old project

Table of Contents

i. Cover Page……………………………………………………………………............

..

1ii. Title Page………………………………………………………………..……... ........... 2

iii. Certificate………………………………………………………………...……............. 3iv. Acknowledgement…………………………………………………………..……......... 3v. Table of content………………………………………………………….………....... 4

vi. List of Symbols and Abbreviations…………………………………………..….........5vii. Executive Summary…………………………………………………………....…8

Chapter 1: Introduction 1.0 Introduction……………………………………………………………..……91.2 History…………………………………………………………………..……9

1.3 Forex Market……………………………………………………….....……..10 1.4 Market size and liquidity……………………………………....…….....…....11

Chapter 2: Objectives of the Projects 2.1 Introduction……………………………………………………...….………13 2.2 objective parameters…………………………………………..….......……..13

Chapter 3: Scope of the project

3.1Scope of project…………………………………………………..…....…....14

3.2 Introduction……………………………………………………...…………14

Chapter 4: Research methodology 4.1Introduction ……………………………………………………......………..15

4.2 Methodology………………………………………………….....….……..15

Chapter 5: Organisation overview

5.1 Power Finance Corporation: An Overview………………………...……….16 5.2 Services Offered by PFC…………………………………………………..17 5 .2.1 Financial Services………………………………………………....……...18 5.3 Consultancy Services……………………………………………………… 18 5.3.1 Institutional Development Services……………………………...……….19 5.4 Borrowing Profile of PFC…………………………………………...….....19 5.5 Risk Identification and Analysis……………………………………......…..20 5.5.1 Types of Risk………………………………………………………..……20

1

5.5.1.1 Credit Risk………………………………………………………..…….20 5.5.1.2 Liquidity Risk…………………………………………………..………20 5.5.1.3 Interest Rate Risk……………………………………….……...……….21 5.6 Managing of Interest Rate Risk on Rupee Debts…………………..….……22 5.6.1 Currency Swap from Rupee to USD……………………………...………22 5.6.2 Coupon Swap from Rupee to USD…………………………..……..…….22 5.7 Hedging of Rupee Loans through Indian Benchmarks…………..…..……..22 5.7.1 MIBOR Linked Swap………………………………………..……..……..22 5.7.2 MIFOR Linked Swap………………………………………....…….…….23 5.7.2.1 Forward rate agreements …………………………………….….……..23 5.7.2.2 Exchange Traded Rupee Interest Rate Futures……………..…....…….23 5.8 Role of AL & RM Unit in Risk Management ……………………..…..…..24 Chapter 6: Literature Survey 6.0 Risk…………………………………………………………………...………25 6.1 Risk Management………………………………………….……………...…25 6.2 Risk Identification………………………………………….………..………25 6.3 Market Risk………………………………………………………..……..….27 6.4 Exchange Rate Risk……………………………………………….…....……27 6.5 How the Forex Market Works……………………………………..…..…….28.

Chapter 7: Project in the Company 7.1. Pricing Option…………………………………………………………..……..29 7.2 Black–Scholes model………………………………………………………..…30 7.2.1. Define Black–Scholes model………………………………………….…….31 7.3.1 Calculation of Option premium using Black–Scholes Formulae……….……33 7.4. Calculate the option premium by varying strike rate…………………...……..34 7.5 Interpretation…………………………………………………………......…….34

Chapter 8: Currency Volatility

8.1 Currency Volatility…………………………………………….…..……………..36 8.2 Historical Volatility…………………………………………………..…………..36 8.3 Mathematical definition……………………………………………..……………37 8.4 IMPLIED VOLATILITY…………………………………………..….…………38 8.5 VOLATILITY CONES……………………………………………..……………38 8.6 TECHNICAL ANALYSIS……………………………………….....……………39

Chapter 9 Hedging

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9.1 Incremental Cost of hedging to the Organization…………………..….…..…….40 9.2 Types of hedging…………………………………………………………..……..40 9.2.1 Natural hedges……………………………………………………….…..……..40 9.2.2 Categories of Hedgeable risk………………………………………......………40 9.3 Hedging currency risk………………………………………………....…..……..41 9.4 Hedging Impact……………………………………………………………..……42 9.4.1 Evaluation for forward hedging …………………………………….....…..…..42 9.4.1 Summary table of Hedging………………………………………….…....……43 9.5 Interpretation………………………………………………………….…...….….45

Chapter 10: Trend analysis

10.1FOREX Trend Analysis…………………………………………..…..………….45 10.2 Important Types of Forex Trend Lines…………………………..…..………….45 10.3 Trend analysis of forex market from 1 January 2009 to 1 June 2009……...……46 10.4 Interpretation…………………………………………………………………….47

Chapter 11: Conclusions and interpretations

11.1 Conclusions……………………………………………………………………..51 11.1 Hedging……………………………………………………………….………..

51

Chapter 12: Suggestions & Recommendations 12.1 Suggestions & Recommendations……………………..………………............52

12.2 Limitations…………………………………………….……………………….52

Chapter13: Annexure

13.1 Annexure…………………………………………………………….………….53 13.2 References…………………………………………………………..…………..54

3

List of Symbols and Abbreviations

1. FOREX..............................................................................................................Foreign Exchange

2. PFCL ……………………….........................…………………..Power Finance Corporation Ltd.

3. SEB………………..……....................................................………….…State Electricity Board.

4. IPPs...................................................................................................Independent Power Projects

5. FI.................................................................................................................Financial institutions

6. SGCs.............................................................................................State Generating Corporations

7. LIBOR........................................................................................London Inter bank Offered rate

8. USD............................................................................................................United Sates Dollars

9. MIBOR.................................................................................. Mumbai Inter Bank Offered Rate

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10. MIFOR................................................................................... Mumbai Inter Bank Forward Rate

11. FRAs..................................................................................................... Forward rate agreements

12. ALCO............................................................................................ Assets Liabilities Committees

13. EBS………………………………………………………...……….. Electronic Broking

System

14. S…………………………………………….…………the price of the stock (please

note below).

15. V(S,t)…………………………… the price of a derivative as a function of time

and stock price.

16. C(S,t) ……………….the price of a European call and P(S,t) the price of a

European put option.

17. K ……………………………………………….………………………..the strike of the

option.

18. r……………………….…….. The annualized risk-free interest rate,

continuously compounded.

19. Ì……………………………………………………….……….. The drift rate of S,

annualized.

20. t …………………………………………..a time in years; we generally use now

= 0, expiry = T.

Executive Summary

5

The project deals with the exposure to the Foreign Exchange Market and the Risk associated with it.

