest rates.

Amortizing Swaps:

Where the principal reduces in a predetermined way to correspond to the amortization schedule on a loan.

Step-up Swaps:

Where principal increases in a predetermined way

Deferred/Forward Swaps:

Where parties do not begin to exchange interest payments until some future date.

Combinations with currency Swaps:

where fixed rate in one currency is exchanged with floating rate in another currency.

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Extendable Swaps:

Where one party has the option to extend the life of the swap beyond the specified period.

Put table Swaps:

where one party has the option to terminate the swap early.

Swaptions :

which is options on swaps.

Constant Maturity Swaps (CMSs):

Where LIBOR is used as reference rate.

Constant Maturity Treasury Swaps (CMTs):

Where LIBOR is exchanged for a particular Treasury rate.

Indexed principal Swaps:

Where the principal reduces based on an index of interest rate levels.

Differential Swaps:

Where a floating rate in domestic currency is exchanged for a floating rate in foreign currency, with both interest rates applied on same domestic principal.

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Back valued Swaps:

Where past effective dates are used.

Prepaid Swaps:

where the fixed leg payer pays his obligations in advance, and only receives payments till maturity, zero coupon swaps are exactly opposite to prepaid swaps, where the whole payment is given at the maturity.

Trends in Indian Markets

Before coming to the actual trends in the market, let us look at the players. Most of the active participation is by foreign banks, followed by Indian banks, Corporates and finally, FIs. The absence of nationalized banks from the Irs scene is noteworthy. Today, if a corporate wishes to enter an IRS deal, it will have to submit the following to its banker :

Certified copy of the firms Memorandum and Articles of Asssociation. Board resolution authorizing derivative deals. An ISDA Master Agreement. Risk disclosure statement. Certificate wing underlying loan exposure. A certificate stating that IRS is for hedging risks, not for speculation.

Thus, we see that IRS today can be used by corporate only for an actual hedging exercise, and it has to have board permission. Moreover, the deal would be within the exposure limits of that firm for the bank with which it is dealing. These measures are to ensure that corporates do not undertake speculative activities, and start dealing only after they have proper risk management systems in place.

On the first day of trading, more than 30 deals were recorded, worth over Rs. 600 crores in notional principal terms. Rs. 500 crores of this was accounted for by corporate deals. The

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rush was because the European and private banks wanted to be a part of the history, dealing on first day, rather than actual hedging. It has also been reported that some deals were circular between three players, with no real effect in any players position. No deal was stuck for more than a years tenor.

Since the first day, there have been almost no deals, and the markets are cold. The reasons for this are many. At the short-term level, almost all the players expect the interest rates to go down in the next few months. This means that there are no conflicting views among players about interest rates, and so IRS deals are not very tempting. Again, there are very few floating rate loans around. These and other fundamental reasons have been discussed in the next secti9on.

In spite of these, there are many underlying reasons for going for IRS. Today, the major financial intermediaries viz. Indian banks, foreign banks, financial institutions, and corporates have radically different sets of asset-liability structures. Thus for ALM alone, IRS are a good options. For example, the FIs have much of their liabilities as bullet repayment bonds, and the bulk of their assets by way of installment repayment loans. Thus, chances are that their liabilities portfolio is longer than their assets portfolio. Commercial banks, on the other hand, have bulk of their liability portfolio in relatively short-term maturities, and assets are at longer maturities with fixed interest rates. Thus, banks and FIs alone can enter in a lot of mutually beneficial deals.

Corporate would also like to hedge their interest rate risks, and convert their fixed rate loans to floating rates, now that the options are available. However, their needs would be medium term in nature (2 to 8 years), and as yet there are no takers for this long maturities.

The market is only about 2 months old now, and is yet to evolve. The likely problem in its evolution and the future is discussed in the following sections.

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2. CURRENCY SWAPS

Each entity has a different access and different long term needs in the international markets. Companies receive more favorable credit ratings in their country of domicile that in the country in which they need to raise capital. Investors are likely to demand a lower return from a domestic company, which they are more familiar with than from a foreign company. In some cases a company may be unable to raise capital in a certain currency.

Currency swaps are also used to lower than risk of currency exposure or to change returns on investment into another, more favorable currency. Therefore, currency swaps are used to exchange assets or capital in one currency for another for the purpose of financial management.

A currency swap transaction involves an exchange of a major currency against the U.S. dollar. In order to swap two other non-U.S. currencies, a dealer may need to arrange two separate swaps. Although, any currency can be used in swaps, many counter parties are unable to exchange of the principals takes place at the commencement and the termination of the swaps in addition to exchange of interest payments on agreed intervals. The exchange of principal and interest is necessary because counter parties may need to utilize the respective exchanged currencies.

The uses of currency swaps are summarized below:

Lowering funding cost Entering restricted capital markets Reducing currency risk Supply-demand imbalances in the markets

As for interest rate swaps, many variants of the plain vanilla currency swaps were created to meet some of the common financial management needs.

Amortizing currency swaps

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The notional principals of these swaps are scheduled to decrease over the life of the swaps. Therefore, principals are exchanged accordingly.

Accreting currency swaps

The notional principals of these swaps increase periodically. Principals are exchanged as scheduled.

Floating-for-floating rate currency swaps

As indicated by the name, this swap involves the exchange of a floating interest rate payment schedule in one currency against another floating interest rate payment schedule in another currency.

Following are risks associated with swaps :

Interest rate risk Exchange rate risk Default risk Sovereign risk Mismatch risk (for dealers only)

In 1987, a set of principal were arranged by the central banking authorities of the Group of Ten plus Luxembourg known as the Easle Supervisors Committee to standardize capital requirements across nations. According to this set of requirements, called the Easle Accord, dealers of swaps and other off balance sheet instruments are imposed risk-adjusted capital requirements.

CAPS & COLLARS

Caps are like insurance

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Protect against rise in rates of interest Benefits of falling rates available

Interest Rate Cap is agreement between a corporate and a bank borrower with floating rate debt. Under the terms of the agreement, the bank undertakes to bear extra cost on account of interest rate going up beyond the agreed rate during the agreed period. For this undertaking, the borrower pays premium.

This instrument caps the interest payment of the borrower as any rise above the cap will be borne by the bank which sells cap to the borrower.

