1.5 Final - Edited

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CHAPTER I

1.1 INTRODUCTION TO THE INDUSTRY

Banking is a major financial activity which provides life blood to an economy. TheBanking Regulation Act, 1949 defines banking as accepting for the purpose of lending

or investment, of deposits, of money from the public repayable on demand or otherwise

and with drawable by cheque, draft and order or otherwise.

In olden days the economy was unorganized. The rate of growth and stability was poor.

The Government didnt have enough control over the economy. People had to suffer for

lack of cheap source of funds to carry on with their agriculture and trade. If they

needed any financial assistance, the only source was traditional money lenders. The

common man had to pay a high interest for the benefit he received. People were badly

exploited by the traditional system. Another aspect was wasteful competition between

the money lenders itself.

In order to bring an end to this situation the government intervened and began to set up

commercial banks and promote private investment in banking to make avail adequate

sources of funds. The Banking Regulation Act, 1949 was introduced in order toregulate the working of banking sector in India.

One of the major milestones in banking in India was the nationalization of commercial

banks in 1969 and later again in 1980.

GOVERNMENTS ROLE IN BANKING INUSTRY

1. Implementation of Banking Regulation Act 1949. (Scheduled Banks and Non-

Scheduled Banks)

2. Nationalization of 14 banks in 1969 in the first phase. And then in second

phase six more banks nationalized in 1980.

3. Brought about the liberalization in 1993.

The following diagram illustrates how the Banking Regulation Act classifies the

commercial banks in India.

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The banking structure in India is as follows:

LIBERALISATION AND MODERN BANKING

In the early 1990s, the then Narasimha Raogovernment embarked on a policy

of liberalization, licensing a small number of private banks. These came to be known

asNew Generation tech-savvy banks, and included Global Trust Bank (the first of such

new generation banks to be set up), which later amalgamated with Oriental Bank of

Commerce, Axis Bank(earlier as UTI Bank), ICICI Bankand HDFC Bank. This move,

along with the rapid growth in the economy of India, revitalized the banking sector in

India, which has seen rapid growth with strong contribution from all the three sectors of

banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in banks may be

given voting rights which could exceed the present cap of 10%,at present it has gone up

to 49% with some restrictions.

The new policy shook the Banking sector in Indiacompletely. Bankers, till this time,

were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of

functioning. The new wave ushered in a modern outlook and tech-savvy methods of

working for traditional banks. All this led to the retail boom in India. People not just

demanded more from their banks but also received more.

Banking in India is generally fairly mature in terms of supply, product range and reach-

even though reach in rural India still remains a challenge for the private sector and

foreign banks. In terms of quality of assets and capital adequacy, Indian banks are

considered to have clean, strong and transparent balance sheets relative to other banks

in comparable economies in its region. The Reserve Bank of India is an autonomous

body, with minimal pressure from the government. The stated policy of the Bank on the

Indian Rupee is to manage volatility but without any fixed exchange rate-and this has

mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

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banking, mortgages and investment services are expected to be strong. One may also

expect M&As, takeovers, and asset sales.

In recent years critics have charged that the non-government owned banks are too

aggressive in their loan recovery efforts in connection with housing, vehicle and

personal loans. There are press reports that the banks' loan recovery efforts have driven

defaulting borrowers to suicide.

Yet private sector Banks in India are witnessing immense progress. They are leaders in

Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public

Sector Banks are still facing the problem of unhappy employees. There has been a

decrease of 20 percent in the employee strength of the private sector in the wake of theVoluntary Retirement Schemes (VRS).

All great dynasties were built up from humble foundations.

1.2INTRODUCTION TO THECOMPANY

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The "South Indian Bank" came into being during the Swadeshi movement. The

establishment of the bank was the fulfilment of the dreams of a group of enterprising

men who joined together at Thrissur, a major town (now known as the Cultural Capital

of Kerala), in the erstwhile State of Cochin to provide for the people a safe, efficient

and service oriented repository of savings of the community.

South Indian Bank was registered as a private Limited Company under the companies

Act of 1913 and commenced business on 29-01-1929 at Round South, Thrissur. The

South Indian Bank Ltd., was formed by a group of 44 enterprising men of Thrissur who

contributed Rs.500/- each to the initial paid up capital of Rs.22,000/-. Their main

objective was to serve the merchant community of Thrissur by freeing them from the

clutches of the money lenders who charged exorbitant rates of interest.

The bank received very good support from the public at large. Initially the growth was

slow but steady. The number of branches opened each year testified its stability and

popularity. It was included in the second schedule of the Reserve Bank of India and

became a scheduled

Bank on 07-08-1946. SIB was the first scheduled Bank in the private sector in Kerala to

get the license under section 22 of the Banking Regulation Act 1949 from RBI on 17-

06-1957.

The Bank got license from RBI to deal in Foreign Exchange on 01-08-1975.It is an

authorized dealer in Foreign Exchange now and operates all types of foreign exchange

business. It has correspondent banking arrangements in all commercial centers of the

world. NRIs can remit funds to an account in the bank either online or through draft

drawing arrangements.

Corporate Vision

To emerge as the most preferred bank in the country in terms of brand, values,

principles with core competence in fostering customer aspirations, to build high quality

assets leveraging on the strong and vibrant technology platform in pursuit of excellence

and customer delight and to become a major contributor to the stable economic growth

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of the nation

Corporate Mission

To provide a secure, agile, dynamic and conducive banking environment to customers

with commitment to values and unshaken confidence, deploying the best technology,

standards, processes and procedures, where customer convenience is of significant

importance and to increase the stake holders value .

CURRENT STRUCTURE

The Bank has taken long strides in its expansion program and with 530 branches and 26

extension counters, it has struck its roots in 23 States and Union Territories. The Bank

has an ATM network at 280 centres. The bank also proposes to open 30 branches

including 11 branches in Delhi region so that SIB will have a CSB branch network of

560 branches by September 2009. With the opening of 3 more branches in the states of

Meghalaya, Tripura and Himachal Pradesh, SIB would expand its footprints to 26 states

and Union territories within two months.

The Bank had 4223 personnel on its rolls in 2010 as against 3868 as on 31st March

2009. Cadre - wise breakup is as under:

Officers 1932

Clerks 1616

Sub staff 675

Total 4223

CORE BANKING SOLUTION

SIB is the first Kerala based bank to implement the core banking system. The bank had

embarked upon a massive technology up-gradation project, by the name Sibertech, for

introduction of Core

Banking Solution. The Sibertech Project was formally launched on January 17,2001 by

Sri.N.R. Narayana Murthy, Chief Mentor, Infosys Technologies Ltd. in a colorful

function at Kochi. For this, a modern Data Center has been set up at Kochi, connectingall the branches, the Departments at Head Office, Regional Offices, the Treasury

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Department at Mumbai and the International Banking Division at Kochi. This robust

network facilitates anywhere banking, Networked ATMs, Internet Banking, Mobile

Banking, Global ATM cum debit card operations etc. The Sibertech project was

launched with a target of connecting the 200 odd branches in two phases by March,

2004.

