A SUMMER INTERNSHIP PROJECT ON

MANAGING TRANSACTION EXPOSURE (EXPORT) BY USING VARIOUS HEDGING TECHNIQUES

SUBMITTED TO PRO. MAULESH RATHORE

PREPARED BY- MEHUL PATEL AND KAILAS PATIL

MAY-2012

GIDC RAJJU SHROFF ROFEL INSTUTUTE OF MANAGEMET STUDIES (GRIMS) VAPI

AFFILIATED TO- GUJARAT TECHNOLOGICAL UNIVERSITY

DECLARATION
We are Mr.MEHUL PATEL & Mr. KAILAS PATIL of GIDC RAJJU sSHROFF ROFEL INSTITUTE OF MANAGEMENT STUDIES, VAPI, affiliated to GUJARAT TEHNOLOGICAL UNIVERSITY, AHMEDABAD hereby declare that this project report is a result of culmination of my sincere efforts.

we declare that this submitted work is done solely by us and to the best of our knowledge; no such work has been submitted by any other person for the award of degree or diploma. we also declare that all the information collected from various secondary sources has been duly acknowledged in this project report.

MEHUL PATEL & KAILAS PATIL

CERTIFICATE
This is to certify that Mr.MEHUL PATEL AND KAILAS PATIL has satisfactorilycompleted the project work entitled, MANAGING TRANSACTION EXPOSURE(EXPORT) BY USINGVARIOUS HEDGING TECHNIQUES.Based on the declaration made by the candidate and my association as a guide forcarrying out this work, I recommended this project report for evaluation as a part of theMBA programme of GUJARAT TECHNOLOGICAL UNIVERSITY.

Place: VAPI Date: Prof.MauleshRathore (Project Guide)

The project is forwarded for evaluation to GUJARAT TECHNOLOGICAL UNIVERSITY for viva-voce. Place: VAPI Date Dr. Pankaj Patel (Director)

ACKNOWLEDGEMENT
It is indeed a moment of great pleasure to express our sense of profound gratitude & indebtedness to all the people who have been instrumental in making our project a rich experience. we got the opportunity to do a challenging project on MANAGING TRANSACTION EXPOSURE (EXPORT) BY USINGVARIOUS HEDGING TECHNIQUES. At the outset we would like to thank Mr. MADAN sir Administrative manager. It was our proud privilege to complete our project under him, as we have gained immense valuable guidance & cooperation from him, throughout our research. we express my gratitude to Lec. MauleshRathore, under his valuable cooperation and guidance we have been successful in completing this training. Last but not the least we extremely appreciate the benevolence to all our colleagues for their ingenious support and thought provoking view and veracity and whole hearted co-operation and those whom we may have forgotten, who have been

instrumental in bringing this work into existence. we attribute the success of this project to all of them.

MEHUL PATEL & KAILAS PATIL

TABLE OF CONTENT
CHAPTER NO. TOPIC PAGE NO. 6 15 18 20 23 26 46 49 52 53 54 56 58 63 65 66 67 CHAPTER 1 INTRODUCTION TO FOREIGN EXCHANGE 1.2 1.3 1.4 1.5 1.6 INTRODUCTION TO COMPANY INTRODUCTION OF PEN INDUSTRY PRODUCTS COMPANY PROFILE DEPARTMENTS IN SUPERNA

CHAPTER 2 LITERATURE REVIEW CHAPTER 3 RESEARCH DESIGN CHAPTER 4 DATA ANALYSIS 4.1 4.2 4.3 4.4 FORWARD CONTRAT MONEY MARKET HEDGING CURRENCY FUTURE CONTRACT ALTERNATIVE HEDGING TECHIQUES

CHAPTER 5 FINDINGS 5.1 CONCLUSION

CHAPTER 6 BIBLIOGRAPHY CHAPTER 7 ANNEXURE

CHAPTER 1. INTRODUCTION TO FOREIGN EXCHANGE

Activities

that

can

possibly

carry

foreign

exchange

exposure:

Foreign exchange exposures arise from many different activities, like A traveller going to visit another country has the risk that if that country's currency appreciates against their own, their trip will be more expensive. Similarly, an exporter who sells his/her product in a foreign currency faces the risk that if the value of the Indian rupee appreciates vis--vis dollar, his revenue in terms of the Indian rupee, decreases. An importer, who buys goods priced in foreign currency, faces the risk that the rupee might depreciate against the dollar, thereby making the local-currency cost of the imports greater than expected.

FOREIGN EXCHANGE RISK MANAGEMENT

Definitions:Foreign exchange exposure means the risk of loss stemming from exposure to adverse foreign exchange rate movements. A measure of the potential change in a firms profitability, net cash flow, and market value because of a change in exchange rates

The foreign exchange rate exposure of a firm is a measure of the sensitivity of its cash flows to changes in exchange rates. Since cash flows are difficult to measure, most researchers have examined exposure by studying how the firms market value, the present value of its expected cash flows, responds to changes in exchange rates

Foreign exchange exposure is defined as the degree to which a company is affected by exchange rate changes. An important task of the financial manager is to measure foreign exchange exposure and to manage it so as to maximize the profitability, net cash flow, and market value of the firm.