FLOORS

It is a hedging product for investors for protection against falls in interest rates. Interest Rate floors, when it protects against fall in interest rates, investors benefit from rising interest rates. Investor has to pay premium to the seller of Interest rate floor.

This instrument defines the floor i.e. the minimum rate of interest the investor would earn in case the interest rate falls beyond the agreed limit.

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COLLARS

Where a corporate takes a view that the interest rate will remain in range, the corporate can combine cap and floor to achieve this objective. The corporate will buy Interest Rate Collar of between 7 % and 9 % if it believes that the interest rates would move between 7 % and 9 %. Corporate looses the benefit if rate falls below 7 %. However, as against this loss the corporate pays fewer premiums and is protected against the upside risk. (Of interest rates rising).

EXAMPLES FROM INDIAN MARKET

SBI-HUDCO Bank of India has entered into a long-term rupee- Japanese yen swap with Housing and Urban Development Corporation (HUDCO).

According to a press release, HUDCO has swapped its foreign currency liability of Yen 2089 billions for equivalent rupee resources with SBI for a tenor of 10 years. Under the arrangement, HUDCO will deposit its yen with SBI on the day of transaction and SBI in return will pay the equivalelnt rupee resources to HUDCO.

According to officials, the swap will be done at the prevailing exchange rate on the day of the transaction. According to officials, HUDCO will use the rupee resources for lending to their projects in India. The overseas branches of SBI in Japan to fund their own assts will use yen. As per the swap agreement, SBI would provide the long-term hedge to HUDCO for a period of 10 years to cover the exchange risk of the foreign liability.

As a result of this, the swap will neutralize both the exchange rate risk and interest rate risk of HUDCO on yen loan by converting the yen flows into risk neutral fixed interest rate rupee flows for the company. At the end of 10 years, HUDCO will take back the yen by giving the rupee equivalent to SBI.

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Earlier SBI had stuck a rupee-dollar swap of sizable transaction with ICICI. At present, the bank is considering similar deals with companies, which do not have international presence to manage the fo9reign currency risk effectively, said an official.

The bank is actively involved in developing the derivative market in India by facilitating the use of hedging instruments such as currency swaps. This has been possible after the permission was granted by the RBI to enable the corporate to obtain suitable hedge for their exposures arising out of their foreign currency loans.

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4. CURRENCY FUTURES
In a futures contract there is an agreement to buy or sell a specified quantity of financial instrument in a designated Future month at a price agreed upon by the buyer and seller.

A Future contract is evolved out of a forward contract and posses many of the same characteristics. In essence, they are like liquid forward contracts. Unlike forward contracts however, futures contracts trade on organized exchanges called futures markets.

The characteristics of a future contract are

Standardization

The future contracts are standardized in terms of quantity and quality and future delivery date.

Margining

The other characteristics of a futures contract is the margining process. The margin differs from exchange to exchange and may change as the exchanges perception of risk changes. This is known as the initial margin. In addition to this there is also daily variation margin and this process is known as marking to market.

Participants

The majority of users are large corporations and financial institutions either as traders or hedgers.

Futures are exchange traded

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1. In futures market there is availability of clearing house for settlement of transactions.

CURRENCY FUTURES

Currency futures markets were developed in response to the shift from fixed to flexible exchange rates in 1971. They became particularly popular after rates were allowed to float free in 1973, because of the resulting increased volatility in exchange rates.

A currency future is the price of a particular currency for settlement in a specified future date. A currency future contract is an agreement to buy or sell, on the future exchange, a standard quantity of foreign currency at a future date at the agreed price. The counterpart to futures contracts is the future exchange, which ensures that all contracts will honored. This effectively eliminates the credit risk to a very large extent.

Currency futures are traded on futures exchanges and the most popular exchange are the ones where the contracts are fungible or transferable freely. The Singapore International Monetary Exchange (SIMEX) and the International Monetary Market, Chicago (IMM) are the most popular futures exchanges. There are smaller futures exchanges in London, Sydney, Tokyo, Frankfurt, Paris, Brussels, Zurich, Milan, New York and Philadelphia.

Pricing of Futures Contract

Futures Price = Spot Price + Cost of Carrying (Interest)

Cost of carrying is the sum of all costs incurred to carry till the maturity of the futures contract less any revenue, which may result in this period.

In India there is no futures market available for the Indian Corporates to hedge their currency risks through futures.

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The advantages of Future Contract

Low Credit Risk : In case of futures the credit risk is low as the clearing house is the counter party to every futures. Gearing : Only small margin money is required to hedge large amounts.

The disadvantages of Future Contract

Basic Risk : As futures contract are standardized they do not provide a perfect hedge. Margining Process : The administration is difficult.

It is observed that a futures contract is a type of forward contract, but there are several characteristics that distinguish from forward contracts.

Standardized Vs. Customized Contract :

Forward contract is customized while the future is standardized.

Counter Party Risk :

In case of futures contract, once the trade is agreed upon the exchange becomes the counter party. Thus reducing the risk to almost nil. In case of forward contract, parties take the credit risk to each other.

Liquidity : Futures contract are much more liquid and their price is much more transparent as compared to forwards.

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Squaring Off:

A forward contract can be reversed only with the same counter party with whom it was entered into. A futures contract can be reversed with any member of the exchange.

CONTRIBUTION OF DERIVATIVES IN THE GROWTH OF FOREX MARKETS.

The tremendous growth of the financial derivatives market and reports of major losses associated with derivative products have resulted in a great deal of confusion about these complex instruments. Are derivatives a cancerous growth that is slowly but surely destroying global financial markets ? Are people who use derivative products irresponsible because they use financial derivatives as part of their overall risk management strategy ?

Thos who oppose financial derivatives fear a financial disaster of tremendous proportions a disaster that could paralyze the worlds financial markets and force governments to intervene to restore stability and prevent massive economic collapse, all at taxpayers expense. Critics believe that derivatives create risks that are uncontrollable and not well understood.

People have certain believes about derivatives which hampers the growth of the derivatives market. They are :

Derivatives are new, complex, high-tech financial products. Derivatives are purely speculative, highly leveraged instruments. The enormous size of the financial derivatives market dwarfs Bank Capital, Thereby Making Derivatives Trading an Unsafe and Unsound Banking Practice. Only large multinational corporations and large banks have a purpose for using derivatives. Financial derivatives are simply the latest risk management fad. Derivatives take money out of productive processes and never put anything back Only risk-seeking organizations should use derivatives The risks associated with financial derivatives are new and unknown

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Derivatives ink market participants more tightly together, thereby increasing systematic risks.

