09th May,2015

BHASKAR PANDA

Agenda

Risk Management An introduction

Risk Management Tools
Options
Swaps
Derivative Regulations
ISDA documentation
Client Scoping & Credit Limits

Risk Management

Risk Management

Risk can be defined as condition in which there is a

possibility of an adverse deviation from an expected or
hoped-for outcome.
Risk can adversely affect the financial position of a
company. Hence, risk needs to be proactively managed.
Risk Management is an important function in which top
management needs to be actively involved.
Types of Risks

Business
Financial Foreign Exchange, Interest Rates, Commodities
Operational
Credit
Liquidity
Legal and Regulatory
Reputational

Types of FX and Interest Rate Exposures

Currency
Exposure

Cross Border trade

Imports
USD,EUR
( Capex /
Normal trade)

Exports
USD,EUR

Interest rate
Exposure

Foreign Currency
Liability / Asset

Loans
USD,JPY
etc

Funds/
Investments/
Overseas
Dividend from
subsidiaries

Liability / Asset

Loans
(Rupee/Fcy)

Deposits

Steps in Financial Risk Management

The Risk Management process contains the some generic steps

irrespective of the type of risk, organisation, or function.
Exposure Analysis
Benchmarking
Forecasting
Hedging
Reporting and review

There are
5 steps
in the RM
process

Step 1 Exposure Analysis

Exposure Analysis consists of identifying, determining the magnitude
and currencies of the contracted or projected cash flows.
Exposure Analysis will need studying of the following aspects
FX cash flows - Determination of the amounts and timing.
Variability of the cash flows - how certain the amounts and/or
timing are?
Inflow-outflow mismatches/gaps.
Time mismatches/gaps.
Currency mix.
Estimation of cash flows should be made across product lines and
markets to account for diversification and net exposure should be
arrived.
Cash flows can either be committed i.e. those appearing on the
Balance Sheet (receivables or payables or loans) and probable i.e.
those anticipated to occur with a great deal of certainty.

Step 2 - Benchmarking

Benchmarking aims to set a minimum possible/desirable rate for the

companys exposures.
Questions to ask in benchmarking Is it the Forward rate / Spot rate
at the time of the birth of exposure (e.g. PO / Invoice raised)? Or is
it the Forward rate / Spot rate at the time of the crystallisation of the
exposure (e.g. LC opened / exports billed)? Or is it the Spot rate at
the time of receiving / making the payment.

Step 3 - Forecasting

After determining its exposures and benchmarks, an

idea has to be formed as to where the market is headed
in the coming months.
Forecasts beyond six months can be unreliable.
The focus of forecasting is on the following

Direction or trends in FX rates.

Underlying assumptions behind the forecasts.
Probability that the forecasts would come true.
Possible extent of the move.
Hedging will be on done the basis of such forecasts

Step 4 Hedging1

Most visible and glamorised part of Risk Management.

Role of hedging to achieve the pre-determined
benchmarks.
Hedging should ideally be put into effect after
determining stop-loss levels.
Hedging could one be the following
Natural Hedging - For example, netting exports and imports or
matching revenues with costs.
Hedging using financial instruments such as forwards, options,
and swaps.

Step 4 Hedging2

Usually, the extreme strategies

are not followed. Being fully open
means being exposed to high
risks. Being fully hedged means
losing on profitable opportunities.
Mostly companies are partly
hedged and partly open; the
proportion depends on the market
forecasts and benchmarks.
Profit Centre Concept - Treasury
expected to generate a net profit
on the exposure over a period of
time. Aggressive strategy.
Cost Centre Concept - Treasury is
required to ensure that the cashflows are not affected beyond a
certain point. Defensive strategy

Low Risk
Hedging
via options
Keeping exposure
fully hedged thru Fwds
Undertaking selective
hedging

High Risk

Churning (booking & cancellations )

