SEMINAR ON RISK MANAGEMENT&

IMPACT OF BUDGET ON RUPEE

New De l h i – 1 s t Ma rc h 2016

Products available on exchanges

• Exporters can mitigate the currency fluctuation risks through various

strategies in the currency markets. Some commonly used methods are:

• Selling USD at Spot + premium• Locks the priceFutures

• Buying premium for selected strike price

• Full advantage if spot goes downOptions

Exporters should take ‘short’ hedge position on the futures market.

This can be elaborated by the illustration below:

March SeptemberCurrency Fluctuation Risk

• Wants to sell USD in September (receivables from export)

• Takes a short position in USDINR September contract to protect from risk.

• Sells USD received as revenue in spot market.

• Squares up position in the futures contract.

Risk covered!

Hedging through Futures

Futures are standardized version of forward contracts.

Trades on regulated exchanges gives higher accessibility, transparency and No counter party risk involved

Upfront margin and daily settlement (MTM) is mandatory in Currency Futures

Ease of trading and lower cost of hedging attracting even smaller entities to the exchange

Bid – Ask spread as low as 0.0025 paisa whereas it is 1 to 2 paisa in OTC.

One can easily hedge indirect exposure also through futures.

Why futures?

MTM CalculationConsider a client who Sell USDINR on day 1 the contract at 68.0000• The settlement price on day 1 is 68.1000

Mark to market :Difference between the two multiplied by the number of contracts and the contract multiplier• The contract is carried forward at the settlement price• The payment of profit or loss happens the next day• The client squares up at 68.6500 on day 5• No open positions and no mark to market

Day Buy Qty in Contracts Price Closing Price Profit / Loss1 1000 68.0000 68.1000 -1002 1000 68.1000 67.9000 2003 1000 67.9000 67.8000 1004 1000 67.8000 68.4000 -6005 1000 68.4000 68.6500 -250

Bank Vs Exchange Traded Currency Derivative

Currency Exchange Traded Forwards/ OTCType of Contracts Standardized Customized

Price transparency High, Real time rate Low, Over the phone

Accessibility Online / Offline modes Offline/ OTC

Underlying exposure Not Required Required

Margin Requirement 3.00% Non standardized may vary from 8-12 %

MTM Settlement Daily Settled NA

Settlement Net settled in INR (Cash) Physical Settlement

Exporter-specific currency strategiesOptions Strategy

Exporter: Risk of appreciation of Rupee beyond spot price of 68

Buy ‘PUT’ option: Strike price 68 :

Premium 0.26 paisa

Profit: Rs 2 in OTC

Loss: Maximum up to premium paid

(in this case, 0.26 paisa)

Loss: Rs 2 in OTCProfit: : Actual loss is

compensated by appreciation in premium

price

If spot price becomes 66

If spot price becomes 70

Source: www.nseindia.com

• Finance Act, 2005 has amended section 43(5) so as to exclude transactions in derivatives carried out in a “recognized stock exchange” for the purpose transactions entered into by hedgers and stock exchange members in course of jobbing or arbitrage activity were specifically excluded from the purview of definition of speculative transaction..

• This implies that income or loss on derivative transactions which are carried out in a “recognized stock exchange” is not taxed as speculative income or loss.

• Thus, loss on derivative transactions can be set off against any other income during the year. In case the same cannot be set off, it can be carried forward to subsequent assessment year and set off against any other income of the subsequent year. Such losses can be carried forward for a period of 8 assessment years.

• NO Securities Transaction Tax (STT)

Source:- NISM Series –I Currency Derivatives

Taxation for Corporates

• Domestic clients may take long or short positions in the permitted currency pairs upto

• The limit (long as well as short) in USD-INR pair upto USD 15 million per exchange

• EUR-INR, GBP-INR and JPY-INR pairs, all put together, upto USD 5 million equivalent per exchange

• As applicable, per stock exchange without having to establish the existence of any underlying exposure.

• Domestic clients may take positions in the permitted currency pairs in excess of above, as applicable, subject to the conditions specified the RBI A.P. (DIR Series) Circular no. 147 dated June 20, 2014.

A.P.(DIR Series) Circular No. 90 dated March 31, 2015

Latest RBI guidelines

How to Start Currency Hedging

Contact our nearest branch office of Religare Securities Ltd and Relationship Manager will fix an appointment with you

Complete the KYC registration along with simple supporting documentation

Your exclusive trading code will be generated within 4 working days

Trading Preference

Mobile Trading App

Odin Software

Web Based Trading

Our Offerings

Real time rates enabling towards customer convenience

Dedicated desk for Corporate and SME clients

We can accept FD, BG, Mutual Funds and other collaterals as approved by SEBI as initial margin

Extended sector-specific hedging advisory & risk management services

Let’s Begin! Website: Email:

www.religareonline.com product.currency@religare.com

Member : NSE, MSEI, BSE

Address:A-3/4/5 , Sec-125, Noida,

Uttar Pradesh, India

Exporter-specific currency strategies

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This document is not intended to be and must not be taken as the basis for any investment decision. The investment discussed or views expressed may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The recipients of this document should rely on their own investigations and take their own professional advice.

Illustration in the presentation are indicative one client shared exercise due diligence before delay.

Exporter-specific currency strategies