Towards this endeavour, the bank concluded a technology partnership with M/s.Infosys

Technologies Ltd. for Finacle, the Core Banking Solution, M/s.HCL Infosystems Ltd.

for Network Integration and M/s.WIPRO for Data Centre set up and maintenance.

The bank has achieved 100 per cent conectivity by implementing Core Banking

Solution by 24th March, 2007. Further to strengthen the ATM reach and globalacceptability, Bank has introduced Global ATM-cum-Debit card, which can be used at

ATMs and merchant establishments all over the world. The Bank has also introduced

value added services such as mobile banking and internet banking.

The aim of the Bank is to offer the latest technology driven value added services to the

customers towards the realization of the motto Experience Next Generation Banking.

SERVICES AND PRODUCTS

The main products and services of SIB are divided into three main heads:

PERSONAL BANKING

A. ACCOUNTS AND DEPOSITS

SIB initiates customers to begin a relationship by Opening an account as a window to

"experience next generation banking". With all their branches networked under Core

Banking System, SIBhas the latest product offerings, and value added services. SIB

offers :

Savings Account - For routing customers cash flow

Term Deposits - For high returns on customers investments

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B. LOANS

As time changes, needs change and so does the spending solutions available. As a

result, mindset has also changed. Nowadays, loans are an integral part of personal

finance. It makes sense in todays financial scenario. The South Indian Bank, foresees

every kind of need and offer various special packages as given.

Personal Loan - Easy general purpose loans

Vehicle loans - for private, commercial or agricultural purposes

Home Loans - for residents, NRIs and Senior Citizens

Gold Loans - Easy Loans against Gold

Educational Loans - for higher studies

Agriculture Loans - for various agricultural needs

Flexi loan - Loan against property (Residential/Non-residential)

C. MUTUAL FUNDS

Mutual Funds is one of the preferred investment options for all those who want to play

safe, yet save more than what traditional saving avenues offer.

South Indian Bank has tied-up with the leading Mutual Funds, so that customers may

pick and choose, as per their investment goals.

D. INSURANCE

At every point of life risks are many. Coverage for life and property are always

advisable to ensure protection. South Indian Bank offers its customers the most

beneficial policies from insurance majors. Whether for households or for businesses,

the bank has all kinds of policies:

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General Insurance - tie-up with Bajaj Allianz Insurance

ECGC Export Credit Guarantee Corporation joins hands with SIB under

bancassurance model

E. MONEY TRANSFERS

Fast, reliable and with minimal charges, money transfers with South Indian Bank is a

no-hassle affair. Be it within the country or abroad , the online money transfer services,

make the business of transferring money look one of the easiest jobs. With all branches

networked under the Core Banking system,customer can send and receive money in an

instant and meet their urgent needs.

Domestic Transfers - Transfer/Receive funds within India

International Transfers - Transfer/Receive funds to/from abroad.

F. VALUE ADDED SERVICES

Value Addition is the norm when customers open an account with SIB. SIB offers

different types of value added services to opt from, as per customers convenience, with

the power of online services

BUSINESS BANKING:

A) BUSINESS ACCOUNTS

SIB offers different types of Business Accounts such as Current Account,

Overdrafts(OD), Cash Credits(CC) and Mercantile Credits. These accounts allow

customers the convenience of conducting day-to-day banking operations, in addition to

offering working capital credit requirements.

B) DOMESTIC FINANCE

A business requires a constant flow of finance for its growth. The finance can be from

various sources, including Bank finance. With rich experience in this segment,SIB

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helps customers understand each and every requirement of business, and provide the

right mix of finance.

Working capital finance: SIB extends short term finance by way of inventory limits in

the form of Overdraft, Cash Credit, Working Capital Term Loan, Mercantile Credit etc.

Post Sale limits are extended by way of discounting of bills or purchasing of cheques,

advances against book debts etc. The different types of accounts and limits offered are,

Long term finance: Long term finance requirements are met through term loans,to suit

cusotmer requirements.

The loans are either disbursed in lumpsum or in stages and the same is repaid in

instalments along with interest.

The loans are mostly given for a specific purpose/project. Such finances allow

customers to go in for capacity upgrades, purchase of assets, etc. The regular repayment

option, coupled with balloon payments in some cases, provides complete flexibility to

customers.

Non fund based finance: SIB offer different types of non-fund based credit facilities

to eligible borrowers,

ILC (Inland Letter of Credit)

Bank Guarantees

Clubbing fund based and non-fund based credit limits

C) INTERNATIONAL FINANCE

Export Finance

To cater to the high growth export sector, SIB offers the following :

A) Pre-shipment credit to take care of purchase and processing of raw materials, for

making the goods ready for export.

B) Advances such as Packing Credits (against LCs/ confirmed orders) shall help the

customer to maintain his cash flow.

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C) Post-shipment credit is extended to exporters against assured sale receivables, till

the actual sale proceeds are realized.

D) Facilities such as Purchase/Discount of export documents under Export Orders,

Advances against export bills sent on collection, are few of such advances.

SIB also offers foreign currency loans, advances against export incentives receivables

etc.

SIB SWIFT services help instant financial services for exporters.

SIB facilitates insurance through Export Credit Guarantee Corporation (ECGC) .

Import Finance

To help customers in Import finance, SIB offers Letter of Credit services, remittanceservices, Import Bill collection services etc.

D) MONEY TRANSFERS

E) VALUE ADDED SERVICES

SIB offers best-of-the-breed technology based online services which would take care of

customers business needs. SIB also offers personalized value added services for the

owners and staff of every kind of business concern.

South Indian Bank had recorded the highest ever net profits in its 80 years history in

2008-09 with Rs.194.75 crores. This is an increase of 28.44% over the previous years

Rs.151.62 crores. The banks aggregate business surpassed Rs 30237 crores by 2009.

This performance reported by the bank is an encouragement to all stakeholders and also

provides impetus to the bank to continue delivering committed service and sustainable

results. The Board of Directors has recommended 30% dividend for the past fiscal year.

The Bank also has enhanced its shareholder value by improving the annualized value of

shares (EPS) to Rs.17.23 in March 2009.The net interest margin (NIM) has registered

an improvement to 2.92% this fiscal as against 2.62% last year.

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FINANCIAL PERFORMANCE ANALYSIS OF SOUTH INDIAN

BANK LTD

KEY PARAMETERS % change 2008-09 2007-08 2006-07

2009 2010

NET INTEREST INCOME +34.06% +28.84% 1686.92 1309.24 976.6

NET INTEREST EXPENDED +50.24% +27.20% 1164.04 915.10 609.09

OPERATING PROFIT(before

tax)

+87.51% 30.04% 301.37 231.75 123.59

NET PROFIT AFTER TAX +45.62% +28.44% 194.75 151.62 104.12

EARNINGS PER SHARE 18.77 14.79

NET WORTH 1160.98 723.96

DEPOSITS 23.83% 19.37% 18092 15156.00 12239ADVANCES 29.44% 12.93% 12145 10754 8308

TOTAL BUSINESS 26.10% 16.70% 30237 25910 20547

NET NPA -56.34% 295.37% 134.31 33.97 77.82

RETURN ON ASSETS 1.09 1.01 0.88

SWOT ANALYSIS OF SOUTH INDIAN BANK

A. STRENGTHS

Achieved 100% technology driven operations and core banking status.