Keeping exposure fully open Do nothing

Step 4 Hedging3
Some practical questions while deciding a hedge policy
What is our companys hedging philosophy? Low risk, Low reward? High
risk, high reward? Or Low risk & reasonable reward?
What are the hedging instruments? Do nothing ,Forwards or Options,
Hedge as a combination of forwards and options?
What is our benchmark rate? Is it the Forward rate / Spot rate at the time
of the crystallisation of exposure (e.g. PO/invoice raised)? Or is it the
Spot rate at the time of receiving the payment.
How much of our exposure should always be open to take advantage of
sudden market movements in our favour? 20%, 30% or more ?
What should be the tenor of our hedges? 3 months, 6 months, 1 year or
more? Should it cover only committed exposures or also probable ones?
If market movements is not in our favour for the open positions, what is
our policy? Do we have a stop loss in mind 50 paisa, 1 rupee or more ?
Is my competitors policies affecting my margins? Is he hedged at a better
rate and thus my margins are getting squeezed?

Step 5 Reporting & Review1

Risk management policies should be subject to review based on
periodic reporting
Reports include: (a) profit/loss status on open contracts after
marking-to-market (b) profitability versus benchmark (c) expected
changes of overall exposures due to forecasted exchange/interest
rate movements
The review analyses whether (a) benchmarks set are valid and
effective in controlling the exposures (b) what the market trends are
and (c) whether overall strategy is working or needs change.
Over-hedging can happen in case probable exposure does not
materalise. Solution is to either rollover the hedge or to cancel it.
Could result in a loss in case of the latter.
Under-hedging can happen due to incorrect forecasting or due to
unanticipated market movements. Could lead to loss situation.

Step 5 Reporting & Review2

Emphasis on Stop Losses

A firms risk management decisions are based on forecasts
which are but estimates of reasonably unpredictable trends.
Hence it is imperative to have stop loss arrangements in order to
rescue a firm if forecasts go awry.
For this, certain monitoring systems should be in place to detect
critical levels in foreign exchange rates for appropriate measures
to be taken

Risk Management Tools Derivatives1

A derivative is a financial instrument whose payoff (value)

is derived from the value of one or more underlying assets
The underlying assets could be anything from tulip buds to
the average temperature of Chicago. But typically: FX
rates, Interest rates, Equities
The derivative could be anything as simple as a forward
contract to Snowballs, Himalayan options
Notional OTC derivative outstanding is upwards of US$
600 trillion. Gross market value is about 4% of notional.
After netting and collateral the risk is about 0.2% of
notional. Interest rate contracts comprise about 77% of the
total followed by foreign exchange at 11%

Risk Management Tools Derivatives2

Foreign exchange risks

Forward contracts
Options
Swaps
Futures
Foreign borrowings / assets
Currency swaps

Interest rate risks

Interest rate swaps

Forward rate agreements (FRA)
Caps /Floors/ Collars

Commodity price risks

Futures
Options
Swaps

Credit risks

Letter of credit (L/C)

Credit insurance
Credit default swaps

Spot & Forwards

Market

Terminology

SPOT - Settlement takes place two working days later.

TOM - Settlement takes place the next working day.
CASH - Settlement takes place the same day.
FORWARD - Any settlement that takes place beyond the spot date
Type of Transaction

Deal Date

Settlement Date

CASH

THURS

THURS

TOM

THURS

FRI
(+1 WORKING DAY)

SPOT

THURS

MON
(+2 WORKING DAYS)

FORWARD

THURS

TUES ONWARDS

Exchange rate
Exchange rate
An exchange rate is the price of one currency expressed in terms of another currency
Base currency
Term / Variable currency
For example
1 USD = INR 64.0000
Quotation- Rupee

1 EUR = USD 1.1215

A quote comprises of a Bid and an Offer

On 08 May,2015

1 USD = INR 64.00/02

You can sell USD 1 M at 64.0000 and get INR 6.40 crores for value date 12 May 2015
You can buy USD 1 M at 64.02 for INR 6.402 crores for value date 12 May 2015

Exchange rate
Quotation- Crosses
Assume you are a EUR Exporter
No direct EUR/INR quote - calculated from EUR/USD and USD/INR quote
EUR/USD

1.1215/1.1217

USD/INR

64.0000/ 64.0200

You receive EUR against your exports.....