Here we are studying FOREX Market in detail and try to analyze the fact & figures associated with it

and how the processing done with it in Financial Institution. The purpose of project is to minimize the

risk associated with Forex Market using the derivative tools (Hedging) in the working profile of PFCL

(Power Finance Corporation Ltd.) in order to gain maximum profit to achieve the heights of success in

near future. The project also deals with the impact of current scenario prevailing and how the various

derivatives tools helps to overcome the various downfalls in particular market scenario. The Project is an

attempt to calculate the Call Option Premium and how it varies if we vary time factor or strike rate

(forward rate) keeping other factors involved constant at the same time. The Project also shows the

effect of hedging on the portion of amount that has been taken by the firm is either beneficial or not for

the company. Hence, the project is an attempt to study the fluctuations that exist in the foreign exchange

market and its impact on the financial institution. The project deals with the study of BLACK &

SCHOLES MODEL in this same context.

Chapter 1: Introduction to FOREX Market

2.0 Introduction

6

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for

another. It is by far the largest financial market in the world, and includes trading between large banks,

central banks, currency speculators, multinational corporations, governments, and other financial

markets and institutions. The average daily trade in the global forex and related markets currently is over

US$ 3 trillion. Retail traders (individuals) are a small fraction of this market and may only participate

indirectly through brokers or banks, and are subject to forex scams

1.2 History

The idea of Forex trading can be traced back to ancient times to when people first began trading

currency from differing countries and groups. Yet despite this, the newest existing financial market is

the foreign exchange industry The foreign exchange market (currency, forex, or FX) is where currency

trading takes place. It is where banks and other official institutions facilitate the buying and selling of

foreign currencies. FX transactions typically involve one party purchasing a quantity of one currency in

exchange for paying a quantity of another. The foreign exchange market that we see today started

evolving during the 1970s when world over countries gradually switched to floating exchange rate from

their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Presently, the FX market is one of the largest and most liquid financial markets in the world, and

includes trading between large banks, central banks, currency speculators, corporations, governments,

and other financial institutions. The average daily volume in the global foreign exchange and related

markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in

April 2007 by the Bank for International Settlements. Since then, the market has continued to grow.

According to Euro money’s annual FX Poll, Volumes grew a further 41% between 2007 and 2008.

1.3 Forex Market

7

The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange

market arises because of the presence of multifarious international currencies such as US Dollars,

Euros, Japanese yen, Pounds Sterling, etc., and the need for trading in such currencies. Foreign

exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled

since 2001. This is largely due to the growing importance of foreign exchange as an asset class and

an increase in fund management assets, particularly of hedge funds and pension funds. The diverse

selection of execution venues have made it easier for retail traders to trade in the foreign exchange

market. In 2006, retail traders constituted over 2% of the whole F1 market volumes with an average

daily trade volume of over US$50-60 billion Because foreign exchange is an OTC market where

brokers/dealers negotiate directly with one another, there is no central exchange or clearing house.

The biggest geographic trading centre is the UK, primarily London, which according to IFSL

estimates has increased its share of global turnover in traditional transactions from 31.3% in April

2004 to 34.1% in April 2007.

The ten most active traders account for almost 80% of trading volume, according

to the 2008 Euro money FX survey. These large international banks continually provide the market

with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at

which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will

buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of

currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203

on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency,

which is a standard "lot" Presently, the FX market is one of the largest and most liquid financial

markets in the world, and includes trading between large banks, central banks, currency speculators,

corporations, governments, and other institutions. The average daily volume in the global foreign

exchange and related markets is continuously growing. Traditional daily turnover was reported to be

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over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market

has continued to grow. According to Euro money’s annual FX Poll, volumes grew a further 41%

between 2007 and 2008.

1.4 Market size and liquidity

The foreign exchange market is unique because of

Its trading volumes,

The extreme liquidity of the market,

Its geographical dispersion,

Its long trading hours: 24 hours a day except on weekends (from 22:00

UTC on Sunday until 22:00 UTC Friday),

The variety of factors that affect exchange rates.

The low margins of profit compared with other markets of fixed income

(but profits can be high due to very large trading volumes)

The use of leverage

Main foreign exchange market turnover, 1988 - 2007,

9

http://en.wikipedia.org/wiki/File:G_foreign_exchange_market_turnover.gif

Measured in billions of USD

As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding

market manipulation by central banks. According to the Bank for International Settlements, average

daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's

main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main

foreign exchange market turnover was broken down as follows

$1.005 trillion in spot transactions

$362 billion in outright forwards

$1.714 trillion in foreign exchange swaps

$129 billion estimated gaps in reporting

Of the $3.98 trillion daily global turnover, trading in London accounted for around

$1.36 trillion, or 34.1% of the total, making London by far the global center for

foreign exchange. In second and third places respectively, trading in New York

accounted for 16.6%, and Tokyo accounted for 6.0%.In addition to "traditional"

turnover, $2.1 trillion was traded in derivatives.

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Chapter 2 Objectives of the Project

2.1 Introduction

The objective of project is to minimize the risk associated with Forex Market using the derivative tools

(Hedging) in the working profile of PFCL (Power Finance Corporation Ltd.) in order to gain maximum

profit to achieve the heights of success in near future

2.2 This would require assessing the following parameters:

Risk

Risk analysis

Risk management

Derivatives

Volatility

Hedging

Value at Risk

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Chapter 3

Scope of the Project

3.1 Introduction

The scope of study primarily involved the study of risk policy of PFC, knowledge of Forex market

worldwide, analysis of currency and interest rate movement hedging technique etc.

Chapter 4

Research Methodology

4.1 Introduction

This section gives a brief on the process followed for analysis and the methodology

of the work executed.

4.2 Methodology

12

All the information and data used in this project has been derived from the

annual report of the company for the year 2007-08. The project is entirely

based on secondary data.

Reasonable assumptions have been made to account for any deficiencies in

the publish data and the same has been verified by the company mentor.

All other data used in this project has been sourced from Internet from reputed

sites like Bloomberg and Reuters, wikipedia etc.

All assumptions have been standardized to percentage terms to maintain

integrity with the actual positions

Chapter 5

Organization Overview

5.0 Power Finance Corporation: An Overview

5.1 Introduction

Power Finance Corporation Limited is a Govt. of India undertaking set up in July 1986 as a

Development Financial Institution (DFI) engaged in Power Sector financing. The Corporation was

13

registered as a NBFC by RBI in February 1997. PFC was set up to establish an institutional mechanism

to augment the flow of resources to power sector. Initially the objective of PFC was to provide

assistance to various State Electricity Boards (SEBs) and State Generating Corporations (SGCs). In line

with the government of India’s decision to privatize power sector, PFC has started extending finance to

Independent Power Projects (IPPs) in the private sector either on its own or as a part of a consortium

with other FIs. PFC has developed and adopted appropriate criteria of financing power projects,

assigning financial resources more closely with physical requirements of projects according to national

priorities. PFC’s principal focus is to leverage off both its power project risk assessment capabilities and

its existing client base, thereby enabling it to be one of the leading sources of project finance in the

Indian power sector.