This is what some people believe, but its not the case.

Actually the financial derivatives have changed the face of finance by creating new ways to understand, measure, and manage financial risks. Ultimately, derivatives offer organizations the opportunity to break financial risks into smaller components and then to buy and sell those components to best meet specific risk-management objectives. Moreover, under a market-oriented philosophy, derivatives allow for the free trading of individual risk components, thereby improving market efficiency. Using financial derivatives should be considered a part of any businesss risk-management strategy to ensure that value-enhancing investment opportunities can be pursued.

Thus, financial derivatives should be considered for inclusion in any corporations riskcontrol arsenal. Derivatives allow for the efficient transfer of financial risks and can help to ensure that value-enhancing opportunities will not be ignored. Used properly, derivatives can reduce risks and increase returns.

Derivatives also have a dark side. It is important that derivatives players fully understand the complexity of financial derivatives contracts and the accompanying risks. Users should be certain that the proper safeguards are built into trading practices and that appropriate incentives are in place so that corporate traders do not take unnecessary risks.

The use of financial derivatives should be integrated into an organizations overall riskmanagement strategy and be in harmony with its broader corporate philosophy and objectives. There is no need to fear financial derivatives when they are used properly and with the firms corporate goals as guides.

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COMPANY INTRODUCTION

4.1

COMPANY PROFILE

Arihant Capital Markets Limited, an ISO 9001:2008 Certified Company, is one of the leading financial services companies in India. The Company provides a gamut of products and services including securities and commodities broking, investment planning, financial planning, wealth management and merchant banking to a substantial and diversified clientele that includes individuals, corporations and financial institutions. Currently the Company has their outlets across the nation in 20 states with over 300 offices. Arihant Capital Markets Ltds registered office is in Indore & Corporate office is in Mumbai. Arihant Capital Markets ltd. is a BSE listed company from its Origin.

Arihant Capital market is not only present in Indore and Gujarat but this company in expanded in 105+ cities and 415+ offices across the nation. The company is listed in BSE and the Script ID: ARIHCAPM and Script Code: 511605 current price is around Rs.250. Arihant capital market is 1st in India in NCDEX Volume basis.

MISSION

Generating Wealth & Satisfying Investors

VISION

To be a leader in setting standards for quality and investor satisfaction. To enhance the wealth of our investors To be an empathetic, fair and responsive organization to our clients.

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4.2

Philosophy
Integrity and transparency in all transactions. Providing investment solutions based on quality and unbiased research. Providing personalized services to all investors, institutions, business associates. Achieving success through client's growth. Making financial services more affordable, understandable and available to all.

4.3

What they aspire

To be the pre-eminent and most trusted provider of financial services.

The values to which they aspire can be summarised in 5 principles:

Integrity Client commitment Strive for profitability Excellence Innovation

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4.4

History

Arihant Capital Markets Limited was established in 1994 by Mr. Ashok Kumar Jain, a Chartered Accountant. Arihant has follotheyd a consistent growth path and has established itself as one of the leading broking houses of the country with the support and confidence of its clients, investors, employees and associates. They pride ourselves on our independence and continuous service since inception.

Since inception, Arihant is dedicated to creating theyalth for clients and over a period of time they have built a reputation for quality service. They have also refined ourselves as an investment advisor and are poised to provide complete investment management solutions to our valued clientele.

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4.5

Associations

Arihant Capital Markets Limited is listed on the Bombay Stock Exchange since 1993 and since then the company has grown in leaps and bounds.

They are members of the leading stock exchanges of India:

National Stock Exchange (NSE) Bombay Stock Exchange Limited (BSE)

They are a depository participant with:

National Securities Depositories Limited (NSDL) Central Depository Services Ltd. (CDSL)

They are members of leading commodities and currency exchanges in India:

National Commodities Exchange (NCDEX) Multi Commodities Exchange (MCX) MCX Stock Exchange Ltd (MCX-SX) NSE FX (Currency Derivatives segment of NSE)

They are AMFI Certified Mutual Fund Distributor, are registered with the SEBI for Portfolio Management Services (PMS) and are a Category - I Merchant Banker

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4.6

Quality Policy

Arihants Quality Policy Statement ISO 9001:2008 At Arihant Capital Markets Ltd. our aim is to continue to achieve high levels of satisfaction for our clients and help them achieve their financial goals through right investment advice and excellent service.

They aim to make financial products easily accessible and understandable to all. They are committed to delivering the highest quality solutions to meet our clients investment needs.

To realise this, it is the policy of the Company to continually review and update our processes, improve the competence of human resources and effectiveness of quality management systems, ensure compliance with all regulatory requirements, optimize technology and infrastructure, thereby enhancing customer satisfaction.

The Quality Policy has full support of the Senior Management, and as such it is their responsibility to maintain and implement our Quality Policy and ensure that the staff adheres to the procedures.

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4.7

Culture and people

Arihant's culture is characterized by five key qualities: commitment to clients, integrity, excellence, strive for profitability and innovation. Integral to our corporate culture is our total dedication to superior client service, reliability and transparency in all our transactions. At Arihant they believe our client's success is our success.

Independence and ownership of work is blended in our culture which helps in creating entrepreneurs within the organization and gives a feeling of ownership to our employees. Our people feel a close relationship to Arihant. They associate their success with the company's growth and this strong sense of belonging has helped us grow over the years.

They believe that our commitment to the interests of our clients proves our value to them. They have a strong corporate culture that is based on firmly held beliefs.

They offer equal opportunity and tremendous growth potential to individuals who have the right talent and a commitment to excellence. Along with our reputation and clients, our people are our most valuable asset.

To maintain our competitive edge and meet the high expectations of our clients, our culture continues to evolve.

They aspire to be the best financial services company in India. To achieve this goal, they focus relentlessly on carrying out our business principles, which are fundamental to everything they do.

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4.8

Business principles
Our clients' growth is our primary objective. They believe that our clients growth is strongly correlated to our growth.

They believe that our clients deserve the best. Our idea is not simply offering a product or service, but it is building a relationship with clients based on trust, reliability, understanding and respect.