Excellent and faithful employee base is the prime strength of south Indian bank.

Average age of employees is low.

Efficient management team that leads the bank from forefront.

Strong clientele base in south India.

Stakeholder satisfaction at all levels.

B. WEAKNESS

The technology driven core banking fails at times of system failures.

Average age of customers is high.

Inability to compete with other commercial banks in case of tie ups with public sector

undertakings for providing utilities like railway ticket reservations and so forth.

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C. OPPORTUNITIES

Expand operations to all states in India.

Act as distribution channel for value services like distribution of application forms for

national level competitive examinations.

Act and provide payment gateways for online reservations and online mobile

recharges.

D. THREATS

Growth of other private sector new generation banks.

Threat of take-over by larger commercial banks.

MILESTONES

The FIRST among the private sector banks in Kerala to become a scheduled bank in

1946 under the RBI Act.

The FIRST bank in the private sector in India to open a Currency Chest on behalf of

the RBI in April 1992.

The FIRST private sector bank to open a NRI branch in November 1992.

The FIRST bank in the private sector to start an Industrial Finance Branch in March

1993.

The FIRST among the private sector banks in Kerala to open an "Overseas Branch" to

cater exclusively to the export and import business in June 1993.

The FIRST bank in Kerala to develop an in-house, a fully integrated branch

automation software in addition to the in-house partial automation solution operational

since 1992. The FIRST Kerala based bank to implement Core Banking System.

The THIRD largest branch network among Private Sector banks, in India, with all its

branches under Core BAKING SYSTEM.

1.3 INTRODUCTION TO STUDY:

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The foreign market is a worldwide decentralized over-the-counter financial market for

the trading of currencies. Like a domestic firm, a multinational firms goal is to

maximise the shareholder value on a global basis. It acquires assets that have present

value more than their initial investment. These firms however, operate more than one

country and their operations involve multiple foreign currencies. Their operations are

influenced by politics and the laws of the countries where they operate. As a result they

face higher degree of risk compared to domestic firms. International firms, who

compete in the international market have to analyse the implications of the changes in

the interest rates, inflation rates and exchange rates on their decisions and to minimise

the foreign exchange risk.

The foreign exchange markets deals with large volume of funds as well as a large

number of currencies belonging to various countries for this reason they are not only

worldwide markets but also the world largest financial market. Though there are

foreign exchange markets in virtually all countries, London, Newyork and Tokyo are

the nerve centres of foreign exchange activity. The large commercial/investment banks

and central bank of the countries are the principal participants in the foreign exchange

markets. In general, business firms do not operates on their own they normally buy and

sell currencies through a commercial bank.

While the primary objective of commercial bank, investment bankers and brokers in

dealing with foreign exchange market is commercial in nature, whether they deal on

their own account or for others, the central banks operations in the market are

regulatory in nature otherwise the principal central bank of the country intervenes in the

foreign exchange market to regulate the volatility of foreign exchange rates.

TERMS USED IN FOREIGN EXCHANGE MARKET:

THE FOREGIN EXCHANGE MARKET:

It is the market where the currency of one country is exchanged for the currency of

another country.

INTER BANK MARKET:

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Is the whole sale market in which major banks trade with each other.

ARBITRAGEUS:

They seek to earn risk-less profits by taking advantage of differences in exchange rates

among countries.

TRADERS:

Traders engage in the export of import of goods to number of countries.

HEDGERS:

Hedgers operate in the exchange market to protect against the risk of fluctuation in the

foreign exchange rates.

SPECULATORS:

They trade in foreign currencies to benefit from the exchange rate fluctuations.

FOREGIN EXCHANGE RATES:

A foreign exchange rates is the price of one currency quoted in terms of another

currencies.

DIRECT QUOTE:

When the exchange rate is quoted per unit of the domestic currency it is referred to as

direct quote.

INDIRECT QUOTE:

When exchange rate is quoted as units of domestic currency per unit of the foreign

currency it is referred as indirect quote.

CROSSS RATES:

A cross rate is an exchange rates between the currencies of two country that are not

quoted against each other but quoted against one common currencies.

SPOT EXCHANGE RATES:

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It is the rate at which the currency can be bought or sold for immediate delivery, which

is within two business days after the day of the trade.

BID-ASK SPREAD:

The foreign exchange dealers are ready to buy or sell foreign currencies. The quotations

are given as a bid-ask price. The difference between buying(bid)and selling (ask)rates is

the bid-ask spread.

FORWARD EXCHANGE RATES:

It is the rate that is currently paid for the delivery of currencies at some future date.

FORWARD PREMIUM/DISCOUNT:

Forward rates are generally quoted as a margin against the spot rate for the currency

concerned. The margin may represent either a premium or discount or may be at par.

When the forward margin is a premium it is added to the spot rate to make it dearer.

Similar when the forward margin is at discount it is deducted from the spot rate to make

it cheaper. This applies only when the rates quoted on the direct basis.

FORWARD CONTRACTS:

Entering into a contract for buying foreign currency on a future date.

FOREGIN CURRENCY OPTION:

It is the right to buy or sell a currency at agreed exchange rates on or before an agreed

maturity period.

1.4 OBJECTIVES OF THE STUDY:

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PRIMARY OBJECTIVE

To study the forward contract as an instrument to hedge currency exchange

risk.

SECONDARY OBJECTIVES

To study the benefits gained by the customers while importing commodities

through forward booking.

To study the cancellation option in forward contract.

To study the strength of the currency using forward premium/discount.

To study the notional expenses incurred by the customers on forward booking.

1.4 NEED FOR STUDY:-

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Volatility of exchange rates makes it necessary for companies engaged in

international operations to make measures for covering against exchange rate risk.

Several techniques are used internal and external. A number of techniques are available

such as hedging in forward rate, money market, currency futures, options, swaps. This

study on one of the hedging tool to reduce risk is forward contract.

1.5 SCOPE FOR STUDY:-

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Foreign Exchange Risk Management constitutes an integral part of all

major corporate decisions, to manage foreign exchange exposure, given the global

business scenario in which the business firms operates. Of all the major external

techniques available for hedging the risk, Forward Contract is tailor made, easy to

operate tool which being widely used in the business. Therefore, traders take advantage

of this derivative to hedge their risk.

1.6 LIMITATIONS OF THE STUDY:

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The currency market is volatile an exact predictions cannot be made due to

macro economic factors.

The hedging techniques suggested are not exclusive and the macro economic

factors have not been considered as it is very difficult to calculate in qualitative form. The data used are secondary.

The first hand information was lacking

The sampling periods calculation is restricted to three years.

CHAPTER II

REVIEW OF LITERATURE

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controlled environment. However, as noted in the introduction, several trends in the industry

will affect a banks ability to implement the best practices as listed in this document.