The functions and the obligations enjoyed upon PFC encompass a leadership role in the sectoral

development that envisages improving the overall efficiency of the utilities through the promotion of

improvements in technical performance, establishment of sound and efficient operational and financial

systems and to encourage balanced growth of all segments of the power sector specifically in terms of

quantity, quality and reliability of the power supply. The development content thus form part of PFC’s

functional role in the power sector.

Corporate Mission

PFC's mission is to excel as a pivotal developmental financial institution in the power sector

committed to the integrated development of the power and associated sectors by channelling the

resources and providing financial, technological and managerial services for ensuring the

development of economic, reliable and efficient systems and institutions.

5.2 Services Offered by PFC

14

5.2.1 Financial Services:

Term loans - It covers financial assistance to power projects including Thermal and Hydro generation

projects, survey and investigation of power projects, system improvement and energy conservation schemes,

renovation and modernization of power plants etc.

Lease Financing- Under schemes for financial leasing of power equipment, any equipment or machinery

essential for power projects and associated works is covered.

Direct Discounting of Bills - The credit under Bill Discounting Scheme is available to all equipment

manufacturers to enable them to sell their equipment on deferred payment terms to the purchasers of power

sector.

Guarantee Services - As the fund requirements for the power sector are enormous and many funding

agencies insist on guarantee by an Indian Financial Institution (FI), PFC has started providing guarantee

services subject to its satisfaction about the borrower’s creditability.

15

Loan Syndication - Large projects have normally more than one Financial Institution (FI) providing funds

for them. For effective arrangement of funds and appraisal, PFC has started considering loan syndication with

other leading Financial Institutions (FIs), like M/s IFCI, ICICI etc.

Short Term Loan – PFC opened up a new window for Short Term loan with a view to broad base its loan

portfolio for improved client servicing and to assist state utilities who otherwise depended on high cost Short

Term Loan from Commercial Banks.

5.3 CONSULTANCY SERVICES:

5.3.1 Institutional Development Services :

Acting as an instrument for ushering in reforms in the state utilities

Utility Development Plans

Financial Assistance for Power Sector Studies

Reform & Restructuring of SEBs

16

5.4 BORROWING PROFILE OF PFC: figures in crores

5.5 Risk Identification and Analysis

A financial risk can be defined as uncertainty attached with an increase or decrease of cash flows on

account of one or more parameters influenced by movement of markets, for example, interest rate risk,

exchange rate risk, liquidity risk, credit risk etc. PFC borrows funds for different tenures from different

sources and on different borrowing terms. Also, the currencies of borrowing and lending can be

17

different. Similarly, on lending side also, PFC is lending money on Rupee terms as well as on foreign

currency terms, having different interest rates and different currencies. This indicates that PFC will face

risks arising out of mismatch of cash flows due to different borrowing and lending maturities (liquidity

risk), risk of interest rates being different at the time of borrowing and at the time of lending or re-

lending after repayment of existing loan assets, risk of foreign currency liabilities lent for different

maturities or in different currencies or at different interest reset periods.

5.5.1 TYPES OF RISK:

5.5.1.1 Credit Risk

Credit risk is most simply defined as the risk of loss due to a counterparty to which a loan has been

extended defaulting on payment (coupon or principal) or failing to meet its obligations in accordance

with agreed terms. PFC needs to manage the credit risk inherent in the entire portfolio as well as the risk

in individual credits or transactions. PFC should also consider the relationships between credit risk and

other risks. The effective management of credit risk is a critical component of a comprehensive

approach to risk management and essential to the long-term success of PFC.

5.5.1.2 Liquidity Risk

Liquidity risk is the current and prospective risk to earnings or capital arising from a bank’s inability to

meet its obligations when they come due without incurring unacceptable losses. Liquidity risk includes

the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises

from the failure to recognize or address changes in market conditions that affect the ability to liquidate

assets quickly and with minimal loss in value.

Long term liquidity risk is periodically monitored by ALCO or the one year liquidity risk which is

managed by Treasury Management Unit through daily cash Budgets for a financial year.

5.5.1.3 INTEREST RATE RISK

18

Interest rate risk has the potential impact on an institution’s earnings and net asset values. Interest rate

risk arises when an institution’s principal and interest cash flows (including final maturities), both on-

and off-balance sheet, have mismatched repricing dates. The amount at risk is a function of the

magnitude and direction of interest rate changes and the size and maturity structure of the mismatch

position managing interest rate risk is a fundamental component in the safe and sound management of

all institutions. It involves prudently managing mismatch positions in order to control, within set

parameters, the impact of changes in interest rates on the institution. Significant factors in managing the

risk include the frequency, volatility and direction of rate changes, the slope of the interest rate yield

curve, the size of the interest-sensitive position and the basis for repricing at rollover dates.

5.6 Managing of Interest Rate Risk on Rupee Debts

RBI in its circular on Foreign Exchange Management (Foreign Exchange Derivative Contracts)

Regulations, 2000, permitted corporate to enter into a derivative contract with an authorized dealer in

India or its branch overseas. The circular states that a person resident in India who has a foreign

exchange or Rupee liability may enter into a contract for foreign currency-Rupee swap with an

authorized dealer in India to hedge long term exposure. It also states that such contract if cancelled shall

not be rebooked or re-entered by whatever name called. It is further provided in the circular that the

notional principal amount of the hedge does not exceed the outstanding amount of the loan and also it

does not exceed un-expired maturity of the underlying loan.

As a result of the above, banks in India have started offering certain products for hedging of risk

arising out of fixed Rupees borrowing by a company by converting into a dollar denominated loan or

only the coupon will be serviced through index like LIBOR for USD. An introduction of these

products along with the associated advantages and risks is given below. For the sake of simplicity, the

explanation of swapping loans into foreign currency is assumed to be denominated in USD but there is

no restriction on selecting currency other than USD.

19

5.6.1 Currency Swap from Rupee to USD: Under this transaction, an existing Rupee liability

will be converted into USD liability on the basis of current USD/INR rate as prevailing on the date

of entering into such transaction. Under this deal, company will pay interest rate as LIBOR plus

margin thereon. The margin will be fixed at the time of the deal, but the LIBOR which is normally

selected for 6 months will be reset every 6 months during the tenure of the hedge transaction. Such

transaction can help PFC to move its fixed Rupee liability into a Dollar denominated LIBOR linked

liability. Under such deals, advantage of low LIBOR rates can be taken but associated risk would be

a. The LIBOR may go up on successive interest reset dates

b. The exchange rate on LIBOR interest payment dates may be higher than the rate on which

the swap deal was entered

c. The exchange rate on loan maturity may be higher than the rate at which swap deal was

entered

5.6.2 Coupon Swap from Rupee to USD: Under this product, the underlying Rupee liability (principal

amount) is not converted into USD but the interest liability thereon is de linked from Rupee and

denominated on USD LIBOR. This product will be beneficial at times when the LIBOR rate is low and

PFC does not want to take risk on exchange rate movement on principal. However, the risk in this

product is that LIBOR may go up on each reset in future.