They believe that righteousness is very important in every sphere of life, including business. They therefore strive to be open and honest with ourselves, our colleagues and our shareholders.

The core assets of our business are our people, customers, capital and reputation. They are dedicated to complying fully with the bye- laws, rules and ethical principles that govern us. Our continued success depends upon constant adherence to this standard.

Our goal is to provide greater returns to our shareholders. They believe our potential to earn profits, re-invest our capital, invest in growth avenues and keep ourselves abreast with the latest technology and systems would lead to prosperity in this highly competitive market. Profitability is critical to achieving superior returns, building our capital, and attracting and retaining our best people.

They offer our people the opportunity to move ahead. They foster an environment of respect and inclusiveness amongst our people.

They work as a family which is responsible for the growth of our client. Our people put in their best to their jobs and the dedication they put in to their work is greater

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than one finds in most other organizations.

They realize the need to constantly change and update ourselves to meet our clients' upcoming needs in this burgeoning world of finance. They constantly endeavour to anticipate the rapidly changing needs of our customers and develop services to meet those needs.

Integrity and honesty are at the heart of our business. They seek to achieve the highest standards of professional conduct and ethics, to prevent and detect wrongdoing, and to govern ourselves in accordance with relevant rules, regulations, and bye-laws. While they try to be perfect, they might make mistakes occasionally, and when it comes under our observation, they take immediate steps to rectify those errors and set things right.

At Arihant, you build a personal relationship and get to work with someone who is genuinely interested in your growth.

You will benefit from an outstanding service, up-to-date technology, comprehensive financial products and services, complete guidance and support. That is not it. They make constant endeavour to understand your needs and make every effort to fulfil them. They strongly believe that our clients growth is strongly correlated to our growth.

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4.9

Products and Services to offer:

Equities and Derivatives Broking Advisory Services and Investment Planning Online Services i-Trade offers online trading, online IPO and online mutual funds IPO Commodities Broking Insurance Currency Derivatives Portfolio Management Services Merchant Banking

Arihant Capital Markets Limited is one of the listed leading financial services companies in India. Arihant was incorporated in 1994 by Mr. Ashok Kumar Jain. ARIHANT capital markets ltd. is a full financial services firm catering to all classes of investors traded in NSE, BSE, F&O, NCDEX, MCX & Currency Derivative Trading. Currently we have our outlets across the nation in 20 states with over 300 offices. Equity & Derivative Trading ARIHANT's Trading Platform offers online equity & derivative trading facilities for investors which provides a convenient and hassle free trading experience. It provides ODIN Application, which helps in trading on the NSE, BSE, F&O, and NCDEX & MCX simultaneously from any destination.

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Mutual Funds and IPOs ARIHANT offers distribution and collection services of various schemes of most major fund houses and IPOs through its network of branches across the country. The company is registered with AMFI as an approved distributor of Mutual Funds. It is also registered with various leading fund houses. Research Services ARIHANT's R&D facility caters to the need of investors who are in need of opportunities to enhance their investments. It has a comprehensive in-house R&D wing with market experts, process and technology resources providing complete research solutions on equity, derivatives, commodities, IPOs and mutual funds. It offer proactive and timely research based advice and guidance to help its clients in making informed investment decisions. Depository Services ARIHANT offers dematerialization services to individual and corporate investors. It have a team of professionals and the latest technological expertise dedicated exclusively to our demat department, apart from a national network of franchisee, making our services quick, convenient and efficient. We offer depository services for both shares and commodities. Insurance broking ARIHANT is licensed as a direct Insurance Broker for Life with Insurance Regulatory and Development Authority (IRDA) for providing a wide array of insurance services.

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Portfolio Management Services Preserving and growing capital is as hard as earning it. Knowing what you want is as important as achieving those goals. Assessing your risk profile and aligning potential returns for the risk assumed from various investment options is the crucial task. As a discerning investor, one who is not averse to taking on more risk in order to achieve greater returns, you want your investments to be managed more actively compared to a mutual fund. You want your investments to be managed in a way that tries to maximize value for you, and is customized just for you. Priority Client Group Arihants advisers offer a tailored advice on when, where and how to invest, and provide you with a host of investment products and solutions focused on achieving your financial goals. So whether you are looking for long-term investment support or want active trading strategies to cash in on daily market movements, our advisory services will cater to your needs.

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4.10 Growth Areas

ARIHANT has planned to increase its size of operations in India as well as abroad largely focusing on NRI investors and institutional business. The mode of expansion operated by sub-broker Riding on the brand image, market awareness and the expertise of ARIHANT, the Sub-Broker can start their own businesses more easily and efficiently. However with a limitation the growth is limited for person under 21 years of age. We offer lucrative terms and conditions for all interested in starting our Sub Brokership.

Benefits for ARIHANTs Sub Broker: Complete financial services under single roof. Technical & Fundamental Equity/ IPO/ MF/ Commodity/ Currency Research of our own R&D wing via, Regular Intraday SMS, Emails for All productsMorning & Evening Alerts, Currency report, Results & IPO update, etc. Our monthly research newsletter Value Plus is unique feature in Industry. Highly efficient technical platform with cost effective connectivity options. Most effective RMS system

Additional features An entity (Individual, Company or, Partnership firm) with good track record & reputation in financial services/other business/social circle with good client base. Minimum a year of experience in selling financial products as a Main broker/ Sub-broker/Remisier/Mutual fund distributor/Insurance Advisor/Financial planner or an employee of existing Broker/Sub-broker.

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Capacity to invest minimum Rs. 1-3 lakhs initially. All the trading clients will be registered separately under client registration agreement with ARIHANT. Sub-Broker would ensure that all clients complete the registration form (KYC) and send it to ARIHANTs head office.

The client requires to deposit an upfront margin amount with ARIHANT (Subject to requirements of Regulatory Authorities, Stock Exchange or Market Conditions) and the gross exposure would be provided by ARIHANT to the client accordingly.

No Cash Transactions are allowed at any point of time. All pay-ins whether cheques or deliveries would be in favor of ARIHANT and all pay-outs would be paid by ARIHANT.

It is the responsibility of the Sub-Broker to collect/pay ARIHANT the pay-in/pay-out and margin obligations levied by the stock exchange from time to time.