Types of foreign exchange exposure: 1. Accounting Exposure:

Accounting Exposure arises when reporting and consolidating financial statements require conversion from subsidiary to parent currency.

Accounting Exposure = Transaction Exposure + Translation Exposure

2. Economic Exposure:
Economic Exposurearises because exchange rate changes alter the value of future revenues and costs.

(1) Translation Exposure also called accounting exposure, is the potential for accounting derived changes in owners equity to occur because of the need to translate financial statements of foreign subsidiaries into a single reporting currency for consolidated financial statements.

Methods of Measuring Translation Exposure: -

(a) Current / non-current Method: The current/non-current method of translation divides assets and liabilities into current and non-current categories, using maturity as the distinguishing criterion; only the former are presumed to change in value when the local currency appreciates or depreciates vis--vis the home currency.

(b) Monetary/Non-Monetary Method: Under the monetary/non-monetary method all items explicitly defined in terms of monetary units are translated at the current exchange rate, regardless of their maturity. Non-monetary items in the balance sheet, such as tangible assets, are translated at the historical exchange rate. The underlying assumption here is that the local currency value of such assets increases (decreases) immediately after a devaluation (revaluation) to a degree that compensates fully for the exchange rate change. This is equivalent of what is known in economics as the Law of One Price, with instantaneous adjustment.

(c) Temporal Method: A similar but more sophisticated translation approach supports the socalled Temporal Method. Here, the exchange rate used to translate balance sheet items depends on the valuation method used for a particular item in the balance sheet. Thus, if an item is carried on the balance sheet of the affiliate at its current value, it is to be translated using the current exchange rate.

(d) Current Rate Method: The Current rate Method is the simplest; all balance sheet and income items are translated at the current rate. If a firms foreign-currency-denominated assets exceeds its foreign-currency-denominated liabilities, a devaluation must result in a loss and revaluation, in a gain. One variation is to translate all assets and liabilities except net fixed assets at the currant rate.

(2) Transaction Exposure measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates but not due to be settled until after the exchange rate changes.

Transaction exposure measures gains or losses that arise from the settlement of existing financial obligations whose terms are in a foreign currency. The situations include Purchasing or selling on credit goods or services when prices are stated in foreign currencies Borrowing or lending funds when repayment is to be made in a foreign currency Being a party to an unperformed forward contract

Acquiring assets or incurring liabilities denominated in foreign currencies.

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Methods of Managing Transaction Exposure: -

(i)

Currency Forward Contract

When dealing with major banks, you can ask for a currency forward contract, which is a negotiated agreement between two parties to exchange specific amounts of currency at a set rate on a particular day. The forward rate is priced based on the current exchange rate, the interest differential for the contract time, a cost to cover potential negative changes to the interest risk differential, and a flexible built-in commission for the forward contract provider. Advantages 1. The forward rate for purchasing or selling a foreign currency amount is locked in at a future date. The future exchange rate is known. 2. Future changes to interest rates, whether positive or negative, will not impact the forward rate. (Forward rates factor in the forward points or interest carry costs, typically with some sort of additional cost to cover potential changes to future interest rates for the traded currencies.) Disadvantages 1. Often, the forward rate includes an uncompetitive exchange rate or built-in commission, making this solution costly; 2. You would require many forward contracts for more complicated scenarios (such as monthly payments); 3. Since a forward contract is between two parties, there is no secondary market for the purchase and sale of these contracts, making them rather inflexible or expensive to terminate early or extend; and

11

(ii)

Futures Contract

Futures are similar to forward transactions in that the cost is based on the current exchange rate, the interest differential for the contract time, an amount to cover potential negative changes to the interest risk differential, and a formal commission. Advantages The major advantage of futures contracts over forward contracts is the existence of a liquid secondary market so they can be sold at any time on the open market and do not have to be held until their maturity date. Futures contracts can be traded on organized exchanges, such as the Chicago Mercantile Exchange (CME) or London International Financial Futures Exchange (LIFFE). These exchanges dictate contract specifications, such as expiration times (third Wednesday of March, June, September and December), face amount, and margin requirements. Disadvantages (from a hedging perspective) 1. Futures contracts involve not just a spread, but also a commission; 2. The face value of futures contracts traded on exchanges are fixed. For example, British pound futures are sold in lots of GBP 62,500 and euros are generally sold in lots of EUR 125,000, making it difficult to hedge an exact amount; 3. A margin deposit must be posted and maintained daily; 4. There are limited expiration times; 5. Futures contracts are typically speculative, so taking delivery of the money at the end of the term are not expected and may cost a commission.

