Welcome to the world of currencies

Transcription

1 Welcome to the world of currencies

2 What is a currency? A generally accepted medium of exchange for goods and services, issued by a government and circulated within an economy.

3 World currencies Different countries have different currencies.

4 What is currency exchange rate? Each currency of a country is valued with other currency, the net ratio is called exchange rate.

5 Currency exchange rates Each currency exchange rate represents a pair of currency. Examples of currency pairs: USD/INR - US Dollar against Indian Rupee EUR/USD - Euro against US Dollar EUR/GBP - Euro against British Pound GBP/INR - British Pound against Indian Rupee

6 How is currency quoted? Each currency is quoted/paired/valued with another currency. USD/INR = Base currency Quote currency Quote of USD/INR = means for every 1 USD paid, INR will be received. Quote of EUR/USD = means for every 1 Euro paid, USD will be received.

7 Understanding appreciation & depreciation of currency $ ` How valuation of rupee changes?

8 Valuation changes due to Economic forces - inflation rate, purchasing power, interest rate Market forces - supply & demand of dollar & rupee due to economic factors The value of a currency depends on demand and supply of currency. Demand depends on economic valuations & economic factors.

9 Economic forces affecting rupee Macro economic reviews Monetary policy Banking policies Economic data announcements Global economic scenario Global capital flow Performance of equity/financial markets Performance of other currencies Performance of key commodities affecting trade Policy announcements affecting flows trade or capital Do we have control on these factors???

10 Impact of economic news on rupee News flow Meaning Impact on rupee Greek crisis Euro crisis FII outflow Rise of OIL price Overseas loan payment RBI managing strong rupee FII/FDI inflow in India Overseas borrowing Higher bank rates News: GDP will improve NRI sending money Gold rises RBI managing rupee fall Outflow of Greek currency & investment in USD. USD demanded in market against Euro FII sell rupee & buy USD Higher inflation - Low purchasing power, & demand for more USD, fall of rupee value against USD Payment in USD against rupee. Corp sell rupee & buy USD Demands dollars & supply rupee Inflow by FDI/FII supply of USD & demand of rupee Demands for dollars by corporate against INR Investment by FII for bank interest Foreign investors will bring money to invest USD flow Buying gold against USD. Supply of USD. Demand for dollar against rupee. Outflow of dollar Depreciation Depreciation Depreciation Depreciation Depreciation Depreciation Appreciation Appreciation Appreciation Appreciation Appreciation Appreciation Appreciation

11 How is change in currency rate a financial risk?

12 USD-INR in last 4 years

13 USD-INR movement impact Do we know what will be USD-INR rate next???

14 What is currency risk? When rise or fall in value of one currency against another currency has direct or indirect impact on financial statements, it is a currency risk.

15 When is currency a risk? Currency risk occurs when - transactions undertaken by entity involves international currencies. - rate of exchange has direct or indirect impact on its financial statements. Transactions may be - receivable or payable fx instruments. - purchase/sale commitments in fx. - future transactions in a foreign currency. - speculative transactions.

16 Who is affected by currency market? Corporate, exporters, importers, governments, central & other banks, financial markets, individuals - travellers, students

17 How is exchange rate a financial risk? Mr. ABC is an exporter and has to receive USD 5 million as payment for his exported goods next month. If today USD-INR rate is 55.60, Mr. ABC is expecting to receive INR 27.8 Crs. (5*10^6*55.60 = 27.8 Cr). By the time of payment delivery, if USD-INR moves to 57.30, Mr. ABC will receive INR Cr. He will gain additional INR 0.85 Cr. In a situation, USD-INR changes to at the time of delivery, Mr. ABC will receive INR Cr. A loss of INR 1.05 Cr. In above situations, Mr. ABC will hugely gain or lose basis exchange rate movement in USD-INR, for which he has no control.