You give EUR to buy USD 1.1215
You sell these USD to buy INR 64.0000
So net rate for EURINR will be 71.7760 settled value spot.

Forward Rates
A forward contract is an obligation to buy or sell an agreed amount of one currency in
exchange for other currency (Notional Value) for an agreed future date (Expiry Date) at
an agreed exchange rate (Strike Price) for a specific underlying.
Simplest form of hedging with locked in a fixed rate for a date or a range of days
A contract once booked can be utilized in full or part prior to the defined maturity.
Rationale
The structure provides an opportunity to lock into the exchange rate prior to the
maturity of the underlying exposure.
It also protects the underlying from being exposed to volatilities in the spot market.
The hedge cost can be ascertained upfront and thus the end value of the underlying
asset in local currency terms is known. It aids in projecting revenues and controlling
costs for underlying linked to foreign exchange.
Risks
It restricts participation in further exchange rate movements you are locked into a
fixed rate.
The MTM (mark-to market) of the contract will vary vs. the current market rate and
could be in the money or out of the money at any point during the tenor of the
contract. In the event the MTM of the contract exceeds the tolerance level indicated
by the Bank it may be required to pledge incremental collateral.
In the event the underlying ceases to exist then the hedge has to be unwound at the
prevailing market rate (which could be out of the money). The utilization rate of the
contract prior to the maturity will be adjusted (expect for option dated contracts).

Forward Rates
When in premia they are quoted- Ex USDINR Forwards
For USD INR Spot-64.00/64.02
Tenor

Forward Premia
(Paisa )

Net Rate for

booking forward

1month

40/42

64.40/64.44

2 month

81/83

64.81/64.85

When in discount they are quoted Ex GBPUSD Forwards

For GBPUSD spot 1.5424/1.5426
*Pip refers to (1/10000)
Tenor

Forward Premia
(Pips)*

Net Rate for

booking forward

1 month

-4.3/-4.06

1.54197/1.542194

2 month

-7.8/-7.50

1.54162/1.54185

Cancellation & Roll-over of

Forward
On 08 May,2015 a contracts
corporate wants to sell USD 1 million for 30
th

th

June,2015

Spot
64.00/64.02
Premia
64/66
Net rate that a company can get is 64.00+.64=64.64
- Cancellation
If on 31st May Client wants to cancel the contract, he has to buy the equivalent
USD at the then current spot.
If the USD on 31st May, is 64.00/64.02, thus there will be net credit (64.6464.30)*1mio = Rs 340,000 value 30th June,2015 to the clients account.
.
- Rollover of the deal
With the valid underlying in place, if the client wants to roll-over his contract for
another 15 days , he can do so by cancelling the existing contract and rebooking
the new contract for another 15 days.

Options

Options

A Call Option is a financial derivative which gives the

option holder the right but NOT the obligation to
BUY the underlying asset at a predetermined price
at sometime in the future
A Put Option is a financial derivative which gives the
option holder the right but NOT the obligation to
SELL the underlying asset at a predetermined price
at sometime in the future

Options

underlying asset

Stock price/index, FX rates, IR(S)

pre-determined price

STRIKE (X)

sometime in the future

At a specific time in the

future (Expiry)

European

At anytime in the future

between now and Expiry

American

Long = bought, Short = sold

Options - Example

A USD call INR put for notional USD 1 mio at

strike 64.00 gives the buyer the right to buy USD 1
mio at 64.00. If on the expiry date, USD/INR is
trading above 64.00, buyer will exercise his right
to buy USD else he will let the option expire
worthless
A USD put INR call for notional USD 1 mio at
strike 64.00 gives the buyer the right to sell USD 1
mio at 64.00. If on the expiry date, USD/INR is
trading below 64.00, buyer will exercise his right
to sell USD else he will let the option expire
worthless

Understanding the payoff Long Underlying Asset

payoff

Unlimited Upside Gain

60
54

-6

65

Underlying (S)

but Unlimited
Downside Risk!!