Although the market will continue to evolve and develop mitigating controls, and any set of

recommendations will eventually require revision, management should consider the

practices suggested here as helpful responses to recent developments in technology,

instruments, and innovations in the marketplace.

CHAPTER III

RESEARCH METHODOLOGY

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Research methodology is a way to systematically solve the research problems.

It may be understood as a science of studying how the research is done scientifically. In

it we study the various steps that are generally adopted by the researcher in studying his

research problem along with the logic behind them. It is necessary for the researcher to

know not only the research methods/techniques but also the methodology. Researcher

also need to understand the assumptions underlying various techniques and they need to

know the criteria by which they can decide the certain techniques and procedures will

applicable to certain problem and others will not.

Research design is needed because it facilitates the smooth sailing of various

research operations, thereby making research as efficient as possible yielding maximal

information with expenditure of effort, time and money. Research design stands for

advance planning of the methods to be adopted for collecting the relevant data and the

techniques to be used in analysis, keeping in view of objective of the research and the

availability of time and money.

Nature of the study:

The nature of the study is descriptive research.

Descriptive research includes surveys and fact-findings enquires of different kinds.

The major purpose of descriptive research is descriptive of the state of affairs as it

exists at present. The data and information generated through this descriptive design

can provide the decision makers with evidence that it can lead the course of action.

Research design:-

The study is descriptive in nature and it is based on the forward rates and its effect on

the profitability of the company.

Source used for data collection is secondary datas are :-

Annual reports of South Indian Bank.

Books of accounts pertaining to foreign exchange business.

Documentary files.

Sampling period:-

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The sample period is taken for 3years.

Period of study:-

The period of study is 45days.

CHAPTER IV

FACTORS AFFECTING EXCHANGE RATES & CURRENCY

FORECASTING

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The influences in the exchange market are too numerous and diverse to give a single

explanation foe exchange movements. Several factors such as social, economic and

political influences affect the exchange rate movements. It is how ever possible to

identify some factors that affect considerably or more fundamentally the development

in the exchange market and influence in the exchange rate.

EXCHANGE CONTROL:

In a country it exchange control regulations, fixing of an exchange rate becomes policy

matter it is said that with the mechanisms of exchange control the actual degree of this

equilibrium present in a countries balance of payment position does not get revealed in

the exchange rate. The exchange rate is kept an artificial level, as the exchange rate

policy is required to be complimentary to the exchange control regulations which in

turn form the part of general economic policy. In India there was exchange control and

their used to be an administered exchange rate system. However, now the exchange

control regime stands largely dismantled exchange rate is allowed to be determining the

market forces in keeping with relaxations in an exchange control regulations.

BALANCE OF PAYMENT:

It is believed by some the balance of payment on current account influences a

currencies exchange rates vis-a vis in another currencies. According to this point of

view, the demand for a particular currency is mainly dependent on the demand for good

and services respective country. A favourable balance of payment on current account

indicates a greater demand for goods and services of that country abroad as compared

to the demand for the foreign goods and services by the residence of the country. As the

demand for the currency abroad (i.e. supply of foreign currency at home) is greater than

the demand for the foreign currency at home, the home currency is likely to appreciate

in relation to foreign currency till and equilibrium is reached. As the goods of the

country with appreciating currencies are likely to be less competitive and demand

would thus get reduced, equilibrium will be struck after a period of time.

Normally, a phenomenon is obvious in case of the currency which servers as the

reserve currency for other countries. The reserve currency country can pursue an

expansionary monetary and fiscal policy and resort to deficit financing to support its

higher economic expansion. This can be managed with lesser degree of inflation if it

24


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can shift some of its excess demand to the rest of the world and agree for an adverse

balance of trade. The adverse balance of trade, the other things being equal, should go

to deprecate the reserve currency vis-a-vis other currencies; but the countries which are

having balances in the reserve currency or who are exporting to that country would

intervene and try to maintain the valve of the reserve currency vis-a-vis home currency

so that the value of their financial assets is protected and the demand for their goods in

the reserve currency doesnot come down. In this process they keep their depreciated

level and allow their economies to become inflationary. In this process of adjustments

there is an all round movement in the exchange rates of different currencies.

RELATIVE PRICES:

The exchange rate movements between two currencies tend to offset the differential

movements in the relative price levels. If a country is having an inflation of say 10% to

20% and another country which is having, say ,only 2%to3%inflation , the country

which is having a lower level of inflation will be in position to maintain the prices of

its export commodities which will improve the demand for its goods and hence its

currency and thus the currency of the country which has higher inflation will deprecate

to the extent of differential in inflation.

The relative price supports the purchasing power parity theory that the exchange rate

levels in the long run vary with relative inflation performance.

ASSETS MARKET:

The demand for goods produced in a country explains partly the demand for the

currency of the particular country. It has to be recognized that the demand for the

currency also arises from the desire to hold stock of assets denominated in that

currency. Therefore, it become necessary to consider the factors affecting the demand

for and supply of financial instruments denominated in that currency in relation to the

factors affecting the demand for and supply of financial instruments denominated in

other currencies.

Since the demand for and supply of financial assets tend to get translated into demand

and supply of money the demand and supply positions of money in different countries

can be used as a yardstick for measuring their relative impact on exchange rates. Thus,in a country with a moderate monetary growth, the exchange rates would tend to

25


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strengthen as it would reduce the domestic inflationary pressures, improve the

competitive of the goods produced and exported, and also induce the inflow of capital

from other countries.

INTEREST RATES:

Exchange rate movements are often induced by imbalances between the demand and

supply position in the money markets; the significant factors in all such developments

being the interest rates differential. Interest rate differential can decisively influence the

relative attractiveness of the currencies- a sharp rise in the interest rates can be

anticipated to be accompanied by an increase in the demand for the currency resulting

in a market strengthening of the currency.

OTHER FACTORS:

There are large number of factors viz political developments like war, change in the

government, official intervention in the money exchange market, restrictions on the

capital flow, change in the productivity levels, fiscal and monetary policy of the

government concerned and the underlying psychology of the market operators.

The exchange rates get adjusted not only with the developments that have already takenplace but also are influenced by the changes in the variables that are expected to take

place in future. International investors and speculators move funds on the basis of such

expected changes and as a result, anticipatory adjustments take place in the currency

levels.

CURRENCY FORECASTING:

No dealer in foreign exchange can survive without forecasting, although he recognises

that even a well equipped system of forecasting can often be misleading. Decisions

taken in conjunction with well equipped system of forecasting can yield better results

than those based on no forecasts and strategies. An assiduous analysis such of the

factors determining the exchange rate movements can be used as a guide with

advantage by those dealers who adopt such a judicious approach. Those dealers who

have the support of or access to economic estimates of many input variables (eg:-

money supply, trade balance, interest rates, inflation rates, capital flows and many other

26


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non-quantifiable factors)may use even computer programmes with diagnostic checks

and possibilities of exploring sensitivity of the forecasting exercises with advantage.