Sub-Broker has to comply with rules, bye laws, and regulations of all the stock exchange/Depository/SEBI/FMC and follow them religiously.

It is compulsory to install signage in front of Sub-broker premises. Flex of the sign board will be provided by ARIHANT.

ARIHANT has a tie-up with AXIS band & HDFC bank for collection of Pay-In cheques & for distribution of Pay-Out cheques.

Cost of the stationary will be borne by ARIHANT. It is the sole responsibility of the Sub-Broker for all bad-debts. However we will assist to recover the amount through our legal desk.

As a Sub-Broker of ARIHANT you are required to sell all the products promoted by the company which includes IPO/MF/Insurance/PMS, etc. exclusively for ARIHANT

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RESEARCH
METHODOLOGY

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PROBLEM STATEMENT
A study of hedging tools adopted by organizations facing foreign exchange risk

REVIEW OF LITERATURE
So far researchers have carried out a little work on the prospectus and problems of currency future in India, but the suggestions based on the material published so far are mentioned hereunder: V D M V Lakshmi (2008)1 have quoted the decision taken by RBI to allow exchange traded currency future in India as a gift to traders and investors as well since it is a standardize and transparent instrument to hedge their exposure to the currency risk. He also described how the currency future can be used by market participant to cover the risk due to fluctuation in exchange rates in currency market besides the legal framework and sanction approval procedure from authorized agencies. Nirvikar Singh (2008)2 stated that off-shore non-deliverable forward markets have existed in India and Reserve Bank of India also oversees domestic currency forward trading but exchange traded currency future were simply banned. However, in June 2007, trading of rupee future started on Dubai Gold and Commodities Exchange prompting the RBI to set up a Committee to look into this possibility for India. The paper described that during 2007 rupee future trading on DGEX and despite the fact that it was not controlled by the RBI, so there were no restriction on trading and participation beyond those that would be normal for an exchange and it clearly seemed that the new market was being used for short-term hedging, probably by parties engaged in international trade. He concluded with stated the RBI role should be of macroeconomic management not microeconomic details if India is serious about financial sector development.

1
2

LuxmiV D M V Currency future: Another Gift by Regulators to Market participants icfai, Oct.2008.

Singh Nirvikar Currency future Trading in India Roubini Global Economics, Aug. 2008

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S. B. Kamashetty (2008)3 threw a light on trading mechanism of currency future with the average daily traded volume in the global forex market and in India as well. He also mentioned the guidelines for the currency future trading with its flip slide and shortcomings. The author also suggested granting the permission in dealing with three-four major currencies besides USD, in which India has strong underlying traded. Krishnan Sitaraman and Satish Prabhu (2010)4 descried the currency future with mitigating exchange Rate risk with illustrative support. They have also showed the progress, operational aspect and new developments of currency future in India. The paper also suggested introducing the currency option in the market.

Padmalatha Suresh (2010)5 has admitted that currency future helped the undernourished Indian financial markets in a big way and described how exchange traded futures are the answer to preventing systematic risks in the future. He also thanked to the RBI decision to extend the currency futures market to include three more currency pairs as earlier stated financial advisors were saying and appears that currency options, as natural extension at the currency future market, are also on the anvil. He also reviewed the performance of currency futures in December, 2009 since the inception of trading, and presents some interesting insights i.e. both OTC markets ( INR and other currencies ) and currency futures ( only INR/USD ) traded on NSE and MCX showed a remarkable increase in the turnover of derivatives as a percentage of OTC forward turnover. The paper also quoted some reasons for inefficient and illiquid market in India such as inadequacy of financial firms, Regulators and structured barriers, Frictions caused by taxes and suggested that currency futures are not an end in themselves but more positive actions from the regulators and government are expected to nourish the market without being overprotective.

3 4

Kamashetty S. B. Exchange-traded currency Futures ICFAI, Dec. 2008. Sitaram Krishnan and Prabhu Satish Currency Futures: Mitigating Exchange Rate Risk Chartered Financial Analyst, March, 2010. 5 SureshPadmalatha Currency Futures: Heralding a New Dawn The Analyst, March, 2010

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OBJECTIVES
This project attempts to study the intricacies of the foreign exchange market. To get a better idea and the comprehensive details of foreign exchange risk management and to study the organization on how they manage the foreign exchange risk. To know about the various concepts and technicalities in foreign exchange. To know the various functions of Arihant capital markets Ltd regarding their advisory services. To get the knowledge about the hedging tools used in foreign exchange.

IMPORTANCE OF STUDY This kind of research helps in long term study of the market. It enhances the skills of getting correlations between 2 distinct factors. It helps in relating global and regional events to the currency markets and studying its impacts. This will help in enhancing the analytical skills of the market.

POPULATION Business organizations facing foreign exchange risk in Ahmedabad.

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SAMPLE SIZE The sample size has been taken as 100 units of randomly chosen business organizations facing foreign exchange risk.

TYPE OF SAMPLING Non-probability and convenience sampling

DATA COLLECTION
Data collection technique for this research report will be primary As well as secondary data collection. The data has been collected by questionnaire with an informal interview; while the secondary data will be collected from books, newspapers, other publications and internet.

DATA ANALYSIS
Primary data has been analyzed with the help of MS-Excel and SPSS software. Various statistical tools have been taken like correlation, charts & graphs etc. It has also been analyzed by the percentage method which is comprehensively studied for having an integrated evaluation. Secondary data shall be analyzed by brainstorming. QUALIFICATIONS OF RESEARCHERS Student researcher

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LIMITATIONS OF THE STUDY

Time constraint. Resource constraint. Bias on the part of interviewers.

NATURE AND FORM OF RESEARCH Descriptive research SCHEDULE The project has been executed in June - July 2012 in Ahmedabad. The planning has taken 15 days along with the theoretical training. Then we shall complete the primary survey in 30 days while doing our job in the fields of currency & operations. The data analysis and finalizing the project from internal faculty guide and external mentor would take 7 days. Thus the project would be completed in 52 days starting from 5th June 2012. FACILITIES A telephone line and an instruction guide has been provided by the company after the basic training of all the products. They helped us in the work and solved our queries related to the project. We have also received help from our project guide regarding various issues.

PROJECT MANAGEMENT The project has been planned to be managed by a balanced distribution of areas between both the students. May it be the primary survey, data collection or analysis.