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(iii)

Money Market Hedge

Also known as a synthetic forward contract, this method utilizes the fact from covered interest parity, that the forward price must be exactly equal to the current spot exchange rate times the ratio of the two currencies' riskless returns. It can also be thought of as a form of financing for the foreign currency transaction. A firm that has an agreement to pay foreign currency at a specified date in the future can determine the present value of the foreign currency obligation at the foreign currency lending rate and convert the appropriate amount of home currency given the current spot exchange rate. This converts the obligation into a home currency payable and eliminates all exchange risk. Similarly a firm that has an agreement to receive foreign currency at a specified date in the future can determine the present value of the foreign currency receipt at the foreign currency borrowing rate and borrow this amount of foreign currency and convert it into home currency at the current spot exchange rate. Since as a pure hedging need, this transaction replicates a forward, except with an additional transaction, it will usually be dominated by a forward (or futures) for such purposes; however, if the firm needs to hedge and also needs some short term debt financing, wants to pay off some previously higher rate borrowing early, or has the home currency cash sitting around, this route may be more attractive that a forward contract.

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1.2) INTRODUCTION TO COMPANY

Suparna Chemicals was formally incorporated in 1980. Suparna Chemicals was founded by Mr. R.N. Mandal, Chemical Engineer, I.I.T. Kharagpur. We are a research, development and manufacturing company of specialty chemicals. We specialize in commercializing products developed by our R&D for manufacture and supply of products meeting global standards.

SERVICES
We are a research, development and manufacturing company of specialty chemicals. We specialize in commercializing products developed by our R&D for manufacture and supply of products meeting global standards. We serve the Agro, Coatings, Inks, Explosives, Electronics Pigments, Defense, Under-ground Mining and, in particular, the Pharmaceutical Industries.

SUPERNA VISSION
Strive to be industry leader based on: 1 ] Knowledge Management. 2 ] Research Orientation. 3 ] Quality Consciousness. 4 ] Good Environment, Health and Safety practices.

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1.4)PRODUCTS
Breathing Apparatus

Sodiam Potassium Alloy

sodium and potassium are miscible in all proportions giving a mobile silvery liquid. The phase diagram shows that nak alloy in the concentration of 40-90 wt % of k remains liquid at room temperature. Cyclohexanone-Formaldehyde Resins Ketonic Resins (KTR) dissolve readily in alcohol (except methanol), Ketones (except acetone) ester and in low chlorinated hydrocarbons. It is neutral, light in colour and inert to saponification. Ketonic Resins have good pigment-wetting properties. This leads to brilliant gloss even at high pigmentation. In printing inks, KTR improves solid content, hardness, adhesion and drying time. KTR also increases yield of coating systems.

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Potassium Metal 1. 2. 3. 4. 5. 6. Appearance Potassium (%W/W) Sodium (%W/W) Boiling Point (C) *Rod size (mm) *Rod weight (gm) *Other Sizes are also available. Potassium Superoxide a] b] The product is packed under dry nitrogen with positive pressure of nitrogen inside the drum. The quantity of the product deteriorates very fast if exposed to atmosphere even for a brief period. c] While sampling, please ensure that the sample is taken out under dry nitrogen in a preweighed stoppered bottle and analysis is done immediately. d] After sampling, tie the bag securely with a thread, put positive nitrogen pressure in the drum and tighten it properly. This is very important so that the product does not deteriorate on storage. Propellant Binder 1] 2] 3] 4] 5] Appearance. Reactive immine (%). Moisture (%). Sp.Gr. at 25C. RI at 25C. Clear straw coloured liquid 98 / 96 /92 min. 0.4 - 1. 1.075 - 1.085. 1.4780 - 1.4830. Soft, silvery white material 99 min. 0.5 max. 760 766 Dia 50+-5; height 50+/-10 Approx 165+/-15

resin (30) synthetic (29) ketone (28)ketonic resin (28) synthetic ketonic (27) ktr (21)resin ktr (18) bags (14) wooden (12) paper (7)paper bags (7) potassium (4) potassium tertiary (3)suparnaktr (3) suparna (3)
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1.5 COMPANY PROFILE Suparna Chemicals Ltd.

Our Products : Web Site : RakshaKavch http://www.suparnachemicals.co.in procuremant@suparnachemicals.co.in vapi.commercial@suparnachemicals.co.in : 54-A Mittal Tower Nariman Point Mumbai-400021. : 022-22027446

Office Email : Factory Email : Office Address Office Phone Office Fax Factory Address

: 022-22830212 :Plot No. 656 100 Shed Area Vapi-Silvassa Road GIDC Vapi-396195

Factory Phone Factory Fax Factory Cell

: 0260-2450526 : 0260-2453132 :9377014481

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BOARD OF DIRECTORS: Name

DIRECTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR

Designation

1.6)Department in SUPERNA:

Sr. no

Name of Departments

1 2 3 4 5 6 7

Human Resource Department Marketing Department Finance Department Purchase Department Production Department Packing Department Distribution Department

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Human Resource Department:Human resource plays a very important role in any organization whether big or small, consumer goods industries or manufacturing unit. So there should be proper human resource planning, recruitment and selection, training etc.

Main task of Human Resource Department at SUPERNA are: HUMAN RESOURCE PLANNING RECUITMENT & SELECTION TRAINING PERFORMANCE APPRAISAL SALARY & WAGES PROMOTION & TRANSFER SAFETY MEASURES MOTIVATIONAL PROGRAMMES GRIEVANCE HANDLING TRADE UNION

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1. MARKETING DEPARTMENT
Marketing is an important activity for any organization irrespective of its nature, size, and the type of industry in which it operates. The main task of marketing department is to found out the needs of its customers and fulfill them satisfactorily. Their responsibility is to increase the sales of the product by informing the customers regarding the variety of products they manufacture.