5.7 Hedging of Rupee Loans through Indian Benchmarks

In the above paragraph the possibility of hedging a Rupee liability into foreign currency principal or

coupon liability has been explained. However, it is possible to hedge Rupee fixed liability into Rupee

floating liability. Since, in this case both the transactions are based on Rupee rates, the provisions of

FEMA do not get attracted. For hedging on Rupee benchmarks the following indices are being used:

20

5.7.1 MIBOR Linked Swap: Under this swap, company can convert its Rupee fixed liability into a floating

liability determined by MIBOR (Mumbai Inter Bank Offered Rate) plus a margin payable to the Bank.

The risk under this deal is that in case MIBOR goes up faster than foreseen, the liability for interest

payment can be higher than what was payable at Rupee fixed rate.

5.7.2 MIFOR Linked Swap: Under this swap, company can convert its Rupee fixed liability into a

floating index called MIFOR (Mumbai Inter Bank Forward Rate). The MIFOR is sum of LIBOR

plus forward premium for Dollar Rupee. In addition, a margin is to be paid by PFC over the MIFOR

to Bank. The risk under this swap is that in case the LIBOR or the Dollar Rupee forward rate goes

up (incidentally both are influenced by movements in external markets), the liability of PFC can go

up. The suitability of this product will be analyzed keeping in view the interest rate outlook in India,

the LIBOR movement risk, the forward premium on Dollar Rupee.

Other Rupee Interest Derivative Instrument

5.7.2.1 Forward rate agreements (FRAs): A FRA is an agreement between two parties through which

they agree to a rate of interest to be applicable from a future date, on an agreed amount of Principal.

FRAs can be used to hedge the risk of a particular interest rate setting in a floating rate asset or

liability. FRAs can again be used with reference to any floating benchmark rate.

5.7.2.2 Exchange Traded Rupee Interest Rate Futures: NSE introduced Interest rate futures in June 2003

as cash settled contracts. Currently there are three types of contracts:

Futures on 10-year Notional GOI Security with 6% coupon rate

Futures on 10 year Zero coupon notional GOI Security

Futures on 91 day Treasury bills

Contracts are available for maturities upto 1 year. At present the exchanges are using a Zero Coupon

Yield curve based methodology to arrive at the final settlement price of the contract

21

Since PFC is not in the business of investing in Govt. /other Securities or to take trading position in

interest rate movements, the FRAs/ Futures quoted for such securities are not to be used.

5.8 Role of AL & RM Unit in Risk Management

In order to identify the responsibilities to be shared by various departments in connection with the risk

identification and implementation of transactions to mitigate risk, it is considered necessary to specify

the role of AL&RM Unit in the existing set up. The following jobs are being done currently:-

1. Preparation of Asset Liability Gap statement with next 10 years bucketing

2. Identification of actions based on such liquidity analysis

3. Organizing periodical meetings of Assets Liabilities Committees (ALCO)

4. Monitoring interest rate and exchange rate movement and identifying opportunities for hedging

against such risks

5. Suggesting products to be used by concerned user department for hedging of interest rate and

exchange rate risks

6. Monitoring macro financial performance parameters of PFC through critical ratios

7. Follow up regarding implementation of decisions taken by ALCO

8. Facilitating computerization of data required for getting necessary inputs for asset liabilities

management analysis

Chapter 6

Literature Survey 6.0 Risk

Introduction

22

Risk can be defined as the combination of the probability of an event and its consequences. Risk is one

aspect that a business looks into while deciding on various issues. To enter or not to enter, to do or not to

do depends upon the particular risk associated with that business or project.

It has been rightly said “HIGHER THE RISK, HIGHER THE RETURN AND VICE VERSA”. So in

order to mitigate those risks, the strategy of risk management has been followed by the company in

today’s world.

Risk Management is increasingly recognized as being concerned with both positive and negative aspects

of risk. Therefore this standard considers risk from both perspectives. In the safety field, it is generally

recognized that consequences are only negative and therefore the management of safety risk is focused on

prevention and mitigation of harm.

6.1 Risk Management

Risk management is a central part of any organization’s strategic management. It is the process whereby

organizations methodically address the risks attaching to their activities with the goal of achieving

sustained benefit within each activity and across the portfolio of all activities. The focus of good risk

management is the identification and treatment of these risks. Its objective is to add maximum sustainable

value to all the activities of the organization. It marshals the understanding of the potential upside and

downside of all those factors which can affect the organization. It increases the probability of success, and

reduces both the probability of failure and the uncertainty of achieving the organization’s overall

objectives. Risk management should be a continuous and developing process which runs throughout the

organization’s strategy and the implementation of that strategy. It should address methodically all the risks

surrounding the organization’s activities past, present and in particular, future. It must be integrated into

the culture of the organization with an effective policy and a programmed led by the most senior

management. It must translate the strategy into tactical and operational objectives, assigning responsibility

throughout the organization with each manager and employee responsible for the management of risk as

23

part of their job description. It supports accountability, performance measurement and reward, thus

promoting operational efficiency at all levels.

6.2 Risk Identification

Risk identification sets out to identify an organization’s exposure to uncertainty. This requires an intimate

knowledge of the organization, the market in which it operates, the legal, social, political and cultural

environment in which it exists, as well as the development of a sound understanding of its strategic and

operational objectives, including factors critical to its success and the threats and opportunities related to

the achievement of these objectives. Risk identification should be approached in a methodical way to

ensure that all significant activities within the organization have been identified and all the risks flowing

from these activities defined. All associated volatility related to these activities should be identified and

categorized. Business activities and decisions can be classified in a range of ways, examples of which

include:

• Strategic - These concern the long-term strategic objectives of the organization. They can be affected by

such areas as capital availability, sovereign and political risks, legal and regulatory changes, reputation

and changes in the physical environment.

• Operational - These concern the day-today issues that the organization is confronted with as it strives to

deliver its strategic objectives.

• Financial - These concern the effective management and control of the finances

of the organization and the effects of external factors such as availability of

credit, foreign exchange rates, interest rate movement and other market exposures.

• Knowledge management - These concern the effective management and control of

the knowledge resources, the production, protection and communication thereof.

External factors might include the unauthorized use or abuse of intellectual

24

property, area power failures, and competitive technology. Internal factors might be

system malfunction or loss of key staff.

• Compliance - These concern such issues as health & safety, environmental, trade

descriptions, consumer protection, data protection, employment practices and

regulatory issues.