Payoff Long Call Option

the right (to buy)

Unlimited Upside Gain

5

54

64
70

and now
no Downside risk!!
but NOT the
obligation

Payoff
Payoff == max(S
max(S -- 64,
64, 0)
0)

Well.almost

Payoff Long Call Option

and so the payoff changes a bit
payoff

5
4

64
65

Option Premium
= 1 in the illustration

Payoff Long Put Option

The right to sell the underlying.but not the obligation
payoff

60
S

54

the right (to sell)

but not the obligation

Payoff
Payoff == max(60
max(60 -- S,
S, 0)
0)

Payoff Short Call, Short Put

payoff

Short Call
the Option writer has the obligation to sell the
underlying to the Option holder at the Strike price
S

64

Hence limited upside (equal to the premium) but

Unlimited downside risk

payoff

Short Put

64

the Option writer has the obligation to buy

the underlying to the Option holder at the Strike
price
Hence limited upside (equal to the premium)
but Unlimited downside risk

FX option
Now we define the underlying asset: an FX rate, say USD/INR
payoff

Strike = 60
Rs/USD

e.g. The Call Option above on the USD/INR gives the holder
the right but not the obligation to buy a Notional, say 1M USD
at a rate of 60 R/$ after 12 months

Forward vs. Option Payoff

Payoff

Payoff

Buy Forward

Sell Forward
Spot (S)

Payoff

Payoff

Buy Call

Spot (S)

Spot (S)

Buy Put

Spot (S)

Vanilla Options and their Cost

Exporter Example
Spot

: 64.00

1 year forward premium

: 440 paise

1 year forward rate

: 68.40

Option Costs
At the money Forward (ATMF) Put : Strike 68.40 : 205 paise
In the money (ITM) Put : Strike 69.00 : 233 paise
Out of the money (OTM / ATMS) Put : Strike 64.00 : 120 paise
Deeply Out of the Money (OTM) Put : Strike 58.00 : 55 paise
Buying Vanilla Options involve cash outflows for premium (mostly immediate)
Difficult to justify the costs to Management in absence of specific hedge
budget

Building Blocks : Option Payoffs

Payoff

Payoff

Buy Call

Spot (S)

Buy Put

Buy the
underlying
asset
Payoff

Sell the
underlying
asset
Payoff

Sell Call

Sell Put

Spot (S)

X
Sell the
underlying
asset

Spot (S)

Spot (S)

X
Buy the
underlying
asset

Combinations (Cost Reduction Strategies)

Payoff

RANGE FORWARD
Buy Put at 64.00
Sell Call at 74.00
Payoff
If Spot < 64.00 : Sell at 64.00
74.00
0
64.00

Spot (S)

If 64.00 < Spot < 74.00: Sell at market

If Spot > 74.00: Obligation to sell at 74.00
Rationale
Cost effective strategy to execute the view
that market shall be range-bound
(Cost of the structure : Zero Cost)
One can protect budgeted rate while
gaining some more upside as compared to
a forward
Range shall be larger when markets expect
USDINR to go up (Calls are favoured) Risk-reversal

Combinations (Cost Reduction Strategies)

PUT SPREAD

Payoff

Buy Put at 64.00

Sell Put at 55.00
Payoff
7

If Spot > 64.00: Sell at the market

If 55.00 < Spot < 64.00: Sell at 64.00
Spot (S)

0
55.00

64.00

If Spot < 55.00 : Sell at 7 rupees better than

market
Rationale
Helps reduce the cost of vanilla option by
forgoing unlimited upside
Cost of this structure : 90 paise as against a
cost of 120 paise for an ATMS Put

Swaps

Why swaps?