THE MAIN MOTIVES BEHIND THE FUNCTIONING OF MARKETING DEPARTMENT :

CUSTOMER SATISFACTION

The department is concerned with a building long term relationship with the customer by understanding their needs and delivering product and services that fulfill entire requirements. EXPLORING NEW CUSTOMER

One of the important functions of marketing department is of find new and prospective customer of the products.

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2. PRODUCTION DEPARTMENT :a) Planning of product realization b) Customer related processes c) Design and development d) Purchasing e) Production & service provision

A) Planning of product realization

This organization plans and has developed the processes needed for product realization

Planning of product realization is consistent with the requirement of other processes of the quality management system

In planning of product realization, the organization determines the following as appropriates Quality objectives and requirement for the product The need to established processes document &resource specific to the products Required verification, validation, monitoring, inspection and the activities specific to the product and the criteria for product acceptance Record keeping providing evidence that the product realization meets requirements. The output of this is in the form of bar charts, customer feeds back and work schedules prepared before & during product realization

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B) Customer related processes(sales)

Identification of customer/ market requirement

a. Specified by customer b. Requirements taken for granted c. Statutory/regulatory requirement Review of requirement related prior to acceptance/ commitment to customer-ability to meet customer requirement

C) Design and development

Superna Chemicales product will plan and design and development of product. The Superna Chemicales product will determine the plan during the design and development.

Supernachamicales product manager interfaces between different groups involved in design and development to ensure effective communication and assignment of responsibility. Design and development and input Design and development output Design and development review Available information which describethe product characteristics.eg product specification. Work instruction for actually performing specialized task for product realization equipment/machinery required for product processing. Suitable test and measurement are undertaken by trained and sufficiently skilled personal.At Superna Chemicales products, company does not have any special process which called validation after the product is in use or put to service.
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3. PURCHASE DEPARTMENT
Purchasing is done in controlled manner to ensure that purchased products confirms to specific requirement.

Purchasing procedure:This is required for insuring that the purchase item and services confirmed to specified requirement.

Where applicable, goods are procured fromsuppliers. Selection of new supplier describes the additional controls required when purchasing from new suppliers who are not approved at the time of order placing

If the product or service needs to be procured in case an emergency from a new supplier who is not on the approved list of supplier, then the evaluation of supplier is carried out later depending criticalness of the raw material upon successful evaluation and minimum one satisfactory supply, the supply is approved on the basisof work instruction described the criteria of evaluation and selection of supplier.

Purchase order indicates description of goods, quantity, quality, price and delivery schedule material to be purchased. Purchase order reviewed an approved purchase officer prior to release.

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4. FINANCE DEPARTMENT
The primary purpose of any business is to earn profits. To earn profit, the business has to produce goods or render services. To do either, management of business must have adequate supply of funds. It is the responsibility of the finance department to ensure the supply of the needed funds.

Financial management is the application of planning and control to the finance function of a business to ensure that the funds needed are raised and used effectively for its benefits. Financial management means procurement of funds at minimum cost and its effective use in order to maximize the wealth of shareholders.

Every organization requires funds for operation. The firm can perform successfully only if has proper cash flow with it so that it can meet various expenses to run the business.

FUNCTION OF FINANCE DEPARTMENT

1.INVESTMENT DECISION 2.FINANCING DECISION 3.DIVIDEND DECISION

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CHAPTER 2. LITRRATURE REVIEW

An early study by Dufey (1972) discussed how the depreciation of a

foreign currency against a groups reporting currency could generate the confrontational situation discussed in Section 2 of the present study. Because of accounting translation practices, the depreciation of the reporting currency of a foreign affiliate may reduce the amount of reported earnings of that affiliate which are included in the consolidated results of the group. But, the currency depreciation may actually improve the economic competitiveness, and ultimate financial profitability of the affiliate. Because of the conspicuousness of translation adjustments in consolidated earnings statements, Dufey comments on how potentially profitable direct investment opportunities, in countries with unstable currency histories, might well be foregone.

Considerable theoretical debates exist as whether firms should hedge

the transaction exposure. But the study by DalinaDumitrescu1 supports the fact that the hedging reduces the variability of cash flows to firm. It does not increase the cash flows to the firm. In fact the costs of hedging may lower cash flows of the company. The research and the study case support the idea that the choice of the type of contractual hedge to use depend on the individual firms currency risk tolerance and its expectation of probable changes of exchange rate over the transaction exposure period.
1

The Institute for Business Administration in Bucharest, CaleaGrivitei, 8-10 ,Bucuresti.