In this project, we study about that risk which is associated with FOREX market. These

risks can be categorized and subdivided in any number of ways, depending on the

particular focus desired and the degree of detail sought. Here, the focus is on two of

the basic categories of risk — MARKET RISK and CREDIT RISK as they apply to foreign

exchange trading. However, we have also taken the note of some other risk in foreign

exchange trading i.e. liquidity risk, legal risk and operational risk.

As PFC is dealing in foreign currencies so it is exposed to these risks, viz.:

6.3 MARKET RISK

Market risk, in simplest terms, is price risk, or “Exposure to (adverse) price change.”

Market risk is the risk that the value of an investment will decrease due to moves in market factors. The

four standard market risk factors are:

Equity risk , or the risk that stock prices will change.

Interest rate risk , or the risk that interest rates will change.

Currency risk , or the risk that foreign exchange rates will change.

Commodity risk , or the risk that commodity prices (i.e. grains, metals, etc.) will change.

6.4 Exchange Rate Risk

Exchange rate risk is inherent in foreign exchange trading. The risk that a business' operations or an

investment's value will be affected by changes in exchange rates. For example, if money must be converted

25

http://en.wikipedia.org/wiki/Equity_risk

http://en.wikipedia.org/wiki/Commodity_risk

http://en.wikipedia.org/wiki/Currency_risk

http://en.wikipedia.org/wiki/Interest_rate_risk

into a different currency to make a certain investment, changes in the value of the currency relative to the

American dollar will affect the total loss or gain on the investment when the money is converted back.

This risk usually affects businesses, but it can also affect individual investors who make international

investments, also called currency risk.

Interest Rate Risk

Interest rate risk is risk to the earnings or market value of a portfolio due to uncertain future interest rates. It

arises when there is any mismatching or gap in the maturity structure.

6.5 How the Forex Market Works

The Forex market comprises of banks, commercial companies, hedge funds,

investment management firms, brokers and retail investors. The market does not

have any centralized exchange. Trading generally takes place through the interbank

market, which is a network of more than a thousand banks. Each bank in the

network trades directly with others with the help of an Electronic Broking System

(EBS), where buy and sell orders are placed and then matched on the basis of price.

Interbank Forex trading continues 24 hours a day, 5.5 days a week, from Monday through midday on

Saturday. On a single trading day, the market opens in Australia and shifts operations throughout the day

to Asia, Tokyo, Hong Kong, Singapore, Europe and New York. The Forex trading day ends with the close

of trading in New York. In the Forex market, trading always occurs in currency pairs. The pricing of a

currency pair in this market is determined by the demand and supply of a currency in relation to the other

in the pair. Apart from banks, currency pairs are bought and sold by individual investors via brokers.

26

Chapter 7Project in the company

7.1. PRICING OPTIONS Introduction

An option buyer has the right not the obligation to exercise on the seller. The worst

that can happen to a buyer is the loss of the premium paid by him. His downside is

limited to this premium, but his upside is potentially unlimited. This optionally is

precious and has a value, which is expressed in terms of the option price. Just like in

other free markets, it is the supply and demand in the secondary market that drives

the price of an option. There are various models which help us get close to the true

price of an option. Most of these are variants of the celebrated Black-Scholes model

for pricing European options. Today most calculators and spread-sheets come with a

built-in Black-Scholes options pricing formula so to price options we don’t really

need to memorize the formula. All we need to know is the variables that go into the

model.

7.2 Black–Scholes modelThe Black-Scholes model of the market for an equity makes the following explicit

assumptions:

• It is possible to borrow and lend cash at a known constant risk free interest

rate.

• The price follows a geometric Brownian motion with constant drift and

volatility.

• There are no transaction costs.

27

• The stock does not pay a dividend (see below for extensions to handle

dividend payments).

• All securities are perfectly divisible (i.e. it is possible to buy any fraction of a

share).

• There are no restrictions on short selling.

The model treats only European-style options. From these ideal conditions in the

market for an equity (and for an option on the equity), the authors show that the

value of an option (the Black-Scholes formula) varies only with the stock price and

time to expiry. "Thus it is possible to create a hedged position, consisting of a long

position in the stock and a short position in [calls on the same stock], whose value

will not depend on the price of the stock.

7.2.1. Define Black–Scholes model

S, the price of the stock (please note below).

V(S,t), the price of a derivative as a function of time and stock price.

C(S,t) the price of a European call and P(S,t) the price of a European put option.

K, the strike of the option.

r, the annualized risk-free interest rate, continuously compounded.

ì, the drift rate of S, annualized.

ó, the volatility of the stock; this is the square root of the quadratic variation of the stock's log price process.

t a time in years; we generally use now = 0, expiry = T.

Ð, the value of a portfolio.

R, the accumulated profit or loss following a delta-hedging trading strategy.

N(x) denotes the standard normal cumulative distribution function,

28

.N'(z) denotes the standard normal probability density function

, .We can define the premium value as given below

where

The price of a put option may be computed from this by put-call parity and simplifies

to

Interpretation: N(d1) and N(d2) are the probabilities of the option expiring in-the-

money under the equivalent exponential martingale probability measure (numéraire

= stock) and the equivalent martingale probability measure (numéraire = risk free

asset), respectively. The equivalent martingale probability measure is also called the

risk neutral probability measure. Note that both of these are "probabilities" in a

measure theoretic sense, and neither of these is the true probability of expiring in-

the-money under the real probability measure.

Using the Black–Scholes Formulae we calculate the option premium by varying Time,

Strike rate, Interest rate

29

7.3 .1 Calculation of Option premium using Black–Scholes

Formulae:

Using following values

Volatility( ó) 3.30%

ó2 0.0011Risk Free

Rate 3.91%Spot Rate

(s) 47.50Time (t) 57 days

Calculate the option premium using Black-Scholes formula

30

7.4.Calculate the option premium by varying strike rate

Voltality( ó) 3.30%

ó2 0.0011

Risk Free Rate 3.91%Spot Rate (s) 47.50

Time (t) 57Expiration Time

(T) 90(T-t) 0

Sqrt (T-t) 0.3007Exponential 0.9965

32

Analysis on the basis of STRIKE RATE Variation

0.0000

0.0500

0.1000

0.1500

0.2000

0.2500

0.3000

0.3500

Str ike Rate

-0.1150

-0.0950

-0.0750

-0.0550

-0.0350

-0.0150

0.0050

Option Premium

% Change

7.5 Interpretation: Graph depict that market is not stable with change in strike rate

Option premium is decreasing with strike rate while percentage change in premium is almost

constant or very small change.

34

Chapter 8

Currency Volatility8.1. Introduction

Volatility most frequently refers to the standard deviation of the continuously compounded returns of a

financial instrument with a specific time horizon. It is often used to quantify the risk of the instrument over

that time period. Volatility is typically expressed in annualized terms, and it may either be an absolute

number ($5) or a fraction of the mean (5%). Volatility can be traded directly in today's markets through

options and variance swaps. For a financial instrument whose price follows a Gaussian random walk, or

Wiener process, the volatility increases as time increases? Conceptually, this is because there is an

increasing probability that the instrument's price will be farther away from the initial price as time increases.