Three risks of any floating-rate FCY borrowing

1. Exchange rate risk on the principal
2. Interest rate risk on the floating rate index
3. Exchange rate risk on the interest

Swap Products

Principal Only Swp (POS) mitigates only Risk 1

Interest Rate Swap (IRS) mitigates only Risk 2

Coupon Only Swap (COS) mitigates Risk 2 and 3

Cross-currency Interest Rate Swap (CCIRS) mitigates all

three risks

CCIRS
Loan details
Loan amount: $10 million

Lender

USD/INR spot: 64.00

Repayment: Bullet 5 years

L+2.50%
p.a. on USD
notional

USD 10
million on
repay date

USD 10 million on repay date

Company

L+2.50% p.a. on USD notional

9.85% p.a. on INR notional
INR 620 million on repay date

HDFC Bank
Treasury

POS
Loan details
Loan amount: $10 million

Lender

USD/INR spot: 64.00

Repayment: Bullet 5 years

USD 10
million on
repay date

USD 10 million on repay date

Company
5.50% p.a. on INR notional
INR 620 million on repay date

HDFC Bank
Treasury

IRS
Loan details
Loan amount: $10 million

Lender

USD/INR spot: 64.00

Repayment: Bullet 5 years

L+2.50%
p.a. on USD
notional

Company

L+2.50% p.a. on USD notional

4.00% on USD notional

HDFC Bank
Treasury

COS
Loan details
Loan amount: $10 million

Lender

USD/INR spot: 64.00

Repayment: Bullet 5 years

L+2.50%
p.a. on USD
notional

Company

L+2.50% p.a. on USD notional

4.35% on INR notional

HDFC Bank
Treasury

Derivative Regulations

Derivative regulations Allowed products

Generic derivatives
FX forwards
Plain vanilla options
Currency swaps
Interest rate swaps
Interest rate caps and floors (vanilla)
Forward Rate Agreements

Structured derivatives
Combination of one cash and one or more generic derivatives
Combination of two or more generic derivatives

Hence a cost reduction structure is a Structured derivative

Products under contracted / probable exposures

Contracted exposures

Probable Exposure based on Past

Performance

Products allowed

Products allowed

Forward Contracts
Vanilla Options, both FCY and INR
Cost Reduction options, both FCY
and INR
Swaps, both single and multicurrency
Purchase of Caps and Collars and
FRA

Forward Contracts
Vanilla Options, both FCY and INR
Cost Reduction options, both FCY
and INR

Guidelines Contracted Exposures1

Underlying to be submitted in 15 days time. If not submitted

within 15 days, contracts to be cancelled and gains on
cancellations not to be passed on to customer.
If more than 3 instances of non-submission of underlying
within 15 days in a single FY, then future contracts to be
booked only on production of underlying upfront.
Annual (earlier quarterly) certificate from statutory auditor.
Facility of rebooking (including rollovers) not permitted unless
exposure information submitted at beginning of FY.
Where hedging done in third currency, then should be
expressly allowed by Risk Management Policy, duly approved
by the Board.

Guidelines Contracted Exposures2

Overseas Direct Investment (equity/loan)

Exchange risk on market value to be hedged
Can be cancelled or rolled over on due dates
If hedge becomes naked in part or full, can continue up to
maturity date but rollover permitted up to market value

Dividend from subsidiary can be hedged provided that the

dividend has been crystallized (for e.g. approved by
shareholders in AGM)
Hedge exchange risk of transactions denominated in foreign
currency but settled in INR
To be settled in cash on maturity
Once cancelled cannot be rebooked except due to change in
customs notifications.

Guidelines Probable Exposures1

Allowed for hedging the probable exposure based on declaration

in respect of merchandise goods as well as services.
Contracts booked during the current FY and outstanding
contracts at any point of time not to exceed the eligible limit (for
importers, only 25% of eligible limit)
The eligible limit (exports/imports) = Max (last FY
exports/imports, avg. of exports/imports of last three FY).
The eligible limit to be computed and monitored separately for
imports and exports.
Contracts booked in excess of 75% of eligible limit on deliverable
basis only.
Contracts cancelled or rolled over or matured are blocked
against the eligible limits.
Submission of audited declaration to be given by June 30.