Different factors that influences the fluctuation in the exchange rates, explain different

aspects of currency price movements while no single factor can be used to predict the

changes, it has to be recognised that some of the actors are more valuable than the

others .

The some of the important features are:-

Excessive monetary growth is the principal source of inflation,

Inflation has a decisive influence on the balance of payment,

Changes in interest rates,

Changes in balance of payment result in a change in the demand/supply

relation of the currency involved and

Increase in the inflation result in hardening of rates.

The following aspects of market behaviour should be noted while making any attempt

to predict the course of exchange rate movements:-

No single factor provides reliable bases.

The relative influence of each factor varies from time to time

The exchange rates response quickly to the changes in some of the variables

(eg:- interest rate changes)

If the Central Bank/ Government has a significant intervention policy the task

of forecasting becomes primary one of forecasting the action and the timing of Central

Bank/Government.

The existences of international speculators who move funds from one market

to another can significantly change the short term movements.

The day - to- day influences can move exchange rates substantially away from

the major trend in currencies / movements for short term periods.

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Most of the future developments are foreseen by the market operators causing

anticipatory adjustments in the market rates. As the developments cast their shadow

forward, the market discounts expected changes and after the occurrence of the event

the currency may not always move really in the same direction.

FOREIGN EXCAHNGE EXPOSURE AND RISK MANAGEMENT:-

The foreign exchange risk management constitutes an integral part of all major

corporate decisions to manage foreign exchange exposure, given the global business

scenario in which business firms operate. Therefore, it is imperative that the corporate

firms are known of the various types of the foreign exchange risk they are exposed to as

well as are fully conversant with various important FERM techniques to deal with such

risks.

Business firms, having international business operation primarily encounter three types

of exposure:

Transaction exposure

Translation exposure

Economic exposure

TRANSACTION EXPOSURE

Transaction exposure involves gain/loss arising out of the various types of transaction

that require settlement in foreign currency. The transactions may relate to the cross-

border trade in terms of import or export of goods, borrowings or lending in foreign

currencies ,domestic purchases and sale of goods and services of foreign subsidiaries

and the purchase of assets or takeover of the liability involving the foreign currency.

TRANSLATION EXPOSURE:

The translation exposure results from the need to translate the foreign assets/liabilities

into local currency at time of finalising accounts.

ECONOMIC EXPOSURE

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This exposure implies the change in the value of a company that accompanies an un

anticipated changes in the exchange rates.

OPERTAING EXPOSURE:

The operating exposure has the impact on firms future operating revenue, costs, and

cash flows.

FOREIGN EXCHANGE RISK MANAGEMENT- EXTERNAL TECHNIQUES:-

The foreign exchange risk is defined as the possibility of loss to the business unit on

unfavourable movement in foreign exchange rates. Foreign exchange risk management

is the process through which the finance managers try to eliminate/reduce the impact of

unfavourable changes in the foreign exchanges rates to tolerable level.

The four major external techniques of the FERM also called as derivatives. The

derivatives are

Forward contracts

Currency futures

Currency options

swaps

FORWARD CONTRACTS:-

Forward exchange contracts are widely used by business firms to hedge against

volatile exchange rates. Business firms enter into forward contract to buy or sell foreign

currency in exchange of home currency at a specific future date, at a predetermined

exchange conversion rate. Forward exchange contracts enable the firm to cover the

foreign exchange risk. They are ideally suited for hedging transaction exposure typical

forward contract specifies the contract amount forward exchange rate, parties to the

contract, the specified date of delivery, name of foreign currencies involved in

exchange and terms and conditions for cancellation.

Execution of forward contracts in foreign exchange market:-

A customer under forward exchange contract knows in advance the time and amount of

foreign exchange to be delivered and the customer is bound by this agreement. Thereshould not be any variation and on the due date of the forward contract the customer

29


30/119

will either deliver or take delivery of the fixed sum of foreign exchange agreed upon.

But, in practice, quite often the delivery under a forward contract may take place before

or after the due date, or delivery of foreign exchange may not take place at all. The

bank generally agrees to these variations provided the customer agrees to bear the loss,

if any, that the bank may have to sustain on account of the variation.

Though the delivery or take delivery of a fixed sum of foreign exchange under a

forward contract has to take place at the agreed time, quite often this does not happen

and it may either take place before or after the due date agreed upon. However, the

bank generally agrees to these variations provided the customer bears the loss if any on

account of this variation.

Based on the circumstances, the customer may end up in any of the following ways:

1. Delivery on the due date.

2. Early delivery.

3. Late delivery.

4. Cancellation on the due date.

5. Early cancellation.

6. Late cancellation.

7. Extension on the due date.

8. Early extension.

9. Late extension.

As per the Rule 8 of FEDAI, a request for delivery or cancellation or extension of the

forward contract should be made by the customer on or before its maturity date.

Otherwise a forward contract which remains unutilized after the due date becomes anoverdue contract. Rule 8 of FEDAI stipulates that banks shall levy a minimum charge

of Rs. 100 for every request from a merchant for early delivery, extension or

cancellation of a forward contract. This is in addition to recovery of actual loss incurred

by the bank caused by these changes.

Delivery on Due Date:

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This is the situation envisaged when the forward contract was entered into. When the

foreign exchange is delivered on the due date, the rate applied for the transaction would

be the rate originally agreed, irrespective of the spot rate prevailing.

Early Delivery:

When a customer requests early delivery of a forward contract, i.e., delivery before its

due date, the bank may accede to the request provided the customer agrees to bear the

loss, if any, that may accrue to the bank.

Cancellation/Extension of forward contract:

The customer is having the right to cancel a forward contract at any time during the

currency of the contract. The cancellation is governed by Rule 8 of the FEDAI. The

difference between the contracted rate and the rate at which the cancellation is done

shall be recovered or paid to the customer, if the cancellation is at the request of the

customer. Exchange difference not exceeding Rs.50 shall be ignored. The spot rate is to

be applied for cancellation of the forward contract on due date. The forward rate is to

be applied for cancellation before due date. In the absence of any instruction from the

customer, contracts which have matured shall on the 15th day from the date of maturity

be automatically cancelled. If the 15th day falls on a holiday or Saturday the

cancellation will be done on the next succeeding working day. The customer is liable

for recovery of cancellation charges and in no case the gain is passed on to the

customer since the cancellation is done on account of customers default. The customer

may approach the bank for cancellation when the underlying transaction becomes

infractions, or for any other reason he wishes not to execute the forward contract. If the

underlying transaction is likely to take place on a day subsequent to the maturity of the

forward contract already booked, he may seek extension in the due date of the contract.

Such requests for cancellations or extension can be made by the customer on or before

the maturity of the forward contract.

Cancellation of Forward Contract on Due date:

31


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33/119

contracts are undertaken simultaneously. However it is observed that banks do include

margin for cancellation and rebooking as in any other case. Further only a flat charge of

Rs.100 (minimum) should be recovered and not Rs.250 as in the case of booking a new

contract.