However, rather than increase linearly, the volatility increases with the square-root of time as time increases,

because some fluctuations are expected to cancel each other out, so the most likely deviation after twice the

time will not be twice the distance from zero More broadly, volatility refers to the degree of (typically short-

term) unpredictable change over time of a certain variable. It may be measured via the standard deviation of

a sample, as mentioned above. However, price changes actually do not follow Gaussian distributions. Better

distributions used to describe them actually have "fat tails" although their variance remains finite. Therefore,

other metrics may be used to describe the degree of spread of the variable. As such, volatility reflects the

degree of risk faced by someone with exposure to that variable.

8.2 Historical Volatility

Historical volatility (or ex-post volatility) is the volatility of a financial instrument based on historical

returns. This phrase is used particularly when it is wished to distinguish between the actual volatility of an

instrument in the past, and the current (ex-ante, or forward-looking) volatility implied by the market.

Volatility over time

35

It's common knowledge that types of assets experience periods of high and low volatility. That is, during

some period’s prices go up and down quickly, while during other times they might not seem to move at

all. Periods when prices fall quickly (a crash) are often followed by prices going down even more, or

going up by an unusual amount. Also, a time when prices rise quickly (bauble) may often be followed by

prices going up even more, or going down by an unusual amount. The converse

behavior, 'doldrums' can last for a long time as well. Most typically, extreme

movements do not appear 'out of nowhere'; they're presaged by larger movements

than usual. This is termed autoregressive conditional heteroskedasticity. Of

course,whether such large movements have the same direction, or the opposite, is

more difficult to say. And an increase in volatility does not always presage a further

increase—the volatility may simply go back down again. In general over time

volatility always increases

8.3 Mathematical definition

The annualized volatility ó is the standard deviation ó of the instrument's logarithmic returns in a year.

The generalized volatility óT for time horizon T in years is expressed as:

Volatility

36

The closing price on the ith day

n Number of historical days used in the volatility estimate

Log return on the ith day

Z The number of closing prices in a year

VOLATILITY SIMPLE SD MODEL

This volatility provides a basic over view of the historical volatility of the currency.

8.4 IMPLIED VOLATILITY

One difference between implied and historical volatilities should be noted. In

principle, volatility is a measure of the magnitude of changes in market prices of

the underlying asset, and should therefore be independent of the strike price or

maturity of an option. This is clearly so as regards historical volatility, as the strike

price does not enter the calculation. On the other hand, in practice, volatilities

implied by market prices of options are not identical across the range of strike prices

or across maturities. Under normal market conditions, implied volatilities are lowest

for at-the-money options and increase as the strike price moves more and more in-

the-money and out-of-the-money ranges.

8.5 VOLATILITY CONES

A technique for visualizing current option implied volatility relative to historic

volatilities at different maturity ranges. This technique, developed by Galen

Burghardt, uses the range of historic volatilities for each option’s maturity from, say,

37

one month to two years or longer, depending upon the maturities of instruments

available in the market. An historic volatility series is calculated for each period and

25% and 75% confidence intervals on either side of the mean historic volatility line

are added. When the current implied volatility term structure is drawn on this

diagram, the investor is able to determine how current option premiums compare to

historic premium levels at various maturities.

The volatility data as on 26th May, 2009 are as follows:

Volatility Cone of USD/INR

TIME PERIOD VOLATILITY (%)

Annually 3.30

Quarterly 1.50

Daily 0.40

8.6 TECHNICAL ANALYSIS

Technical analysis involves the identification of the current trend i.e. the direction of

price movement and spotting any trend reversal as early as possible in different

currency pairs. It involves the analysis of historical price and volume data with the

help of charts.

for currencies, shares and commodities traded on exchanges, such data is usually

available but in the case of interbank currency market, volume data is not available

and the analyst can make use of different indicators, which are derived from the

price data. Many of these indicators have become so popular that they are being

used extensively even for financial assets and instruments traded on exchanges.

38

Chapter 9 Finding, Data Analysis

9.1 Incremental Cost of hedging to the Organization

Introduction

Hedging is a strategy designed to minimize exposure to such business risks as a

sharp contraction in demand for one's inventory, while still allowing the business to

profit from producing and maintaining that inventory. Holbrook Working, a pioneer

in hedging theory, called this strategy "speculation in the basis," where the basis is

the difference between today's market value of (in this example) wheat and today's

value of the hedge. If that difference widens, he earns a little more at harvest time.

If that difference narrows, he earns a little less. He has mitigated, but not

eliminated, the risk of losing the value of his wheat as of the day he established his

hedge. Banks and other financial institutions use hedging to control their asset-

39

liability mismatches, such as the maturity matches between long, fixed-rate loans

and short-term (implicitly variable rate) deposits.

9.2 Types of hedging

As investors become more sophisticated, along with the mathematical tools used to

calculate values, known as models, the types of hedges have increased greatly.

The different types of hedges are elaborated below:

9.2.1 Natural hedges

A natural hedge is an investment that reduces the undesired risk by matching cash

flows, i.e. revenues and expenses. An example is a company that opens a

subsidiary in another country and borrows in the local currency to finance its

operations, even though the local interest rate may be more expensive than in its

home country: by matching the debt payments to expected revenues in the local

currency, the parent company has reduced its foreign currency exposure.

9.2.2 Categories of Hedgeable risk

Volatility risk- In financial markets is the likelihood of fluctuations in the

exchange rate of currencies. Therefore, it is a probability measure of the

threat that an exchange rate movement poses to an investor's portfolio in a

foreign currency.

Interest rate risk – is the risk that the relative value of an interest-bearing asset,

such as a loan or a bond, will worsen due to an interest rate increase. Interest

rate risks can be hedged using fixed income instruments or interest rate swaps.

40

Equity – the risk, or sometimes reward, for those whose assets are equity

holdings, that the value of the equity falls

Credit risk is the risk that money owing will not be paid by an obligor. Since

credit risk is the natural business of banks, but an unwanted risk for commercial

traders, naturally an early market developed between banks and traders: that

involving selling obligations at a discounted rate. See for example forfeiting, bill

of lading, factoring, or discounted bill.

Securities lending - Hedged portfolio stock secured loan financing (see Hedge

Loan) is a form of individual portfolio risk reduction that results typically in a

limited recourse loan.

Futures contracts and forward contracts are a means of hedging against the risk of

adverse market movements. These originally developed out of commodity markets

in the nineteenth century, but over the last fifty years a huge global market

developed in products to hedge financial market risk.