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Currency Risk Management-Export Transaction2

(1) Exchange rates of major currencies are fluctuating with change in demand & supply position of concerned currencies. (2) Exchange rates have capacity to translate profit from international business transaction into loss or vice versa. (3) Currency Risk depends upon Nature of Currency, Amount, Exposure period and use of internal and external hedging techniques. (4) Forward Contract instrument offered by commercial banks is used by exporters/importers for currency risk management. It is easy to understand, cheap and latest RBI relaxation provides opportunities to create wealth from exchange rate movements. (5) To cover currency risk, company has to develop information input system as timely decisions are essential for currency risk management and for wealth creation from exchange rate movements.

Another study by Aggarwal et al. (1978) examined the effect of FASB

No. 8 on reported financial statements of U.S. based multinational firms. Aggarwal concluded that the procrustean accounting adjustments required by FASB No. 8 were not likely to reflect the economic reality of the underlying changes in exchange rates. Therefore, reported accounting figures were likely to misrepresent the economic reality of the firms exposure to exchange rate risk, unless they were supplemented with other detailed information. This view was supported by OBrien (1997) who asserted that accounting methods might either underestimate or overestimate the true economic exposure, in terms of changes in some microeconomic factors. These factors include such things as the elasticity of exchange rate changes or the responsiveness of firm level operating profits to changes in exchange rate.
2

By Professor HarkiratSingh,IIFT,New Delhi.(http://india.smetoolkit.org/india/en/content/en/42539/Currency-Risk-Management-ExportTransaction)

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An article Strategies for Hedging FX Risk3

The future will see more focus on areas of poor financial performance, whereby businesses will be rated and acclaimed, or criticised on their results. Shares will gain or lose value and profit margins will either support growth or strangle development and progress. With either the option of employing a sophisticated internal treasury function with the associated costs and resource issues, or looking for professional help and efficient trading platforms, the writer feels sure many would and should opt for the later. In many cases businesses do neither and as such suffer the cost of mismanagement of risk. Now is the time to look at what and who is available and to make a foreign currency requirement pay rather than cost.

Mark Smith-Halverson, CorporateFX - 06 Jun 2005.(http://www.gtnews.com/article/5968.cfm)

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CHAPTER 3

Objective of the study

To study the different hedging strategy used by the SUPERNA CHEMICALES PVT LTD. To show the practical application of new hedging techniques available in the market apart from forward contracts used by company.

Problem Statement
As Superna is a writing products manufacturer and its products are been exported in foreign countries also. So here company faces the exchange risk. Through the overall study of Superna I came to know that Superna only uses the forward contract and current rate method as a basic hedging instrument. So my basic reason to select this topic is to apply other hedging strategy & find out which is the best for Superna.

BENEFIT OF THE STUDY

The main benefit of this study for SUPERNA is that they will be able

to handle their exchange risk in better way by applying these new strategies. And if they are unaware of these hedging strategies then this study will make them aware about it. The main benefit of this study to me is that we will be able to apply

different Hedging Strategy practically.

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DATA COLLECTION: PRIMARY DATA: -

The

Primary Data was collected through appointment of the

head of finance department.

SECONDARY DATA: -

The

secondary data was collected frombooks, newspapers, other

publications and internet.

Through LEDGER account of the company. Through the Sales record of the company.

Number of Transactions studied

Number of transactions in this study is 6 export transactions of

the done in the last year (2011-2012) of Superna.

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DATA ANALYSIS
Analysis of the export transaction of SUPERNA with other hedging strategy for the year 2010-2012 (Past data)

Actual data provided by Superna:Export transaction:Party Name:Country:Amount:Date of Order Received:Date of Amount Received:Credit Period:U.S.A US$ 276200 23/11/2011 24/01/2012 60 days

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4.1)

FORWARD CONTRACT:-

Company has done a forward contract for this particular export transaction: Spot Rate: 2 month Forward Contract rate4: Future Spot rate: 52.299 Rs. /Us$
52.734Rs.

/US$

50.027 Rs. /US$

So here the company has tried to hedge it risk by taking a forward contract. Hence the company will receive at the maturity an amount of:1us$ 276200 $ = = 52.734 Rs. (?)

= Rs14565130.8

Here the company will receive Rs. 14565130.8 at the maturity of the forward contract.

But as the future spot rate is always unpredictable, the actual exchange rate after 2 month was 1US$ = 50.0275 Rs.

So superna by purchasing a forward contract has made a Profit of Rs.747535.3 {FUTURE SPOT RATE SPOT RATE} X US$ Therefore So {50.0275 -52.734 } x276200 Us$ Rs. 747535.3 (Profit)

i.e.

Foreign Exchange Dealers' Association of India (www.fedai.org.in)

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4.2)

MONEY MARKET HEDGE:-

Sr. No. 1 2 3 4

Particulars Spot Rate

(16/12/2008) (15/03/2009)

Details 52.299 Rs. /Us$ 50.027 Rs. /US$ 3.4%pa 8.5% pa

Future spot rate

U.S. Borrowing Rate India Lending Rate5

Now is going to receive US dollars on 23th Nov. 2011 for the export of the goods done. So using the Money Market Hedgesuperna will follow four simple steps to hedge their foreign exchange risk. The steps are as follows:-

STEPS 1 2 3 4

Description Borrow US dollars ($). Invest it in India. Repay the loan amount at Maturity. Compute Profit / Loss.

