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5 TH
5 TH
follows:
1)as 306
do Yen, options
th e
werfirste thS.4.6.1.
of e A
available
Contract OptionOptions Exchange
i)astock buyers
the markets. prominent
Exchange
Exchange
(LIFFE).
Organized Futures Exchangemay processstrike(at-the-money
contact transactions,
then options). A
momentgenerally th e Due
customize
original
contract. the Over
by not obligation. currency
fim fnancial
forward Australian most
the clearing be proceeds case to allow
exchanges. prices looking the
right exchanges and traded of the these writer. Counter prominent Currency option
theon Clearing tradedThey exchanges fo r valuation carry of
to currency For
sellers option (PHLX) Trade currency
OTC institutions.
contracts. Dollar traded
to house and to strike features, meet this,allows
The
buySizes:Stock
Philadelphia
generally on
bid-ask specify
to out
For
Corporation options buy Market: curTencies Options
or also are
exchanges
Options:
regular of option pricemarkets
their themain options andSome1982. in
the
buyerthe
For for and th e
sell example, deal not option an
requircrments
TheseThese
British
th ebuyer Third
MBA
the have such the
quotation. option generally transactions bi d feature
example,
DEM required are the
exchanges currency desk than Philadelphia
Thesetrading. traded Markets
in
Philadelphia settled Options and and contracts
contracts is to
(0CC).clearinghouses contracts Pound. required Semester
62,500. standardized
following have London return contract of inask of types have
Exchange: such now
to by on The money a equals- in the
spread Foreign
DEM pair of th(Financinl
eRTMNU
Derivatives)
deal well are asthe thebank th e
regular contracts feature
can ofHowever, Exchange are to
clearing International well. in parties options choice
pay
standardized Stock the involved, OTC
call. the Swiss
option contracts, directly. organized underlying center OTC is be currency
acting Philadelphia then more
house
Some
market, spot generally involved sold
exchanges.
market. are
Indian prtmium. of
Exchange is Franc, buying in
contract For as carriestheirbank. price liquidity
that back mainly
contracts in of options
so a Financial currencies exchanges
JapaneseCurrency
line guarantor.
example, secondary
that
the maturity,generally
out
The
at Inhigher they
in to but
provides is Stock most Fims
that these the can the than
used are
are with the the the firm in
not
rruemovement,While decide
costscontract proceeds without Byvarious
entered
Indianterms may then future.Foreign firm 5.4.8. exchangeThese: favorableCurrency well.curçencyThe 4) 3) 2) Following ) Coreign
S4.6.4.
favorable Currency
Swaps
5.4.7.. using
exposures. may liabilities Currency
providing by
cost undertaking have th e is These Currency.
Options Excharnge
are such exporter to incurring of obliged If are
may into parameters
investor currency
the lead
ofmove.
consideed sucharrangement "lock are the some rates currencyoptions option Importance are
it contract,
not a
Forwards
Currency
date derivative tools are
face also and
to
Such options, on options the Risk
in is selling loopholes. to negative
rrangements l assured. options, may of options th e used a
protection main
unimited takes thassured
e any need
forwards
make interest price can are Balance &
the the For loss
exposures Corporate
price the
contract have may
to
curency provides For
upfront contract or
to instrumentsmovements. flexiblé also exposure
may
for may-advantages
of
be away payment the Details
rate ma y Sheet. against help
by of befull receive may securing Currency
reducing
downside.
the
while usingreceipts withcosts.seller protection. closely and exposures
provide
tools bebe may also
exporters
Exposure
th e be Refer limited
resold
ortunity
appreciates, protection is a of be downside be of
opportunity forward the due Ror may an th
foreigne used
designing in aligned; which anand th
coverede th e used, currencyManagement
The American date Module for to Options
in for on opportunity are forward in
uncertainty, Euro example, set However, the risk
in
contract, Dollars of long-term are residual
their safeguarding
fÍr
in on risk.options:
fims currency hedging relatively option
costs,them. then the terms, a
otherwise actual
4 (Module
to importer. future useful contracL the protecting
should case ìn an price contingent
the bene the
for
payment forward
making
enerally, but six Indian purpose,
cash liabilities. to 5)
seller
of
exxporter exchange the full in
inexpensive value.paid. their
consider unfavorable fit their
months, As benefit However,
from protection, flowthein
protection market assets
exporter coincide managing curency interests
ward Rupee per when a
these of may rate from and 309
The the
the the any as bybut
i ) NR/USD
depreciate company
= exchange
movemnents
Example
million
) against rate. in vice then months.
theHowever, company wait
turn company
requiredplans For trading
telephone mainly have andcome over are 310
Solution:
1n ofAe
129.75. exchange
around contracts
RIPY
der given.justified?
{42.78Ifthe
Calculate
will companyversa A its for example, time the also to different in
Rupee.(100 Ltd. 10 The and fall
s to change
spot =742.89 It 2: will will million if may six is to send and standard future very an
In periods.