18 How is currency a risk more examples... Mr. XYZ imports goods. He is expecting delivery of his contract next month and has to pay USD 10 million at the time of goods delivered. If today USD-INR rate is 55.60, XYZ has to pay INR Cr. (10*10^6*55.60 = 55.6 Cr). By the time of payment, if USD-INR moves to 57.30, Mr. XYZ will have to pay INR Cr. He will have to pay additional INR 1.70 Cr. In a situation, USD-INR changes to at the time of delivery, Mr. XYZ will have to pay INR Cr. A gain of INR 2.10 Cr. In above situations, Mr. XYZ will gain or lose basis exchange rate movement in USD-INR, for which he has no control.

19 Some more situations - Anjali Jewellers is importing 100 KG of Gold, worth INR 30 Cr from US. Ruchi Soya has entered in a contract to export Soya Oil to US worth INR 20,000 Cr next year. Indian importer ABC partners has deposited USD 5 Million as refundable guarantee deposit to tie up with US Company for 5 Years. Same ABC partners is sourcing business from US every month worth INR 25 Cr every year. Indo-Call runs 1000-seat BPO in India and US. Receives $100 per day as servicing fee. What happens if the INR depreciates against USD - rate moves from $50 to &52 in a month

20 And the fx risks - Anjali Jewellers operating profit falls with Rs 1.2 Cr every month. Ruchi Soya s net income rises by 800 Cr a year. ABC partners will receive INR 10 Million extra on conversion of his deposit. Same ABC partners profit for the year increases to 1Cr for the year. Indo-Call receives Rs 60 Lakh additional gain each month.

21 Problem - currency exposure risk solution - hedging

22 Problem - Firms involved in international transactions face a risk, an unknown gain/loss, on account of unanticipated changes in exchange rates. These transactions are quantified in terms of international exposure. Un-hedged exposures adversely affects P&L of companies and creates operational hitches like cash flow requirements etc.

23 We need to manage our fx exposure Payables Receivables Imports Exports Capital good imports Overseas borrowings - FCCBs, ECBs Foreign deposits Engineering offshore contracts Capital flows - FDI, FI Service export contracts

24 Solution on fx risk - hedging Hedging is a position established in one market in an attempt to offset exposure in some opposite position in another market. The goal is to minimize one's exposure to unwanted risk. Hedging is thus taking of a position, either acquiring a cash flow or an asset or a contract(including a forward contract) that will rise(fall) in value to offset a fall(rise) in value of an existing position.

25 What is hedging overview & concept? Hedging is a position established in one market in an attempt to offset exposure in some opposite position in another market. The goal is to minimize one's exposure to unwanted risk. Hedging is thus taking of a position, either acquiring a cash flow or an asset or a contract(including a forward contract) that will rise(fall) in value to offset a fall(rise) in value of an existing position.

26 Keeping it simple - how to hedge? Forex receivable Short/Sell futures Forex payable Long/Buy futures

27 Cost of hedging & management of hedge Set price for transacting a foreign currency in the future Hedge forex exposure Cost to lock in this exchange rate - margin deposits - premium related to future rate for currency - brokerage fee to obtain contract - mark to market cash flow - net settlement cash flow

28 Problem - currency Currency exposure Exposure risk Risk Solution - hedging Hedging Best Tool - currency Currency derivatives Derivatives

29 What are currency derivatives? The term 'Derivatives' indicates it derives its value from some underlying i.e. it has no independent value. Underlying can be securities, stock market index, commodities, bullion, currency etc. Currency derivatives implies contracts where underlying would be the currency exchange rate. Examples of currency trading pairs: - USD-INR US Dollar against Indian Rupee - USD-EUR US Dollar against Euro - EUR-GBP Euro against British Pound

30 Currency ICICIdirect.com

31 Currency ICICIdirect.com Products offered - 4 currency pairs USD-INR 6 month forward contracts available for trading GBP-INR 3 month forward contracts available for trading EUR-INR - 3 month forward contracts available for trading JPY-INR 2 month forward contracts available for trading - Only futures - Option trading not available Trading screens - Online through web-trading - Call n trade facility