9.3 Hedging currency risk

Currency hedging (also known as Foreign Exchange Risk hedging) is used both by

financial investors to parse out the risks they encounter when investing abroad,

as well as by non-financial actors in the global economy for whom multi-currency

activities are a necessary evil rather than a desired state of exposure. Currency

hedging is not always available, but is readily found at least in the major

currencies of the world economy, the growing list of which qualify as major liquid

markets beginning with the "Major Eight" (USD, GBP, EUR, JPY, CHF, HKD, AUD,

CAD), which are also called the "Benchmark Currencies", and expands to include

several others by virtue of liquidity. Currency hedging, like many other forms of

41

financial hedging, can be done in two primary ways: with standardized contracts or

with customized contracts (also known as over-the-counter or OTC)

9.4 HEDGING IMPACT

9.4.1 EVALUATION OF FORWARDS FOR HEDGING USD / Rs

In this context we have analysis the hedging impact on company. Taking assumption

The Company has taken a Loan amount 100m$ on 27th May 09

USD/INR rate is 47.50

Interest to be paid LIBOR +1%

Maturity of loan 27 may 2014

IRS for 5 years 3.4%

Margin 1%

Using this data we calculate

Interest rate in USD = 22.01

Interest rate in Rs= 114.42

Withholding tax =11.4

9.4.1 Summary table of Hedging

42

For calculating the Impact of Hedging we have taken different slots if the company

If the company Hedge 0% of the total amount at the time taking loan











9.b Feasible region

55.00 8.46% 8.48% 8.51% 8.53% 8.56% 8.58% 8.61% 8.63% 8.66% 8.68% 8.71%55.10 8.50% 8.52% 8.54% 8.56% 8.58% 8.60% 8.63% 8.65% 8.67% 8.69% 8.71%55.20 8.54% 8.56% 8.58% 8.59% 8.61% 8.63% 8.64% 8.66% 8.68% 8.69% 8.71%55.30 8.58% 8.60% 8.61% 8.62% 8.63% 8.65% 8.66% 8.67% 8.68% 8.70% 8.71%55.40 8.63% 8.64% 8.64% 8.65% 8.66% 8.67% 8.68% 8.68% 8.69% 8.70% 8.71%55.50 8.67% 8.67% 8.68% 8.68% 8.69% 8.69% 8.69% 8.70% 8.70% 8.71% 8.71%55.60 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%

9.5 Interpretation: From all the tables of different percentage of hedging total summary tables yellow region is best

feasible region.

Ranges from 55.00 to 55.60 are most suitable range 8.71 because beyond from this range there is no

use of hedging.

If Forwards are better than 56.50 than only it will be beneficial

If Rupee depreciates more than 55.60 than then keeping the position will increase the cost.

44

Chapter 10 FOREX Trend Analysis

10.1 Introduction

The world of investment is flooded with excellent ideas of growing your money, but you are required to

make use of geometrical patterns, diagrams, statistical analysis and other similar tools to reach a definite

conclusion for efficient investments. The hugest trading market called forex is also not spared from in-

depth study of market trends to earn profits and avert losses. Forex trend lines serve the purpose, as these

patterns help to extract most rewarding information and plan your course of action for investing in various

currencies.

Usefulness of Forex Trend Lines

The forex trend lines are helpful in introducing the most vital entity required by an investor and this entity

is called information. How can one expect to make worthy investment, without adjudging the highs and

lows existing in the market? Here is the list of most prominent benefits of forex trend lines:

These lines help to depict the support and resistance levels, which are of great importance in

deciding the sale or purchase of various investments.

The trend lines help the investors to decide their entry and exit points to the forex trading market.

These patterns make you familiar about nature of forex market; the sharp turns taken by trends and

unwarned movements of different investments.

In a nutshell, these lines fuel technical analysis of this investment market, which is certainly the

most appreciable tool for making an investment.

45

10.2 Important Types of Forex Trend Lines

The forex trend lines are available in different popular forms, as summarized below:

Simple trend lines consist of straight lines drawn vertically, horizontally as well as diagonally.

Fibonacci trend lines have gained popularity in recent times and are excellent tools of understanding

current market trends in forex trading. There are different variations of these lines in the form of

Fibonacci Arc, Fibonacci Fan and Fibonacci Retrenchment.

Pivot trend lines are drawn on the basis of fluctuations in the market during previous time frames.

Speed trend lines are similar to Fibonacci trend lines, with the only replacement of Fibonacci

numbers with calculations by thirds.

10.3 Trend analysis of forex market from 1 January 2009 to 1 June 2009

Time Rate Trend1/1/2009 49.90021/2/2009 50.0951/3/2009 49.89181/4/2009 49.6551/5/2009 49.655 49.776961/6/2009 49.52 50.068631/7/2009 49.6709 49.782561/8/2009 49.7595 49.791371/9/2009 50.255 49.78475

1/10/2009 49.7903 49.773211/11/2009 49.555 49.772051/12/2009 49.5555 49.752771/13/2009 49.7973 49.760051/14/2009 50.0963 49.735161/15/2009 49.9717 49.725411/16/2009 50.0063 49.742501/17/2009 49.5689 49.752461/18/2009 49.505 49.743821/19/2009 49.505 49.715371/20/2009 49.4202 49.682051/21/2009 49.8541 49.63414

46

1/22/2009 49.9315 49.624541/23/2009 49.6635 49.618921/24/2009 49.7772 49.636191/25/2009 49.685 49.660021/26/2009 49.685 49.639321/27/2009 49.7264 49.589581/28/2009 49.5385 49.537061/29/2009 49.3835 49.486221/30/2009 49.4441 49.431411/31/2009 49.432 49.400252/1/2009 49.7295 49.365922/2/2009 49.73 49.322492/3/2009 49.5849 49.296072/4/2009 49.2849 49.269272/5/2009 48.9808 49.242212/6/2009 49.1162 49.186992/7/2009 48.9725 49.150452/8/2009 49.28 49.125082/9/2009 49.28 49.11052

2/10/2009 48.974 49.167482/11/2009 49.04 49.253522/12/2009 49.0957 49.342732/13/2009 49.0802 49.411882/14/2009 49.0117 49.519952/15/2009 49.255 49.651572/16/2009 49.255 49.737272/17/2009 49.0957 49.819682/18/2009 49.7212 49.904252/19/2009 50.2348 50.016732/20/2009 50.1322 50.159722/21/2009 50.1789 50.368952/22/2009 50.685 50.590432/23/2009 50.685 50.778062/24/2009 50.1541 50.929262/25/2009 50.167 51.067552/26/2009 50.1797 51.196682/27/2009 50.4739 51.273182/28/2009 51.1138 51.399343/1/2009 51.975 51.566333/2/2009 51.975 51.737953/3/2009 52.1604 51.867633/4/2009 52.2004 52.013423/5/2009 51.93 52.142123/6/2009 51.8575 52.109153/7/2009 51.6796 52.183423/8/2009 52.325 52.243383/9/2009 52.325 52.26846