Step 1: -Superna will borrow some amount of US dollars which after investing it
for 2 month will become the actual he is going to receive. The formula to find out the exact amount is: -

Business standard News paper (Money & market) Pg no .14

32

FORMULA = Future Value (1 + r) Where r is the US $ borrowing rate

= 276200US$ (1 + 0.034)

= 267117.99 $ (Borrowed From US)

Step 2: - Now superna will bring this dollars to India & invest it for 3 month in
India itself. So, convert these US dollars in Indian rupees at the spot rate. 1US $ 267117.99 $ = = 52.299 Rs. (?)

= 13970003.76Rs. Invest it in INDIA: - 13970003.76 Rs. x 8.5% x 2/12 = 14168377.81 Rs. Superna will receive Rs. 14168377.81 after 2 month of investment.

Step 3: -

And now the company will repay the loan amount borrowed from US

from the amount that he receives from the customer.

Step 4: -To find out weathersuperna has made profit or loss the company needs to
compare it with the future spot foreign exchange rate. i.e. 276200 $ x 50.027 Rs. = 13817457.4Rs. And the amount after doing money market hedge is 14168377.81 Rs.
33

So here the company makes a profit of Rs. 350920.41 Rs. (14168377.81 -13817457.4)

4.3) ALTERNATIVE HEDGING TECHNIQUES:-

Currency Risk Sharing. Currency Collars. Cross-Hedging. Currency Risk Shifting. Pricing Decision.

Currency Risk Sharing:-

In this Method the Loss & the profit of the exchange rate is been equally shared by both the parties. (i.e. By Exporter & importer). As per the 1st export transaction, Superna is going to receive 276200US Dollar from the party on 24/01/2012. Current exchange rate as on 23/11/2011 is 52.299Rs./$. So now Superna need to hedge the risk of exchange rate fluctuation. With the help of this Currency Risk Sharing Method Superna can hedge the risk. First of all at the time of placing an order Superna& party will have a negotiation in deciding a Neutral Zone. (Price Range) Neutral Zone: - Rs 50.17/$ to Rs 53.17/$. (Decided) And one Base Price will also be decided. Base Price: - 51.50Rs /$.
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Now if the exchange rate on the date when amount is received is:-

Below the Neutral Zone i.e. Rs 49.17/$ then the Rs. 1 (50.17 49.17) will be
bared by both the party equally. = Rs. 1.00 2 = .0.50Rs. So the exchange rate fixed will be Rs. 49.67 (49.17 + 0.50).

Above the Neutral Zone i.e. Rs. 54.17 then,

= Rs. 1.00 2 = .0.50Rs. So the exchange rate fixed will be Rs. 54.67 (54.17 + 0.50).

And if the

exchange rate falls between the Neutral Zone, thenBASE PRICE

(Rs.51.5) will be set as exchange rate.

Currency Collars:Currency collar is almost similar to the Currency Risk Sharing. Here also both the parties mutually negotiate & decide a Neutral Zone. No base price is been set. Neutral Zone: - Rs 50.17/$ to Rs 53.17/$. (Decided) Now if the exchange rate on the date when amount is received is:-

Bellow the natural zone then Rs 50.17/$ will be set as exchange rate. Above the neutral zone then Rs 53.17/$ will be set as exchange rate. And if the rate is between the Neutral Zone, then current exchange rate
will be taken as exchange rate.

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Cross-Hedging:Cross Hedging is common method of transaction exposure when the currency cannot be hedged. Suppose Superna has receivables in US Dollars 120days from now. Because it is worried that the Indian Rupees may appreciate against the US Dollars, Superna may consider cross hedging. In this method it is needed first to identify a currency that can be hedged & is highly correlated with US Dollars. Superna notices that the EURO has recently been moving in tandem with USD & decides to set up a 90 days forward contract with on the euro. If the movement in USD & Euro continues to be highly correlated relative to the Indian Rupees, then the exchange rate between these two currencies should be somewhat stable over time. This type of hedge is sometimes referred to as a proxy hedge because the hedge position is in a currency that serves as a proxy for the currency in which the company is exposed.

Currency Risk Shifting:-

In Currency risk shifting the Superna Company by negotiation with the importer company & convince them to pay the amount of the machine exported in Indian currency (Rupees). So here the exchange rate risk is been shifted to importer company and Superna will receive the exact amount of is machine in Rupees. So here there is no need to use any other hedging strategy.

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Pricing Decision:-

Now as Superna does all his transaction in USD. So he needs to convert the price of its Machine from INR to USD. So that a fixed amount of US $ can been said to be paid by the importer. Suppose Superna sells one consignment in foreign country. The price of that consignment is 5000000 Rs. So now he needs to convert it this into USD. Current Exchange rate is Rs. 48/ $ Forward Rate is Rs. 46.50/$. So now Superna should convert the price of its machine on the basis of the forward rate (Rs. 46.50). i.e.107526.88 $ (Rs. 5000000 46.50) If Superna converts the price as per the current exchange rate then Supernao will receive only 104166.67 $. So that will be a loss for the company of USD 3360.21.

