HEDGING IN AUTOMOBILE SECTOR

INTRODUCTION - HEDGING COPPER

STEEL
FOREX TECHNOLOGY

INTRODUCTION - HEDGING

INTRODUCTION
Hedging Hedging is a form of risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies or securities A gain or loss in the cash position due to changes in price levels will be countered by changes in the value of a futures position. Hedging is done based on Past Experiences and Future Market Projections Automobile Sector Hedging metals and currency is one of the major strategies, which global automobiles companies are practicing to mitigate the risk.

MAJOR STRATEGIES
Global Macro
Macroeconomic analysis based on global market events and trends to identify opportunities for investment Discretionary (trading is carried out by investment managers) and Systematic (trading is based on mathematical models and executed by software) Utilize market movements, trends, or inconsistencies when picking stocks across a variety of markets Sub-strategies: emerging markets", sector funds", "fundamental growth", "fundamental value" Investment opportunities in corporate transactional events such as consolidations, acquisitions, recapitalizations, bankruptcies, and liquidations Three categories - distressed securities, risk arbitrage, special situations Take advantage of relative discrepancies in price between securities Sub-strategies include: fixed income arbitrage, equity market neutral, convertible arbitrage

Directional

Event-driven

Relative value

COPPER

COPPER
Fundamental Analysis
Demand Supply factors varies From Business environment in developed economies to huge growth in emerging economies Labor unrest to political climate Difficult to estimate Unable to predict the short term positions Hence, identified certain factors but didnt try to analyze the magnitude of impact.

Technical Analysis
Started with pure Mathematics with many permutation and combination Concept: Hundreds of variable have their impact on metal pricing and exchange rates. Identified 4 parameters which are result of various forces of these variables a-Monthly % change in copper grade-A, cathode monthly price b-Monthly % change in USD/Euro exchange rate (International trade) c-Monthly % change in crude prices (Future prospects) d-Monthly % change in NYSE (Impact of the various global factors)

COPPER ANALYSIS
Analysis Methodology Published monthly data from Mar 1988 to Dec 2012

Various P &C to come-up with a strong correlation

8% of the data set removed as outliers

Analysis explanation Very weak correlation ranging from -0.26 to 0.19, moved to parameter groups with strong correlation Utility : Copper prices of future month and other parameters of the same month.

Parameter a+ a+ a+

Parameter Groups Sqrt {d*d +b*(c-a)} c*(d+a)/b (c-d)/(b-a)

Correlation Coefficient 0.67 0.56 0.49

COPPER ANALYSIS - CONSTRAINTS

Difficulty in estimating direction and magnitude of each parameter

Arbitrariness removed the outliers without any pattern and this limits the analyses application as mentioned below: Rigorous analyses will be required each time rather than just repeating certain set of specified actions

Explanation behind the erratic behavior of outliers

Weightage of the each parameter group is yet to be find out

Combined formula is yet to be developed on the basis of the strong relation between a certain factors

STEEL

STEEL HEDGING STRUCTURES

SWAP

Enables client to lock in a fixed price at which to buy (client pays fixed) No upfront premium Client is protected from prices above the swap price There is no benefit if prices fall below swap price
CAP Enables client to protect costs above the cap price Client pays an upfront premium to purchase the cap When prices rise above the cap price, payments are made to the client equal to the difference Client retains 100% of the benefits of prices falling below the cap level

FOREX

FOREX
Type of Foreign Currencies involved: Last 3 Year Capital Investment Trend in MSIL
2008-09 MRs % 9,407 56% 701 4% 432 3% 412 2% 1 0% 5,796 35% 16,749 100% 2009-10 MRs % 3,826 26% 1,099 7% 95 1% 318 2% 15 0% 9,418 64% 14,771 100% 2010-11 MRs % 8,824 40% 896 4% 12 0% 419 2% 1 0% 11,854 54% 22,006 100%