Overdue Forward Contracts:

As we have already seen, the customer has the right to utilize or cancel or extend the

forward contract on or before its due date. No such right exists after the expiry of the

contract. FEDAI Rule 8 provides that a forward contract which remains overdue with

any instructions from the customer concerned on or before its due date shall on the 15th

day from the date of maturity be automatically cancelled by the bank. The customer

remains liable for the exchange difference arising there from but if it results in profit it

need not be passed on to the customer. In case of delivery subsequent to automatic

cancellation the appropriate current rate prevailing on such delivery shall be applied.

Roll over Forward Contracts:

When deferred payment transactions of imports/exports takes place, the repayment of

the installment and interests on foreign currency loans by the customer requires long

term forward cover where the period extends beyond six months. The bank may enter

into forward contract for long terms provided there is suitable cover is available in the

market. However the cover is made available on roll over basis in which cases the

initial contract may be made for a period of six months and subsequently each deferred

installments for the outstanding balance of forward contract by extending for further

periods of six months each. For these transactions the rules and charges for cancellation

/ extension of long term forward contracts are similar to those of other forward

contracts.

Interbank Deals:

Foreign exchange transactions involve transaction by a customer with the bank while

interbank deals refer to purchase and sale of foreign exchange between banks. In other

words, it refers to the foreign exchange dealings of a bank in interbank market.

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Cover Deals:

The banks deal with foreign exchange on behalf of its customers. Purchase and sale of

foreign currency in the market undertaken to acquire or dispose of foreign exchange

required or acquired as a consequence of its dealings with its customers is known as the

cover deal. In this way that is through cover deal the bank gets insured against any

fluctuation in the exchange rates. While quoting a rate to the customer the bank is

guided by interbank rate to which it adds or deducts its margin, and arrives at the rate it

quotes to the customer. For example, if it is buying dollar from the customer special it

takes interbank buying rate, deducts its exchange margin and quotes the rate. This

exercise is done on the assumption that immediately on purchase from customer the

bank would sell the foreign exchange to interbank market at market buying rate.

Foreign currency is considered as peculiar commodity with wide fluctuations price, the

bank would like to sell immediately whatever it purchases and whenever it sells, it

immediately tries to purchase so that it meets it is commitment. The main reason for

this is that the bank wants to reduce exchange risk it faces to the minimum. Otherwise,

any adverse change in the rate would affect its profits. In the case of spot deals the

transaction is quite simple. If the bank purchased any foreign exchange, it would try to

find another customer to whom it can sell this and thus books profit. In this process the

profit would be the maximum because both buying and selling rates are determined by

the bank and the margin between the rates is the maximum. If it cannot find another

customer its sells in interbank market where the rate is determined by the market

conditions and the margin is narrower here.

CURRENCY FUTURES:-

A future contract is a standardised agreement to buy or sell a specified amount of

foreign exchange in future at some future date. Futures being standardised contract in

nature are traded on an organized exchange the clearing house of the exchange operates

as a link between the two parities of the contract, namely the buyer and the seller.

CURRENCY OPTIONS:-

Currency option is a financial instrument that provides its holder a right but no

obligations to buy or sell a pre-specified amount of a foreign currency at a pre-

34


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determined rate in the future. While the buyer of an option wants to avoid the risk of

adverse changes in exchange rates, the seller of the option is prepared to assume the

risk. Options are of two types namely, call option and put option.

Call option:

In a call option the holder has the right to buy/call a specific currency at a specific price

on a specific maturity date or within a specified period of time the holder of the option

is under no obligation to buy the currency. Such an option is to be exercised only when

the actual price in the forex market, at the time of excising option is more than the price

specified in call option contract.

Put option:

A put option confers the right but no obligation to sell a specified amount of currency at

a pre fixed price on or up to a specified date. Put option will be exercised when the

actual exchange rate on the date of maturity is lower than the rate specified in the put

option contract.

SWAPS:-

Swaps are exchange of debt obligations between two parties. Currency swaps are

arranged between two parties through bank .swaps are not financing instruments. they

comfort the parties involved not only in the terms of the desired currency involved in

the debt financing but also provides logistics conveniences in making specifies

payments of interest. Swaps are of two types interest swaps and currency swaps.

35


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CHAPTER V

ANALYSIS AND INTERPRETATION

TABLE:-5.1.1

Benefits gained by M/s Jayajothi Textile Mill (Pvt) Ltd, Aruppukottai during the

period 2009-2010 through one month forward contract .

36

DATE BILL

AMOUNT

IN USD

FORW

ARD

BOOK

ED

RATE

DATE OF

UTILIZAT

ION

SPOT

RATE

ON THE

UTILIA

TION

DATE

DIFFER

ENCE

IN THE

RATES

BENEFITS

IN INR

03.06.09 121604.90 47.04 01.07.09 48.24 1.20 145925.90

04.06.09 344066.80 47.06 29.06.09 48.34 1.28 442125.80

07.06.09 494879.90 47.24 17.07.09 48.92 1.68 831398.20

08.06.09 264492.70 47.06 30.06.09 48.06 1.00 264492.70

05.10.09 131959.80 47.65 27.10.09 47.10 -0.55 -71918.10*

Net

notional

gain#

1612025.00


37/119

(* all these contracts were cancelled by paying bank charges #actual

position if contract not

cancelled).

INFERENCE:-

The company gained an amount of Rs.16,83,942.60 due to favourable

exchange rate and incurred a notional loss of Rs.71,918.10 due to unfavourable

position. The net gain was Rs. 1612025.00 due to forward contract.

INTERPRETATION:-

With respect to the transaction dated 03.06.09, if the company hadnt

optioned forward booking facility the cost of the imported commodity in terms of

Indian Rs would have been Rs.58,66,177.00. The currency exchange risk was hedged

and company paid an amount of Rs.57,20,252.00 gaining an amount of

Rs.1,45,925.00.like wise the company incurred lesser expenses for the import

transactions, taking advantage of the forward booking facility provided by the bank on

the other hand for the transaction dated 5.10.09 the company had to pay higher cost

since the exchange rate was unfavourable generally the company would have preferred

to cancel the contract and cover the loss.

37


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CHART: - 5.1.1(A)

38


39/119

INFERENCE:-

From above chart we infer that irrespective of the period, the forward rates are

favourable for

importer.

TABLE:- 5.1.2

Benefits gained byM/s Jayajothi textile mill (Pvt) Ltd, Aruppukottai, during the

period 2009-2010 for two months forward contract.

39


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position if contracts are not cancelled).

40

DATE BILL

AMOUN

T IN

USD

FORW

ARD

BOOK

ED

RATE

DATE

OF

UTILIZ

ATION

SPOT

RATE ON

THE

UTLIATI

ON DATE

DIFFER

ENCE

IN THE

RATES

BENEFITS

IN INR

03.06.09 274062.8 47.48 24.08.09 48.65 1.17 322023.7

03.06.09 194470 47.69 09.11.09 46.75 0.94 181829.5

03.06.09 256425 47.80 02.12.09 46.41 -1.39 -356431*

03.06.09 236954 47.80 02.12.09 46.41 -1.39 -329366*

06.10.09 314537 47.55 10.12.09 46.85 -0.70 -220176*

06.10.09 222815.6 47.50 07.12.09 46.68 -0.82 -182709*

06.10.09 299949 47.55 10.12.09 47.85 0.30 91984.36

06.10.09 310915 47.50 07.12.09 46.68 -0.82 -254950*

Net

notional

loss#

747794.00


41/119

INFERENCE:-

The company gained an amount of Rs.5,95,837.56 due to forward

booking and incurred a notional loss of Rs.13,43,932.00 due to unfavourable market

position.