Guidelines Contracted Exposures2

AD banks can offer only after following conditions satisfied :

An undertaking that all documentary evidence will be
produced before maturity of all contracts booked
Quarterly certificate duly certified by statutory auditor
regarding amounts booked with other banks
Aggregate of overdue bills to not exceed 10% of turnover
for exporter
Aggregate outstanding contracts in excess of 50% eligible
limit allowed after following
Statutory auditor certificate that all guidelines adhered
to while availing this facility
Certificate of import/export turnover of the customer
during the past 3 years duly certified by statutory
auditor

Derivative Guidelines

OPTIONS
Cross currency options
Only buying of vanilla options allowed
(subject to cost reduction facilities)
Can be used for trade transactions .All
guidelines of cross currency forwards also
applicable.
FCY-INR Options:Only buying of vanilla options allowed
(subject to cost reduction facilities)
All guidelines of FCY-INR forwards also
applicable
Options can be used to hedge contingent
liability arising out of submission of bid in
foreign exchange

SWAPS
Both for FCY to INR and INR to FCY.
Only incorporated resident entities can
convert long term INR liability in to FCY
subject to: Risk management systems of
corporate
Natural hedge / economic exposure
In absence of natural hedge, only listed
companies or unlisted companies with NW
of the INR 200 Crs. can do after AD is
satisfied about suitability and
appropriateness and financial soundness of
the customer
Once cancelled should not be rebooked or
re-entered.

Guidelines Cost reduction structures

Only listed companies and their subsidiaries/JV/associates with
common treasury and consolidated balance sheet OR Unlisted
companies with NW of INR 200 crores provided:
All products are fair valued on each reporting date
Company follows section 211 of Companies Act
Disclosures made in financial statements as prescribed ICAI press release
of 02 Dec 2005

Only trade transactions and ECB allowed to be hedged through cost

reduction trades
Leveraged structures, digital options, barrier options, range accruals
and any other not allowed
In case of trade transactions, maximum tenor allowed is 2 years
For using cost reduction against past performance:
Minimum Net Worth of 200 crores
Annual export and import turnover exceeding 1000 crores

Copyrights HDFC Bank

Restricted

Documentation

Documentation Requirements :
Board Resolution authorizing company personnel to enter into derivative
contracts. The Board Resolution should specifically
For Vanilla Options, Swaps
(i) State the limit assigned by the company to each bank. This limit shall be
monitored on a gross basis i.e., amounts of buy and sell positions cannot be netted
(ii) State the names and designations of the companys officials authorized to
undertake transactions its behalf of the Company and the specific products that can
be transacted by each of them
(iii) State the names of the company officials to whom transactions must be
reported by the bank these persons must be different from those authorized to
transact on behalf of the company
(iv) State the names and designations of the company officials authorized to
sign the ISDA and similar agreements

Documentation Requirements : Options

For Cost Reduction Options / Combination Structures

(i) State that the Company has in place a Board-approved Risk Management
Policy that sets out the following:
Guidelines on risk identification, measurement and control
Guidelines and procedures to be followed with respect to revaluation and monitoring of
positions
Designations of the Companys officials authorized to undertake transactions on
behalf of the Company and limits assigned to each official on a per transaction basis
Accounting policy and disclosure norms to be followed in respect of derivative
transactions
A requirement to disclose the MTM valuations appropriately
A requirement to ensure separation of duties between front, middle and back
office
Mechanism regarding reporting of data to the Board including financial position of
transactions etc.

Documentation Requirements : Options

For Cost Reduction Options / Combination Structurescontd.

(ii) State that the Company has laid down clear guidelines for conducting the
transactions and institutionalized the arrangements for a periodical review of
operations and annual audit of transactions to verify compliance with the
regulations.