3/10/2009 52.3981 52.310233/11/2009 51.8655 52.359633/12/2009 52.3691 52.369483/13/2009 52.7869 52.312053/14/2009 51.5464 52.30205

47

3/15/2009 52.9405 52.286433/16/2009 52.94 52.283983/17/2009 52.5264 52.231853/18/2009 52.473 52.162613/19/2009 52.4997 52.171623/20/2009 51.8076 52.072023/21/2009 51.5785 51.978173/22/2009 52.195 51.916143/23/2009 52.195 51.893163/24/2009 51.8337 51.759453/25/2009 51.6914 51.754823/26/2009 51.8867 51.726133/27/2009 51.6635 51.616223/28/2009 51.6457 51.537763/29/2009 51.72 51.487093/30/2009 51.72 51.415803/31/2009 52.1743 51.321034/1/2009 50.7614 51.256634/2/2009 51.7475 51.174524/3/2009 51.2055 51.080384/4/2009 50.7662 50.994234/5/2009 51.175 50.873134/6/2009 51.175 50.838414/7/2009 50.7646 50.713734/8/2009 50.6547 50.630754/9/2009 50.8263 50.57145

4/10/2009 50.5782 50.491234/11/2009 50.4963 50.447774/12/2009 50.6 50.435884/13/2009 50.6 50.429654/14/2009 50.31 50.430054/15/2009 50.1267 50.447804/16/2009 50.1268 50.461654/17/2009 49.9952 50.437454/18/2009 50.1322 50.368364/19/2009 50.61 50.386054/20/2009 50.61 50.416224/21/2009 50.5737 50.472074/22/2009 50.8315 50.510164/23/2009 50.809 50.505754/24/2009 50.6763 50.475324/25/2009 50.2855 50.473784/26/2009 49.7018 50.475044/27/2009 50.54 50.413234/28/2009 50.5189 50.330414/29/2009 50.8528 50.252924/30/2009 50.4904 50.172255/1/2009 50.0749 50.138355/2/2009 50.2144 50.073735/3/2009 50.59 50.010745/4/2009 50.59 49.914085/5/2009 50.028 49.85582

48

5/6/2009 49.7323 49.836135/7/2009 49.6689 49.826275/8/2009 49.2368 49.765455/9/2009 49.2611 49.73353

5/10/2009 49.7 49.744845/11/2009 49.7 49.671565/12/2009 49.5963 49.535925/13/2009 49.733 49.421145/14/2009 49.8189 49.295305/15/2009 50.0862 49.111715/16/2009 49.7994 48.952095/17/2009 50.175 48.800455/18/2009 50.175 48.627525/19/2009 48.7797 48.465175/20/2009 47.9055 48.288345/21/2009 47.7447 48.143515/22/2009 47.6252 47.915775/23/2009 47.3133 47.724235/24/2009 47.625 47.640025/25/2009 47.625 47.586955/26/2009 47.4849 47.541595/27/2009 47.7083 47.487835/28/2009 47.7874 47.489395/29/2009 47.9166 47.465675/30/2009 47.2144 47.487215/31/2009 47.685 47.519526/1/2009 47.685 47.521186/2/2009 47.2155 47.499006/3/2009 47.1551 47.461046/4/2009 46.9263 47.485706/5/2009 47.3336 47.463566/6/2009 47.3166 47.435886/7/2009 47.905 47.467366/8/2009 47.905 47.519406/9/2009 47.7299 47.63802

10.b Graph showing FOREX trend line

49

46.5

47.5

48.5

49.5

50.5

51.5

52.5

53.5

1/5/

2009

1/12

/2009

1/19

/2009

1/26

/2009

2/2/

2009

2/9/

2009

2/16

/2009

2/23

/2009

3/2/

2009

3/9/

2009

3/16

/2009

3/23

/2009

3/30

/2009

4/6/

2009

4/13

/2009

4/20

/2009

4/27

/2009

5/4/

2009

5/11

/2009

5/18

/2009

5/25

/2009

6/1/

2009

6/8/

2009

Rate

Trend

10.5 Interpretation

From the trend line we can forecast the trend in FOREX market.

Trend change with respect to rate

50

Chapter 11 Conclusions & Interpretations

11.1 Conclusions

The Conclusions obtained after analysis are summarized below:

The rupee is largely a bounded currency with very low levels of volatility and

the current trend establishes that the rupee is expected to depreciate

against the US dollar in the short run If Rupee depreciates more than 55.60

then keeping the open position will increase the cost.

If Forwards are better than 56.50 than only it will be beneficial. Ranges from

55.00 to 55.60 are most suitable range (indicated by yellow region in

hedging total summary tables) because annualized cost is restricted to a

minimum of 8.71%. Beyond this range there is no use of hedging as it will

only lead to increase in cost.

By varying strike rate, interest and time we get option premium

Option premium is decreasing with strike rate while percentage change in

premium is almost constant or very small change.

51

Chapter 12

12.1 Suggestions & Recommendations

Based on the analysis it is suggested to Hedge open due to in nest year one to two year

50 % to 60 % hedging is suggested to get benefit of appreciation of rupee for the position left open

and to avoid losses on Hedged portion due to depreciated in currency

To hedge through forward is suggested due to high volatility rate with respect to high premium rate

12.2 Limitations

Limitation of this project is as follows.

1. This project is totally based on secondary data from company site, annual report, reutor,

Other site and company previous used data

2. Forex market transaction done by the large company it is not possible to use actual data of

company

3. Forex data is so sensitive so we are not get opportunity to get work live data

52

Chapter 1313.1 Annexure

1. Premium Calculation excel sheet.

2. Strike rate varying Calculation excel sheet.

3. Strike rate varying graph.

4. Time varying Premium Calculation excel sheet.

5. Time varying Premium Calculation graph.

6. Volatility calculation sheets.

7. Hedging calculations having following excel sheets












Summary of all percentages hedging sheets.

53

8. Trend analysis of FOREX market excel sheet

9. Trend analysis of FOREX market graph

13.2 References

1. Glyn Holton, Value-at-Risk: Theory and Practice, Academic Press (2003). ISBN 978-0123540102

2.Kevin Dowd,Measuring Market Risk. John Wiley & Sons (2005) ISBN 978-0470013038

3.http://www.trade2win.com/boards/planning-risk-money-management/13258-risk-var-books-

recommendation.html

4. A b c Triennial Central Bank Survey (December 2007), Bank for International

Settlements.

5. A b Annual FX poll (May 2008), Euro money.

7. Source: Euro money FX survey FX Poll 2008: The Euro money FX survey is the

largest global poll of foreign exchange service providers.'

8. www.wikipedia.com

9. www.pfcindia.com

10. http://en.wikipedia.org/wiki/Value_at_risk

11. http://www.x-rates.com/d/USD/table.html

12. http://en.wikipedia.org/wiki/Trend_analysis

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