However,
findwhich and against is but stands company the requiredswap there in
interesting
the the estimated The lac) X would months
go online
S10ABC parameters OTC demanding
s rate LLd. will be be
actual value
JPY/USD= if Yen, the is
out given expected
firm saved true. to
Dolars to mnillion the format
on and current S Ltd. category
direct
as is, and suffer dollarsconnections.
the inthe still gain. can a or to hese T of
s: situatíon 30 JPY/USD to
takes thatpayable However, exchange bank long world. the option
enter has
nefit Indian
fact ¿43. spot Indian loss from stay But, into now
as in a
link
than
in as MBA
137.85forward loss
September Yen
and
Dollars as exposure
contracts terms these
the September rates of at INR buy into foreign
it
next betweenthereForeign for Third
Forward
if = company the ifrate would
exporter
cross
of the
hedging will advantage INR the the may futures
137.35. are 945,000 six require
managing
of
Semester
direct is depreciate losses a is amount.
hedge thecover? exchange
actual NR
in curency andsubsidiary are
contract
rate 2011 INRUSD 945,000. six receive and receive
months. the currency
no
is decision rates end. contracts.
isYou has short centralized
buyer traded the
etc., ofquote
interested was not
caused
due proceeds months in
sell (Financial
risks.
six Foreign
size, buyer
the are for to Yen an rate
to With forward.contract.
proceeds
aINR.
The in and forward
one of
eventually done. JPY/USD =741.79
144 and export months. quote US.
two to required
September is th e by goesturns the on Forwards
must INR/USD take level not It company
Forward
the
settlement Derivatives)
to
given thein position
Howthe favorable the this to
beupout
would of It United location regulated
may in
currency
have
exposure
directly seller contract
alculate forward to: and contract, 0.945 Dollars.
direct INR/USD unfavorable received to
quotes. JPYIUSD Rupees
2011 0.97, be
to be choose States. contracts full
contracts
will through for process,futures RTMNt
quoted of change able in
quote cover 0.90 The The be their may stoc grasp
thc So, are to 10 the by the to six to It
=
So, Forward
i.,Current
Now, 1/(JPY/USD).
USD/JPY JPY/USD TPYNoW 1/(JPY/USD).
The Rate USDJPY= JPY/So, USDi.c., The Current
CrossRatFoereign
i) USDJPY So, Expected
1I(JPY/USD).
JPY/USD ie., The
i) Calculation Now, INR JPY/USD
is If JPYUSD JPY NR JPYUSD Exchange
Receipt
Actual
137.85. the f Therefore,
4.800-98,300), So. Loss is II Actual
Tberefore,
LossReceipt
Hedging JPY INR
the Hedging
loss
eventual
the = Cross 1/(JPY/USD)
=0.007281 = INR
Receipt at Receipt USDJPY NR 1/0PYIOSD)=
USD
Curreot is Curent is 1/JPY/USD) is Risk
may loss USD INR
of is is
be can
spot Done: Not
Exchange givenSpot given
JPY USD given Corporate &
scertained as September September Rate JPY USD
USD
ates if be Rate Done:
Rate
as as as
the
educed (1,00,00,000x032207)
(1,00,00,000 41.790.007707
137.35. 129.75.
Sepember
bedging Particulars
End End Loss: =0.006944
JPY 43.00
NR 144.00. 0.007281
0.31224
42.89
1 0.007707
1 Exposure
(1,00,00,000
(1,00,00,000x029859)
by 5.
follows:
Tbe
cDd done isan 1 Now, Now, Now,
x 1 Management
(Module 5)
are amotnt 0.32207) the
by 0.006944 the the =0.32207
(42.78 the >x031224)
JPYUSD USDJPY USDIJPY USDIJPY
exporteT. of
and
R136500 =029859
137.85,
is
given is is is
the the the
then ie..
as inverse inverse inverse
31,22,400
32.20,70o 29,85.900
32,20,700
234800
98,300 311
of of of
MBA Third Semester (Financial
312
Now, the USD/JPY is the inverse of JPY/USD i.e., 1//(JPYAISD
Derivatives) RTMNU
So, USD/JPY = 1/JPY/USD) = 0.007254
INR INR USD 42.78 0.007254
Now, JPY USD
-X
JPY 1 1
=0.31032
Now, the loss may be ascertained as follows:
Curent Receipt (1.00,00,000x0.32207)
31.32.1,0213,0,7,2750000)00|
Actual Receipt September End (1,00,00,000 x 0.31032)
Therefore, Loss is
So, the hedging is still justified
5.5. EXERCISE
1) What do you understand by foreign
Discuss the features of exposure. exchange risk and management?
2) What is the classification of
exposures with references to forejgn
exchange?
3) Explain the measuring of exposures in detail.
4) Discuss the foreign exchange risk
management framework.
5) Elaborate the risk management techniques in
detail.
6) Explain the various internal and external
techniques of risk
1) Differentiate between the transaction exposure and economicmanagement.
exposure.
8) What are the benefits of foreign exchange risk
risk management practices in India. management? Discuss the
9) What is international portfolio investment? Explain the
modes and benefits
of international portfolio investment.
10) What do you mean by international portfolio diversification? State its and
barriers for diversification.
11) What are currency derivatives? Discuss the application and uses of
currency derivatives.
12) Illustrate the types of currency derivatives.
13) What do you mean by currency futures? Explain the features and uses Ol
currency futures.
14) Explain the currency options with its applications, determinants and
importance.
15) Write notes on:
i) Transaction exposure,
ii) Managing of economic exposure.
jiü) Measurement of translation exposure.
iv) Currency forward.