The Board Resolution (irrespective of whether for generic or structured

options) must be signed by a person different from those authorized to
transact on behalf of the Company

Risk Disclosure Statement (not required for Only Forwards)

ISDA Agreement (Master FX Agreement in case Only Forwards)
Any other documentation prescribed by the bank

ISDA documentation

ISDA documentation

ISDA Founded in 1985. 840 members from 60 countries

including HDFC Bank.
40% of members are end-users.
1987 ISDA Interest Rate Swap Agreement & 1987 ISDA
Interest Rate and Currency Exchange Agreement
1992 ISDA Master Agreement
2002 ISDA Master Agreement
Introduction of Close Out Amount
Introduction of Set off clause
Schedule to the ISDA Master

ISDA clauses requiring credit approval1

Threshold amount
Usually 3% of net worth for both parties
Linked to Cross-Default clause of ISDA Master

Specified Entities
Usually All Affiliates for the counterparty
Affiliates means, subject to the Schedule, in relation to any
person, any entity controlled, directly or indirectly, by the person,
any entity that controls, directly or indirectly, the person or any
entity directly or indirectly under common control with the person.
For this purpose, control of any entity or person means
ownership of a majority of the voting power of the entity or
person.
Linked to the Default under Specified Transaction, Cross-Default,
Bankruptcy and Credit Event Upon Merger clauses of ISDA
Master

ISDA clauses requiring credit approval2

Credit Support Document

Usually None

Credit Support Provider

Usually None

MTM Clause
Not necessary when only plain vanilla options are intended

Credit Covenants
Not necessary when only plain vanilla options are intended
Not an industry standard
Important to select covenants which can withstand the test of time

Scoping clients & credit limits

Identifying exposures

Identifying exposures

Exports including deemed exports

Imports
A2 payments
Local payments indexed to FCY rates
ECBs / FCY loans
Overseas Direct Investments
Commodity hedging

Current pricing for trade products

Current hedging process
Current banks for trade / hedging
Capital account transactions
Our USPs including RBI liaison

PSR

PSR = PFE + Negative MTM

PFE = Potential Future Exposure. Defined as the maximum
expected credit exposure over a specified period of time
calculated at some level of confidence
Example 15.71% for USDINR 1 year, 26.32% for EURUSD 1
year
Assume PSR blocked is 10 crores of which 6 crores is on
account of PFE and 4 crores on account of negative MTM. The
actual risk at any point in time is the negative MTM + a small
PFE to account for time taken for the unwind of deals

DPSR and FX PSR

DPSR is not necessarily more risky than FX PSR

PSR for certain specific deals

Spot bookings for Nostro credits

Money already lying with us as inward remittance has come

LC / BC / FCY loan
PSR lines required for forward / option booking to mitigate FX
risk associated with the liability

INR loan
In absence of USD funds, client can take INR loan and swap it
into USD mimicking a USD loan

Sole banking clients

In case of sudden market movement causing huge negative
MTM, extra lines needed especially for sole banking clients or
clients where a substantial portion of flows routed through us
Else client exposed to risk of being unhedged which is not good
for his Balance Sheet

Daily EUR=

16-07-2014 - 01-07-2015 (GMT)

Price
USD

Cndl, EUR=, Bid

08-05-2015, 1.1265, 1.1276, 1.1180, 1.1218, -0.0047, (-0.42%)
SMA, EUR=, Bid(Last), 200
08-05-2015, 1.2002
Ichi, EUR=, Bid, 9, 26, 52, 26, 26
08-05-2015, KinSen 1.0955, TknSen 1.1125, ChkuSp 1.1218, SkuSpA 1.1040, SkuSpB 1.0924

1.39
1.38
1.37
1.36
1.35
1.34
1.33
1.32
1.31
1.3
1.29
1.28
1.27
1.26
1.25
1.24
1.23
1.22
1.21
1.2002
1.2
1.19
1.18
1.17
1.16
1.15
1.14
1.13
1.1218
1.12
1.1218
1.1125
1.11
1.1040
1.1
1.0955
1.09
1.0924
1.08
1.07
1.06
1.05
1.04
1.03
Auto

21 28
J ul 14

04

11 18 25
Aug 14

01

08

15 22
Sep 14

29

06

13 20 27
Oct 14

03

10 17 24
Nov 14

01

08

15 22
Dec 14

29

05

12 19 26
J an 15

02

09 16 23
Feb 15

02

09

16 23
Mar 15

30

06

13 20 27
Apr 15

04

11 18 25
May 15

01

08

15 22
J un 15

29

Thank You