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Q-2

Have you ever dealt in currency market? Yes No

TABLE 1
Frequency Valid YES NO Total 29 71 100 Percent 29.0 71.0 100.0

CHART 1

INTERPRETATION
71% of the people concerning foreign exchange business risk feel negative. There for most of them have not dealt in such market.

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Q-3Which of the following hedging tools do you know? Forwards Futures Swaps Options CHART 2

INTERPRETATION
This chart shows the hedging tools being considered as an option. Currency forwards has been the options considered by all the traders. People have started switching to futures that has some amount of knowledge of market and its proceedings in this context. People have felt that options have been the last priority for it. The old hedging tool swap and its role has been cut mostly because of banks and their services in this area. some amount of knowledge of market and its proceedings in this context. People have felt that options have been the last priority for it. The old hedging tool swap and its role has been cut mostly because of banks and their services in this area.

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Q-4Which of the following hedging tools do you use? Forwards Futures Swaps Options CHART 3

INTERPRETATION
The chart confirms that people have used the currency forwards 95 out of 100 times. This shows their confidence in banking system. 30 times they have trusted currency futures that mean some of them have started trusting this market governing systems. A lack of knowledge about the hedging product has caused absolutely no attempt towards options. Swaps have lost its importance due to their biggest disadvantage of trust over the counter party which have been done by the banks in their modern roles.

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Q-5

Rank the hedging tools in the order of your preference. ______Currency Futures ______Currency Forwards ______Currency Options ______Currency Swaps

CHART 4.1 FUTURES

INTERPRETATION

Here we can see that almost 35 people have given futures second highest position in their option to be considered and used as the hedging tool. This shows the confidence in the market and as it is not too old and popular concept in the market it is likely to take the first position for the people who want transparency and commitment for the better services. Well a lot of people have given it the last rank; this may be the risk averse people who do not think that their money wouldnt be the worth in this tool. 25 percent people have given it the third option that shows the slowly positive growing scenario for the tool in the market. But still 30% feel that it should be used in the first position; this might be their experience or expectation from the tool.

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CHART 4.2 FORWARDS

INTERPRETATION

The system has been the most trusted by the people - almost 60% have given it the first preference. People still think that their money is better in the position if the work is done through bank. The trust banks have developed can be the sole reason to the response. We can also say that these people are satisfied with their current settings and have stopped looking to other options for the purpose. The reason might be of having lesser confidence in the speculative nature of the market which is the result of lack of knowledge. But there are some who do not think this system is perfect. 30% people have taken it to the second position. This may be the people who follow the system of futures or swaps either modern or too old. Yes this can be a big threat to the bank because people know that some better option is available now and they have started switching over there. Yet we have to admit that opposition of this tool is very weak. Even less than 10% people have given 3rd or 4th position to the options. Thus the threat is not that big. Yet if they start preparing for something which can hold the customers from moving to futures they might save their business for a little long.

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CHART 4.3 SWAPS

INTERPRETATION

The traditional system of doing bipartite contract of currency exchange with a foreign unknown firm have many reasons to go out of business over here; but a 5% have still to support them on the first position. These firms have rigid mentality and they do not want to change. A considerable people are backing them from 2nd position and 3rd position; 15 and above 30 percent respectively. But largely almost 50 percent people have accepted it to be out of date and hence given 4th position. Banks and broking houses providing currency hedging and currency exchange have proven it infeasible in the era.

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CHART 4.4 OPTIONS

INTERPRETATION

Options have been used by the speculators for the purpose of speculations only has been the mentality and therefore people are averse of the hedging tool. But here some have been practicing it successfully since a long period and they stick to it even if they fall in 2-3% minority. These people are risk takers and they have the capacity to hold and their purpose is beyond hedging, certainly. Some have lost their confidence in it which was there before. They think improving market sentiment can recharge the adoptability of the option. Largely the falling market sentiments have been domination can only be said seeing that above 35 percent people keep it on the 3rd position. Mostly people have admitted that they do not want options as the purpose of speculators have been involved and they may turn the game on any side.

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TABLE 2 DESCRIPTIVE STATISTICS

The table has been derived from descriptive statistics function. This shows that the mean numbers have been in the order of forwards, futures, swaps and options keeping standard error 10 percent at the most. Sample variance has been highest in futures and the lowest in forwards, that shows the majority is unanimous in their decision.

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Q-6Which of the following hedging tool has you used the most? Forwards Futures Swaps Options

TABLE 3
Frequency Valid FORWARDS FUTURES Total 78 22 100 Percent 78.0 22.0 100.0

CHART 5

INTERPRETATION
The chart shows that 78% of people are in favor of forwards. Only 22% are those who have used futures for most of the times. Forwards has been taking its advantage of its trust since last decades.

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Q-7Why do you use the tool? Better averse risk Fewer documentation Easy to operate CHART 6

Lesser cost Better Transparency any other

INTERPRETATION
Still majority people think that their choice of currency forwards has been because it is cheaper. This is showing lack of knowledge about currency futures or it may be due to people think that something may go wrong and they do not want to take any risk which is the second highest frequency. A lot of people think that documentation is the problem with the other options sand some approve of operative difficulties faced by them for other tools. There are people who feel other difficulties are also there which have been hindering their ways.

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Q-8 Are you aware about the different type of currencies traded on MCX-SX? Yes No

TABLE 4
Frequency Valid YES NO Total 58 42 100 Percent 58.0 42.0 100.0

CHART 7

INTERPRETATION

42 percent people are not aware about the currency traded on MCX-SX. This is still a big amount of people who lack awareness. 58 percent majorities are aware about it and it may help them if they are thinking of or already treading in those currency.

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Q-9Do you avail Advisory service? Yes

No

TABLE 5
Frequency Valid YES NO Total 33 67 100 Percent 33.0 67.0 100.0

CHART 8

INTERPRETATION
People answered favorable to the question are half of the negative. The sentiment is not so positive about usage of advisory services. This sector can grow very well for the significant amount of benefits on part of the clients.