JPY USD GBP EUR CHF INR

FE Variation in Recent Times

MY 100

JPY to INR
2.20 2.10 2.02 2.00 1.90 1.80 1.79 1.70 1.60 2.13 2.13

1.99
1.95 1.99 1.83 1.87 2.02 1.89 2.00 1.96 1.92

1.88
1.90

1.96
1.89

1.89 1.89 1.85

1.92

1.82

Cost Calculation

MY 100 = MRs 100 / 2.13 = MRs 47 MY 100 = MRs 100 / 1.70 = MRs 59 ------------------------ MRs 12 ------------------------

(Apr-2010) (Sep-2010)

Pay 25 % More

GOING FORWARD Capital Budget Proposal Formats

Q1 S. No. Dept USD GBP Euro JPY Q2 Total USD GBP Euro JPY FE Q3 Total USD GBP Euro JPY FE 203 5 415 166 13 31 223 1,037 18 All data in millions Q4 Total Total FE USD GBP Euro JPY FE (MRs.) 730 231 581 25 185 1,752 1 1 0 3 1 0 1,188 95 697 20 512 284 119 95 53 1,060 589 1 2,855 1,858

1 2 3 4 5 6 7

Engineering Assembly Press Shop Weld Supply chain Machines Paint Grand Total

4 9 1 15

4,368 2,602 1,797 998 151 505 198 110 0 1,493 889 0 8,007 5,104

0 0

365 747 299 55 0 349 0 1,815

939 415 45 0 330 0 1,729

BASIS: All data in corresponding currencies All data in Millions Currency/Quarter USD GBP Euro JPY Total (MRs.) Q1 15 0 8,007 5,104 Q2 0 0 1,815 1,037 Q3 18 0 1,729 1,752 Q4 4 1 2,855 1,858 -

FOREX Support required from Users

Accurate Estimation of Foreign Currencies required for next FY. Accurate break up of Currency wise & Quarter wise Cash Flow for next FY. Accurate Data Entry of FE break up in On-line System

TECHNOLOGY

TECHNOLOGY AND PROCESS

The flow of information between the front office and the back office is critical to any hedge fund. Disparate systems for trading and accounting are a real source of such risk and platforms which reference a single book of records for trading, positions and P&L can keep this risk to a minimum. The high levels of market volatility highlight the need for realtime reporting. Systems must be able to support streaming data to display the impact of trade executions on a funds risk.

TECHNOLOGY PLATFORM BUSINESS OBJECTIVES

Trader position look-up for appropriate allocation of trades to multiple prime broker accounts.

Consolidated reporting tools to present data from across the multiple prime brokers. Prime broker connectivity, a secure and encrypted process in which to transmit trade and position data in the format prescribed by each prime broker.

Exception-based reconciliation of the funds own records of trading activity with those kept by its multiple prime brokers and third party administrator.
Ability to accrue for the various styles of product financing employed by the prime brokers.

TECHNOLOGY CONSIDERATIONS
1. Infrastructure and Security 2. Telecommunications 3. Data Protection
Security is fundamental when considering a funds technology setup and network infrastructure. A multi-tiered security approach is essential to protecting the critical information Internet service Phone and voicemail Market data services. Back up all essential documents and data offsite in an electronic format at least daily, if not in near-real time. Able to access critical information and applications in a remote manner even during outage Host hardware and software in an offsite facility, which provides necessary bandwidth and increased protection Advantages: disaster recovery, business continuity planning, security and flexibility Email and IM data should be saved in WORM format for the amount of time prescribed by law. Records need to be indexed in searchable files to aid in providing only the information that is requested.

4. Collocation

5. Archiving

Hedge funds whose very existence depends on managing risk in volatile markets need to know, in the event of disruption that it is business as usual

OPTIMIZATION COST SAVINGS

Virtualizati on Telecommu nication Smart Purchasing

Cost Saving Strategy

Disaster Recovery Broker Execution Costs Market data

CONCLUSION

With the growing uncertainty in the global business environment, Hedging as become as an important risk mitigation strategy as part of the operations.

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