The General rule on credit sales overseas is to convert between the foreign currency price and the home currency price by using forward rate not the spot rate.

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CHAPTER 5

FINDINGS :-

According to the data collected from Superna of the past year of export done in different countries, We found that to hedge the risk of foreign exchange, company is using LETTER OF CREADIT and SPOT PAYMENT as their sole instrument. Then we tried to apply other hedging techniques on the same data to find out which method will best suit this organization Superna. And finally what is found can be seen in the following tables given below:-

Forward contract:Transaction No. 1 2 3 4 5

6

Future Contract Amount (Rs.) 8115669.1 14565130.8 5664139.6 6576074.5 3557960

5972280

Future spot exchange rate Amount (Rs.) 8167168.9 13817457.4 5347605.2 6183636 3514630
6099840

Profit / Loss (Rs.) (51499.8) 747535.3 316534.4 392438.5 43330

(127560)

Total

44451254

43130337.5

1320916.5

From the forward contract done on above eight export transaction the over all
profit received by Superna is Rs. 1320916.5

38

 Money Market Hedge:Transaction No.

1 2 3 4 5 6 Total

Money Market Hedge (Rs.)

7894455.97
14168377.81

Future spot exchange rate Amount (Rs.)

8167141.88
13817457.4

Profit / Loss (Rs.)

(272685.91)
350920.41

5509915.6 6397109.85 3461070.15

5347584.547 6183662.355 3514607.6

162331.053 213447.5 (53537.45)

5809710
43240639.38

6099820.8
43130274.582

(290110.8)
110364.798

Now

from the Money Market Hedge method done on above eight export

transactions the over all profit received by Superna is Rs. 110364.798

Overall Profit Comparison table for all the three Methods:Trans. No. 1 2 3 4 5 6 Total
(51499.8) 747535.3 316534.4 392438.5 43330
(127560)

Forward Contract (Rs.)

Money Market Hedge (Rs.)

(272685.91)
350920.41

162331.053 213447.5 (53537.45)

(290110.8)
110364.798

1320916.5

39

Interpretation:So by comparison of the two method in this table we can analysis that there is a maximum profit been achieved by applying Forward contract method. So the SUPERNA Company should use this hedging instrument instead of the Forward Contract and spot payment.

5.1)

CONCLUSION:By applying practically other hedging strategies in SUPERNA of managing transaction exposure, rather than forward contract, there was the overall profit on the two techniques. But comparatively there was highest profit obtained on the Forward Contract. So SUPERNA should follow Forward contract as their main risk hedging tool. Even other Alternative hedging tools Like Currency Risk Sharing, Currency Collars, Cross-Hedging, Currency Risk Shifting, and Pricing Decision can also be used as an exchange risk hedging tools by the company.

40

Bibliography
Web

Sites:

www.rbi.org www.bseindia.com www.nse.com www.businessstandard.com www.india-exports.com www.google.com www.forextrading.com www.fxcm.com

Books:International Financial Mamagement [Book] / auth. Madura Jeff. - florida Atlantic Univercity : Saurabh Printers Pvt. Ltd., 2008. - Vol. Indian Edition.

41

CHAPTER 7

Annexure
FORWARD CONTRACT: 2nd Export Transaction of SUPERNA:For 60 days maturity period:-

AMOUNT :-158950 Date of order Received:- 15-11-2011 Date of Amt Received:-16-01-2012 Forward contract: - US$ x 2month forward contract rate. = 158950$ x 51.058Rs. =8115669.1Rs. ----------------------------- Future spot rate: - US$ x future spot rate = 158950$ x 51.382Rs. =8167168.9Rs. - ---------------------------- Now

= 8115669.1 Rs. 8167168.9Rs =51499.8Rs. (LOSS)

3rd Export Transaction of SUPERNA:For 60 days maturity period:AMOUNT :-108700 Date of order Received:-07-12-2011
42

Date of Amt Received:-08-02-2012

Forward contract: - US$ x 2month forward contract rate. = 108700$ x 52.108Rs. = 5664139.6 Rs. ----------------------------- Future spot rate: - US$ x future spot rate = 108700$ x 49.196Rs. =5347605.2 Rs. - ---------------------------- Now

= 5664139.6 Rs. 5347605.2Rs = 316534.4(PROFIT)

4th Export Transaction of SUPERNA:For 60 days maturity period:AMOUNT :-125500 Date of order Received:-19-12-11 Date of Amt Received:-20-02-2012

Forward contract: - US$ x 45 days forward contract rate. = 125500$ x 52.399Rs. = Rs6576074.5 ----------------------------- Future spot rate: - US$ x future spot rate = 125500$ x 49.272Rs. = Rs. 6183636 ---------------------------- Now

= 6576074.5Rs -6183636Rs = 392438.5Rs. (PROFIT)

43

 5th Export Transaction of SUPERNA:For 60 days maturity period:AMOUNT :-70000 Date of order Received:-18-01-2012 Date of Amt Received:-19-03-2012