32 Currency ICICIdirect.com Symbol USD/INR EUR/INR GBP/INR JPY/INR Instrument Type Units of Trading Underlying Tick Size Trading Hours Contract Trading Cycle Last trading Cycle FUTCUR 1 unit denotes 1000 Dollar The Exchange rate in INR for US Dollars 0.25 paise or INR RBI reference rate on last trading day FUTCUR FUTCUR FUTCUR 1 unit denotes 1000 Eur The Exchange rate in INR for Euro 0.25 paise or INR RBI reference rate on last trading day 1 unit denotes 1000 GBP The Exchange rate in INR for Pound Sterling 0.25 paise or INR RBI reference rate on last trading day 1 unit denotes 1000 Yen The Exchange rate in INR for Japanese Yen 0.25 paise or INR (The Quote will be for 100 JPY) 9.00 am to 5.00 p.m. ( Monday - Friday ) 12 months Trading Cycle Two working days prior to the last business day of the expiry month at pm Last working day ( excluding Saturdays ) of the expiry month. The last working day will b e the Final Settlement Day same as that for interbank Settlements in Mumbai Daily Settlement : T+ 1 Final Settlement : T + 2 Mode of Settlement Cash Settled in INR Daily Settlement price (DSP) Calculated on the basis of the last half an hou weighted average price Final Settlement Price RBI reference rate on last trading day

33 Margin calculation in currency futures Pair Underlying Contract example Qty Lot size LTP Contract value Margin per lot Margin % USD-INR USD against INR FUT-USD-INR % EUR-INR EUR against INR FUT-EUR-INR % GBP-INR GBP against INR FUT-GBP-INR % JPY-INR JPY against INR FUT-JPY-INR %

34 Equity Currency Derivatives

35 Equity derivates vs currency derivatives Underlying Market indices like nifty, bank nifty Equity scrips Currency pair is used as indices like USD-INR, EUR-INR

36 Equity derivates vs currency derivatives Margins Vary from 11% to 35%, and upto 60% in exception. Low margins in indices starting from 11%. Prime stock margins vary from 16% to 25%. General stocks margins start from 25% and above. 1 contract of nifty worth, Rs 2,45,000/- available at margin of Rs (@4900). Margins very low. Vary from 8.5% for USD INR. Exceptional margin applicable and extended to 1-2%. 1 Lot position of USD-INR available at Rs 5200/-. For contracts, equivalent to nifty - Rs 2,45,000/-, only Rs 20825/- is required.

37 Equity derivates vs currency derivatives Lot size Lot size is based on contract value. Standard value set by NSE is Rs 2.5 Lakhs. Number of units in lot vary as per market price of scrip at the time of initiating the contract by NSE. Lot size is based on number of units of underlying in contract. Standard is 1000 Units of currency. Lot value is not the set standard.

38 Equity derivates vs currency derivatives Tick size Tick size of Eq Dv is Rs 0.05 i.e. 5 Paise. Example of bid & offer Eq Dv Best bid price Best offer price Fx Dv tick size is Rs or 1/4th of 1Paise or Paise. Example of bid & offer Best bid price Fx Dv Best offer price

39 Equity derivates Vs currency derivatives Exposure with Rs 1 Lakh fund 3 nifty contracts can be taken as position(avg margin 11%). 3 lots of nifty stocks (avg margin 14-15%). 2 lots of junior nifty stocks. 1 lot of fair margin stock. FX Dv is low margin & high leverage product. You can take position of 20 lots of USD-INR. You can take position of 26 lots of EUR-INR. Position value is worth Rs 12 lakhs.

40 Equity derivates vs currency derivatives Instrument Funds available Contract size Price Contract value Margin on contract Margin value No. of contracts on full margin Position value in lakhs Nifty % ITC % PFC % USD INR % EUR INR % In Eq dv, Rs 1 Lakh can allow 3 Lots of nifty and total position value will be Rs 7.35 Lakhs (assuming nifty price at 4900 and 11% margin). In FX, Rs 1 Lakh can allow 19 lots of USD-INR and total position value will be Rs Lakhs (assuming USD-INR pair at Rs 62 with 8.5% margin). Currency derivatives consumes lower margin & provides 3 times higher exposure than equity derivatives.

41 Daily currency report, provided by ICICI Securities research

42 Monthly Currency Derivatives Research Report

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