INTERPRETATION:-

Since, the company availed forward contract facility the company paid a lesser

money towards the cost of the commodity. For example the transaction dated 3.6.09

instead of paying Rs.1,33,33,155.22 the company paid only Rs.1,30,12,501.74.on the

other hand when the currency exchange rate turned unfavourable the company

cancelled the forward contract, incurring a nominal expenses towards bank charges.

41


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CHART:- 5.1.2(B)

INFERENCE:-

From above chart we infer that irrespective of the period, the forward rates arefavourable for importer.

42


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TABLE:- 5.1.3

Benefits gained by M/s Uma Shankar Traders Erode, during the period 2009-

2010through one month forward contract.

(* all these contracts were cancelled by paying bank charges #actual position if

contracts are not cancelled).

INFERENCE:-

The company incurred a notional loss of Rs.1150858.00.

INTERPRETATION:-

43

DATE BILL

AMOUNT

IN USD

FORWARD

BOOKED

RATE

DATE

OF

UTILIZAT

ION

SPOT

RATE ON

THE

UTLIATI

ON DATE

DIFFEREN

CE IN THE

RATES

BENEFITS

IN INR

02.04.09 300000 50.42 06.04.09 50.17 -0.25 -75000*

02.04.09 300000 50.48 06.04.09 50.17 -0.31 -93000*

02.04.09 200000 50.43 06.04.09 50.17 -0.26 -52000*03.04.09 875000 50.34 03.04.09 50.42 -0.08 -70000*

10.09.09 200000 48.57 01.10.09 48 -0.57 -114000*

10.09.0

9

300000 48.63 01.10.09 48 -0.63 -189000*

15.09.09 200000 48.81 05.10.09 48 -0.81 -162000*

16.09.09 412700 48.69 01.10.09 47.79 -0.9 -371430*

16.09.09 39400 48.62 01.10.09 48 -0.62 -24428*

Net notional

loss#

1150858.0

0


44/119

The unfavourable exchange rate compelled the company cancel the contract

due to market fluctuation.

CHART:- 5.1.3(C)

INFERENCE:-


favourable for importer.

44


45/119

TABLE:- 5.1.4


2010through two months forward contract.

45

DATE BILL

AMOU

NT IN

USD

FORW

ARD

BOOK

ED

RATE

DATE OF

UTILIZAT

ION

SPOT

RATE ON

THE

UTLIATI

ON DATE

DIFFEREN

CE IN THE

RATES

BENEFITS

IN INR

18.05.09 500000 48.61 06.07.09 48.27 -0.33 -167500*

18.05.09 500000 48.35 24.07.09 48.57 0.22 110000

18.05.09 500000 48.18 24.07.09 48.57 0.39 195000

19.05.09 200000 48.05 24.07.09 48.57 0.52 104000

19.05.09 270600 47.86 24.07.09 48.57 -0.29 -78474*

19.05.09 119600 47.86 06.07.09 48.39 0.53 63388

04.08.09 110010 47.85 05.10.09 46.96 -0.89 -97908.9*

05.08.09 200000 48.02 01.10.09 47.79 -0.23 -46000*

10.08.09 500000 48.05 01.10.09 46.96 -1.09 -545000*

16.09.09 525000 48.67 06.11.09 48 -0.67 -351750*

07.10.09 500000 47.21 09.01.10 48.95 1.74 870000

07.10.09 700000 47.07 07.01.10 48.95 1.88 1316000

06.01.10 500000 46.43 25.03.10 44.77 -1.66 -830000*

06.01.10 500000 46.36 25.03.10 46.8 0.44 220000

06.01.10 500000 46.29 25.03.10 46.8 0.51 225000

07.01.10 500000 46.1 25.03.10 46.8 0.7 350000

07.01.10 998400 46.22 04.05.10 44.75 -1.47 -1467648*

07.01.10 322300 46.28 17.05.10 44.79 -1.49 -480227*

07.01.10 200000 46.27 17.05.10 45.9 -0.37 -74000*

07.01.10 5687708 45.96 25.03.10 46.8 0.84 47771503

Net notional

gain#

47086383.00


46/119



INFERENCE:-

The company gained an amount of Rs.5,12,24,891.00 due to forward

booking and incurred a notional loss of due to unfavourable market position. The net

gain was Rs.47086383 due to forward contract.

INTERPRETATION:-

The forward contract facility enabled the company to import the commodity at

a lesser cost. For example the transaction dated 18.05.09, if the company hadnt taken a

forward cover booking they might have paid Rs.2,42,85,00.00 but the company paid

only Rs.2,41,7500.00.on the other hand when the currency exchange rate turned

unfavourable the company cancelled the forward contract, incurring a nominal

expenses towards bank charges

46


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CHART:- 5.1.4(D)

INFERENCE:-



47


48/119

TABLE:- 5.1.5


2010through three months forward contract.



INFERENCE:-

48

DATE BILL

AMOU

NT IN

USD

FORWA

RD

BOOKE

D RATE

DATE OF

UTILIZAT

ION

SPOT

RATE

ON THE

UTILIA

TION

DATE

DIFFERE

NCE IN

THE

RATES

BENIFIT

S IN INR

04.08.09 300000 47.92 06.11.09 46.96 -0.96 -288000*

04.08.09 200000 48.06 06.11.09 46.96 -1.1 -220000*

05.08.09 200000 48 06.11.09 48 - -

07.10.09 300000 47.1 09.01.10 45.96 -1.14 -342000*

08.10.09 500000 46.68 19.04.10 47.29 0.61 305000

Net

notional

loss#

5,45,000


49/119


50/119

TABLE:- 5.1.6


2010through six months forward contract.

50

DATE BILL

AMOU

NT IN

USD

FORWA

RD

BOOKE

D RATE

DATE OF

UTILIZAT

ION

SPOT

RATE ON

THE

UTLIATI

ON DATE

DIFFERE

NCE IN

THE

RATES

BENIFITS

IN INR

21.05.09 500000 48.08 06.11.09 46.96 -1.12 -560000*

21.05.09 100000 48.07 06.11.09 46.96 -1.11 -111000*

22.05.09 100000 47.88 06.11.09 46.96 -0.92 -92000*

Net

notional

loss

671000.00


51/119



INFERENCE:-

The company incurred a notional loss of Rs.671000.

INTERPRETATION:-



CHART:- 5.1.6(F)

51


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INFERENCE:-



TABLE:- 5.1.7

Benefits gained by M/s KPS oils, Erode, during the period 2009-2010 through one

month forward contract.

52


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INFERENCE:-

The company gained an amount of Rs.3110160 through forward contract.