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Q-10Are you satisfied with advisory services? Yes No

TABLE 6
Frequency Valid YES NO Total 22 78 100 Percent 22.0 78.0 100.0

CHART 9

INTERPRETATION

Data shows that only 73 percent people are positive about their experience in the advisory services. Thus the services provided with the standard have been satisfactory as compared to the expectations of the clients. Satisfaction ratio is very good with regards to the results. But we can see that almost 70 percent people are not availing the services; which creates the problem in adoption of the results as straight.

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Q-11 Are you aware about guideline of RBI & SEBI regarding FOREX market? Yes No

TABLE 7
Frequency Valid YES NO Total 15 85 100 Percent 15.0 85.0 100.0

CHART 10

INTERPRETATION
Only 15 percent people responded positively to the answer of the question. This shows very poor standards of awareness and which is very much essential to their business. Thus awareness improvement is very much important.

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Q -12 Do you know the difference between forward and futures of currency market? Yes No

TABLE 8
Frequency Valid YES NO Total 28 72 100 Percent 28.0 72.0 100.0

CHART 11

INTERPRETATION
Only 28 percent people responded positively to the answer of the question. This shows that the exact details are not available with respect to the technicalities and the ratio is demanding quick action with respect to the situation.

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Q-13Which one of them, do you think, serves the purpose more accurately? Currency Futures Currency Forwards

TABLE 9
Frequency Valid CURRENCY FUTURES CURRENCY FORWARDS Total 27 73 100 Percent 27.0 73.0 100.0

CHART 12

INTERPRETATION
25 Percent people think that futures can serve the purpose better with respect to forwards. This shows that the awareness level in the organizations concerning the risk has not been enough. The technical details remain as a hurdle; the tool cannot be popular in its usage. The myth has to be removed by campaigns and awareness programs run by many broking firms to popularize themselves.

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Q-14

Looking at the recent debacles in the currency markets volatility do you have confidence in currency futures? Yes No

TABLE 10
Frequency Valid YES NO Total 18 82 100 Percent 18.0 82.0 100.0

CHART 13

INTERPRETATION
82 percent people are opposing you on the matter. When the market sentiment is volatile, and technicalities remain a point of confusion; the tool has to be facing avoidance. If the technical details are available and market sentiment is positive; something can be positive. Awareness has to be increased and the trust has to be on the positive markets.

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Q-15 How frequently do you take position in currency futures ? monthly Half annually Quarterly Annually

TABLE 11
Cumulative Frequency Valid MONTHLY QUATERLY HALF YEARLY YEARLY Total 10 46 24 20 100 Percent 10.0 46.0 24.0 20.0 100.0 Percent 10.0 56.0 80.0 100.0

CHART 14

INTERPRETATION
Almost 50 percent of the traders on the survey are working quarterly for the purpose of hedging. A considerable people work on half yearly and year basis. Very less people are working on monthly basis. Thus the survey shows the results for the quarterly working people and their mentality as well as their perspective in most of the conclusions.

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AGE GROUPS ANALYSES

TABLE 12
Frequency Valid 21-30 31-40 41-50 51-60 ABOVE 60 Total 3 5 21 42 29 100 Percent 3.0 5.0 21.0 42.0 29.0 100.0

CHART 15

INTERPRETATION
From the chart we can infer that almost 3/4th is covered with the people above 50 years. This shows that the reason they may not want to change to the newer market based things. Well there is a proportion of below 10 percent people who are young and 21 percent who are middle aged. But if we plot this on the normal curve we can see that the data is right had side cued. This may be a key reason influencing the results of the study Sample age mix.

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OCCUPATION ANALYSES
TABLE 13
Frequency Valid OWNER OWNER'S SON / MANAGER ACCOUNT / FINANCE Total 55 32 13 100 Percent 55.0 32.0 13.0 100.0

CHART 16

INTERPRETATION
We have categorized the occupation in 3 categories owner owners son or manager and accounts or finance. We found that more than 50 percent of these businesses are run by the owners only without taking help from any accounts or finance manager. When asked they said they avail the services of a Chartered Accountant but they have not suggested us any kind of things for currency exchange. They added that we are not interested in speculations mostly seen in the market so we avoid that, too. This had been another factor mostly influencing the results of the analysis.

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CORRELATIONS
Question 2 and 6 Have you ever dealt in currency market? & Which of the following hedging tool has you used the most? TABLE 14
Descriptive Statistics Mean Std. Deviation .456 N 100

Have you ever dealt in currency market? Which of the following hedging tool has you used the most? TABLE 15

1.71

1.22

.416

100

Correlations

Which of the Have you ever following hedging dealt in currency tool has you used market? the most? Have you ever dealt in currency market?
Pearson Correlation Sig. (2-tailed) N 100 1

-.831**
.000 100 1

Which of the following hedging tool has you used the most?

Pearson Correlation Sig. (2-tailed) N

-.831**
.000 100

100

**. Correlation is significant at the 0.01 level (2-tailed).

INTERPRETATION
The correlation between these two variables has been very near to perfectly negative. This means the higher the people have dealt in the currency market the less they have adopted the currency futures. People do not want to take markets into the picture.

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Question 3 and 4 Which of the following hedging tools do you know? & Which of the following hedging tools do you use?

TABLE 16
Correlations

Which of the following hedging Which of the tools do you following hedging know? tools do you use? Which of the following hedging tools do you know?
Pearson Correlation 1

Sig. (2-tailed) N 100

.000 100 1 .000 100 100

Which of the following hedging tools do you use?

Pearson Correlation Sig. (2-tailed) N

**. Correlation is significant at the 0.01 level (2-tailed).

INTERPRETATION
People use the tool they know perfectly and they are not ready to try or jump with something new. The correlation is nearly perfectly positive correlation. Still 2.5 percent people are ready to take even this sort of risk.

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Question 13 and 14 Which one of them, do you think, serves the purpose more accurately? & Looking at the recent debacles in the currency markets volatility do you have confidence in currency futures? TABLE 17
Descriptive Statistics Mean Std. Deviation .446 N 100

Which one of them, do you think, serves the purpose more accurately? Looking at the recent debacles in the currency markets volatility do you have confidence in currency futures? TABLE 18

1.73

1.82

.386

100

Correlations

Looking at the recent debacles in Which one of the currency them, do you markets volatility think, serves the do you have purpose more confidence in accurately? currency futures? Which one of them, do you think, serves the purpose more accurately? Looking at the recent debacles in the currency markets volatility do you have confidence in currency futures?
Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N 100 1

.712

**

.000 100 1

.712

**

.000 100 100

**. Correlation is significant at the 0.01 level (2-tailed).

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INTERPRETATION
The variables have been positively correlated by 0.71. This shows that 71 percent of the people believe that forwards is more trusted and people do not want to have even slightest hint of the market anywhere. Thus the trust on the market is shown in both the questions.