Forward contract: - US$ x 4 months forward contract rate. = 70000$ x 50.828 Rs. = 3557960Rs. --------------------------------- Future spot rate: - US$ x future spot rate = 70000$ x 50.209Rs. = 3514630 Rs. - ------------------------------- Now

= 3557960 Rs. 3514630Rs. = 43330 Rs. PROFIT

6th Export Transaction of SUPERNA:For 60 days maturity period:AMOUNT :-120000 Date of order Received:-27-01-2012 Date of Amt Received:-28-03-2012

Forward contract: - US$ x 4 months forward contract rate. = 120000$ x 49.769Rs. = 5972280Rs. ---------------------------------
44

Future spot rate: - US$ x future spot rate = 120000$ x 50.832Rs. = 6099840Rs. - ------------------------------- Now

= 5972280 Rs. 6099840Rs. = 127560 RS LOSS

Transaction No.
2
3 4

Future Contract Amount (Rs.)

8115669.1
5664139.6 6576074.5

Future spot exchange rate Amount (Rs.)

8167168.9
5347605.2 6183636

Profit / Loss (Rs.)

51499.8
316534.4 392438.5

5 6 TOTAL

3557960 5972280

3514630 6099840

43330 127560

45

MONEY MARKET HEDGE: 2nd Export Transaction of SUPERNA:For 60 days maturity period:US Borrowing Rate 3.4% India Lending Rate (Per annum) 8.5% 50.6359Rs. Spot Rate Future Spot Rate 51.3818Rs.

Step 1:- Borrow from US:= 158950 (1+0.034) = 153723.40 $ Step 2:- Convert it in Rupees & invest in India:= 153723.4 $ x 50.63591Rs. = 7783924.25 Rs. *8.5%*2/12 = 7894455.97Rs. Step 3: - Repay the loan to US:= 158950 $ x 51.38183Rs. = 8167141.88Rs.

Step 4: - Compute profit /loss:Therefore loss of Rs. (272685.91) (7894455.97 8167141.88)

3rd Export Transaction of SUPERNA:For 60 days maturity period:US Borrowing Rate 3.4% India Lending Rate (Per annum) 8.5% Spot Rate Future Spot Rate 51.67879Rs. 49.19581Rs.
46

Step 1:- Borrow from US:= 108700 (1+0.034) = 105125.725 $ Step 2:- Convert it in Rupees & invest in India:= 105125.725$ x 51.67879Rs. = 5432770.266 Rs.*8.5%*2/12 = Rs.5509915.6 Step 3: - Repay the loan to US:= 108700 $ x 49.19581Rs. = 5347584.547Rs.

Step 4: - Compute profit /loss:Therefore profit of Rs. 162331.053 (5509915.6 5347584.547)

4th Export Transaction of SUPERNA:For 60 days maturity period:US Borrowing Rate 3.4% India Lending Rate (Per annum) 8.5% Spot Rate Future Spot Rate 51.96812Rs. 49.27221Rs.

Step 1:- Borrow from US:= 125500 (1+0.034) = 121373.31 $ Step 2:- Convert it in Rupees & invest in India:= 121373.31 $ x 51.96812Rs. = 6307542.74Rs. *8.5*2/12
47

= 6397109.85 Rs. Step 3: - Repay the loan to US:= 125500 $ x 49.27221 Rs. = 6183662.355 Rs. Step 4: - Compute profit /loss:Therefore Profit of Rs. 213447.5(6397109.85 6183662.355)

5th Export Transaction of SUPERNA:For 60 days maturity period:US Borrowing Rate 3.4% India Lending Rate (Per annum) 8.5% 50.40194Rs. Spot Rate Future Spot Rate 50.20868 Rs.

Step 1:- Borrow from US:= 70000 (1+0.034) = 67698.26 $

Step 2:- Convert it in Rupees & invest in India:= 67698.26 $ x 50.40914Rs. = 3412611.07*8.5*2/12 =3461070.15 Rs. Step 3: - Repay the loan to US:-

= 70000 $ x 50.20868Rs. = 3514607.6 Rs.

48

Step 4: - Compute profit /loss:Therefore Loss of Rs. -53537.45 (3461070.15 3514607.6 )

6th Export Transaction of SUPERNA:For 60 days maturity period:US Borrowing Rate 3.4% India Lending Rate (Per annum) 8.5% 49.35943Rs. Spot Rate Future Spot Rate 50.83184 Rs.

Step 1:- Borrow from US:= 120000 (1+0.034) = 116054.16 $

Step 2:- Convert it in Rupees & invest in India:= 116054.16 $ x 49.35943Rs. = 5728367.19*8.5*2/12 =5809710 Rs.

Step 3: - Repay the loan to US:-

= 120000$ x 50.83184Rs. = 6099820.8Rs. Therefore Loss of Rs. -290110.8 (5809710 6099820.8)

49

Transaction No.
2 3 4 5
6

Money Market Hedge (Rs.)

7894455.97 5509915.6 6397109.85 3461070.15

Future spot exchange rate Amount (Rs.)

8167141.88 5347584.547 6183662.355 3514607.6

Profit / Loss (Rs.)

272685.91 162331.053 213447.5 53537.45

5809710

6099820.8

290110.8

50