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Question 13 and 15 Which one of them, do you think, serves the purpose more accurately? & How frequently do you take position in currency futures? TABLE 19
Descriptive Statistics Mean Std. Deviation .446 N 100

Which one of them, do you think, serves the purpose more accurately? How frequently do you take position in currency futures ? TABLE 20

1.73

2.54

.926

100

Correlations

Which one of them, do you think, serves the purpose more accurately? Which one of them, do you think, serves the purpose more accurately?
Pearson Correlation Sig. (2-tailed) N 100 1

How frequently do you take position in currency futures ?

.601**
.000 100

How frequently do you Pearson Correlation take position in currency Sig. (2-tailed) futures?
N **. Correlation is significant at the 0.01 level (2-tailed).

.601**
.000 100

100

INTERPRETATION
The correlation between the variables is 60 percent. This means that people deal in forwards has the better correlations with quarterly contracts; which has been the highest frequency holders from the available options.

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1) The awareness level about the hedging tools has to be increased. 2) The market has potential but lack of awareness is the problem. Arihant can apply the way IIFL has started its campaign for awareness through the methods of advertisements. 3) Everybody is looking for few very big clients. They work too hard to get them and hold them; but debacles have been playing their role. We recommend Arihant that they contact smaller volume clients too. They are growing in business very rapidly. 4) Holding a client is the difficult task rather than getting it. Arihant has to come with different schemes and cost effective measures which can help them there. They are vey behind if we compare it with IIFL- the best broking firm. For eg. IIFL have their every branch besides some other broking firms. Take law garden area it has got IIFL with other 2 broking firms, Ashram Road Maninagar examples are lot. 5) Besides we know that Ahmedabad has the branch which covers the area of whole Gujarat. As per our observation Arihant is focusing on sub brokers and not on their number of branches. That may be a good strategy from an angle but the other says you have lot of people to give service and you are available with big board everywhere to welcome who want the best. 6) Sometimes there are no mistakes on the part of clients, but some operations misunderstanding play their role and client has to face the result. Operational efficiency has to be so increased that it is near perfect. 7) Sub-brokers play the role of motivators for the investors in the time of market is not going fine. They should be motivated by various measures. For Eg. Non monetary benefits for active support in awareness and co-ordination, best business in the latest launched scheme in last quarter etc. 8) Bank forwards has been taking the fruits of its market confidence but awareness shall help futures as far as the adoption of tools are concerned. The difficult task is to convince those who really think that even currency hedging can hurt them. For that a rigorous marketing campaign for awareness is required. 9) In house sub-broking is a very good step broking firms are doing since long time. New graduates and learners can be attracted very easily for that. The facility and response time of service has to be minimized through better tools and gadgets.

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10) Internal disputes and pulling the legs have been easy practices in broking subbroking.

11) From this analysis we can conclude that currency option and swaps are not so much
famous in currency hedging but we can make people aware about benefits of currency futures. Currency hedging is mainly done by importers exporters because they have to deal in different currencies.

12) We can also conclude that MCX SX is a better platform then NSE for speculation and for
hedging also rather then Banks MCX SX is more beneficial for hedgers. Most of the people are using banking platform to hedge their position but exchange is more beneficial for hedgers.

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BOOKS

NCFM Currency Derivatives: A Beginners Module Financial Markets: A Beginners Module Curriculum

REFERENCES

V D M V Luxmi Currency future: Another Gift by Regulators to Market participants ICFAI, Oct.2008.

Nirvikar Singh Currency future Trading in India Roubini Global Economics, Aug. 2008

S. B. Kamashetty Exchange-traded currency Futures ICFAI, Dec. 2008. Sitaram Krishnan and Prabhu Satish Currency Futures: Mitigating Exchange Rate Risk Chartered Financial Analyst, March, 2010.

Padmalatha Suresh Currency Futures: Heralding a New Dawn The Analyst, March, 2010

INTERNET DOCUMENTS

www.rbi.org www.mcx-sx.com
Information about factors influencing currency market

www.nseindia.com www.bseindia.com
http://www.arihantcapital.com/about-us/overview.aspx http://www.arihantcapital.com/products-services/overview.aspx Information about broking industry

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Dear Respondent, We are student of NRIBM (GLS-ICT) M.B.A. full program. As part of MBA curriculum we have been assigned a project of Arihant capital Ltd. For which we are conducting a research on A Study on tools adopted by organizations to hedge foreign currency risk Your feedback is important for us so please answer all the questions. We assure you that the data collected from you will be used for market study only.

Tick ( ) which-ever is application in following box.

Q-1 Have you ever heard about currency market? Yes No Q-2Have you ever dealt in currency market? Yes

No

Q-3Which of the following hedging tools do you know? Forwards Futures Swaps Options Q-4Which of the following hedging tools do you use? Forwards Futures Swaps Options Q-5Rank the hedging tools in the order of your preference. ______Currency Futures ______Currency Forwards ______Currency Options ______Currency Swaps Q-6Which of the following hedging tool has you used the most? Forwards Futures Swaps Options Q-7Why do you use the tool? Better averse risk Fewer documentation Easy to operate

Lesser cost Better Transparency any other

Q-8 Are you aware about the different type of currencies traded on MCX-SX? Yes No Q-9Do you avail Advisory service? Yes

No

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Q-10Are you satisfied with advisory services? Yes No Q-11 Are you aware about guideline of RBI & SEBI regarding FOREX market? Yes No Q -12 Do you know the difference between forward and futures of currency market? Yes No Q-13Which one of them, do you think, serves the purpose more accurately? Currency Futures Currency Forwards Q-14 Looking at the recent debacles in the currency markets volatility do you have confidence in currency futures? Yes No Q-15 How frequently do you take position in currency futures ? monthly Quarterly Half annually Annually

Personal Details
Name Phone no Age Education Designation : : : : : ______________________________________ ______________________________________ _____________________________________ ______________________________________ ______________________________________

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