INTERPRETATION:-

53

DATE

BILL

AMOUN

T IN USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZTAION

SPOT

RATE

DIFFER

BENIFITS

IN INR

ENCE

IN

RATES

06.04.0

9 500000 49.76 05.05.0950.06

0.3 150000

06.04.0

9 200000 49.76 05.05.09 50.14 0.38 76000

09.04.0

9 200000 49.76 05.05.09 50.15 0.39 78000

09.04.0

9 100000 49.76 05.05.09 50.05 0.29 29000

13.04.0

9 300000 49.99 05.05.09 49.99 0.23 69000

13.04.0

9 100000 49.76 05.05.09 49.97 0.21 21000

13.04.0

9 100000 49.76 05.05.09 50.03 0.27 27000

16.04.0

9 218000 49.76 05.05.09 49.55 0.21 45780

16.09.0

9 100000 46.96 06.11.09 48.49 1.53 153000

17.09.0

9 1460800 46.68 23.10.09 48.29 1.61 2351888

08.10.0

9 25968 46.43 23.10.09 46.43 0.25 6492

06.11.0

9 100000 46.12 20.01.10 47.15 1.03103000

Net gain 3110160.00


54/119


a lesser cost. For example the transaction dated, 06.04.09 if the company hadnt taken a

forward cover booking they might have paid Rs.25030000 but the company paid

Rs.24880000only.

CHART:- 5.1.7(G)

54


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INFERENCE:-



TABLE:- 5.1.8

55


56/119

Benefits gained by M/s KPS oils Erode, during the period 2009-2010 through two

months forward contract.



INFERENCE:-

The company incurred a notional loss of Rs.1059707.00.

56

DATE

BILL

AMOUN

T IN USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZTAION

SPOT

RATE

DIFFER

BENIFITS

IN INR

ENCE IN

THE

RATES

06.11.0

9 200000 47.13 20.01.10 46.12 -1.01 -202000*

09.11.0

9 500000 46.88 20.01.10 46.12 -0.76 -380000*

09.11.0

9 300000 46.8 20.01.10 46.12 -0.68 -204000*

09.11.0

9 448700 46.73 20.01.10 46.12 -0.61 -273707*

Net

notional

loss #

1059707


57/119

INTERPRETATION:-



CHART:- 5.1.8(H)

INFERENCE:-



57


58/119

TABLE:- 5.1.9

Benefits gained by M/s Subramaniam Bros Pollachi during the period 2009-

2010, through three months forward contract.

INFERENCE:-

The company gained an amount of Rs.522107.49 through forward

contract.

INTERPRETATION:-



forward cover booking they might have paid Rs.15405781.68 but the company paid Rs.

15088554.19 only.

58

DATE

BILL

AMOUN

T IN USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZATION

SPOT RATE

ON THE

UTILIZTIO

N

DIFFERENCE

IN THE

RATES

BENIFITS

IN INR

11.03.1

0 337476.05 44.71 11.03.10 45.65 0.94 317227.49

29.03.1

0 197000.00 44.21 29.03.10 45.25 1.04 204880.00

Net gain 522107.49


59/119

CHART:- 5.1.9(I)

INFERENCE:-



59


60/119

TABLE:- 5.1.10

Benefits gained by M/s Agni Steels, Erode, during the period 2009-2010through

three months forward contract.



INFERENCE:-

The company incurred a notional loss of Rs. 104049

INTERPRETATION:-



60

DATE

BILL

AMOUN

T IN

USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZATION

SPOT

RATE OF

UTILIZTIO

N

DIFFERENCE IN

THE RATES

BENIFITS

IN INR

08.03.10 73735.75 46.04 08.03.10 45.62 -0.42 -30969

11.03.10 60891.73 46.08 11.03.10 45.65 -0.43 -26183.4

26.03.10 142109.8 45.9 26.03.10 45.57 -0.33 -46896.2


61/119

CHART:- 5.1.10(J)

INFERENCE:-



61


62/119

TABLE:- 5.1.11

Benefits gained by M/s Agni Steels, Erode, during the period 2009-2010, through

one month forward contract.

INFERENCE:-

The company gained an amount of Rs. 138257.50 through forward

contract.

INTERPRETATION:-


a lesser cost. For example the transaction dated 08.04.09, if the company hadnt taken a

forward cover booking they might have paid Rs.253255.60 but the company paid

Rs.239690.11only.

62

DATE

BILL

AMOUN

T IN

USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZATION

SPOT RATE

ON THE

UTILIZTION

DIFFERENCE

IN THE

RATES

BENIFITS

IN INR

08.04.0

9 4987.31 48.06 30.06.09 50.78 2.72 13565.5

08.04.09 33934.8 47.34 22.05.09 50.78 3.44 116736

18.05.0

9 79560 48.34 29.06.09 48.24 0.1 7956

Net gain 138257.50


63/119


64/119

TABLE:- 5.1.12

Benefits gained by M/s Uma Shankar Traders Erode during the period 2008-2009,

through one month forward contract.

64


65/119


position if contracts are not

cancelled).

INFERENCE:-

The company gained an amount of Rs.1576100 due to forward booking

and incurred a notional loss of Rs.60000 due to unfavourable market position. The net

gain was Rs.1636100 due to forward contract.

INTERPRETATION:-



forward cover booking they might have paid Rs.2,44,20,000 but the company paid Rs.

65

DATE

BILL

AMOUN

T IN

USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZATION

SPOT

RATE ON

THE

UTILIZTIO

N

DIFFERNECE IN

THE RATES

BENIFITS

IN INR

05.11.0

8 500000 47.87 23.12.08 48.84 0.97 485000

10.11.0

8 300000 47.65 23.12.08 48.84 1.19 357000

11.11.0

8 200000 48.06 23.12.08 48.84 0.78 156000

08.12.08 200000 49.56 31.01.09 49.26 -0.3 -60000*

11.12.0

8 300000 48.84 31.01.09 49.26 0.42 126000

11.12.0

8 300000 48.74 31.01.09 49.26 0.52 156000

11.12.08 300000 48.61 31.01.09 49.26 0.65 195000

12.12.0

8 330000 48.59 31.01.09 49.26 0.67 221100

Net gain 1636100


66/119

2,39,35,000 only .when the currency exchange rate turned unfavourable the company

cancelled the forward contract, incurring a nominal expenses towards bank charges.

66


67/119


68/119

TABLE:- 5.1.13


2009, through three months forward contract.

INFERENCE:-

The company gained an amount of Rs.900000.00 t hrough forward

contract.

INTERPRETATION:-


a lesser cost. For example the transaction dated17.12.08, if the company hadnt taken a

forward cover booking they might have paid Rs.2,50,85,000 but the company paid Rs.

2,41,85,000 only.

68

DATE

BILL

AMOUNT

IN USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZATION

SPOT RATE

ON THE

UTILIZTIO

N

DIFFERNECE

IN THE

RATES

BENIFITS

IN INR

17.12.0

8 500000 48.37 06.04.09 50.17 1.8 900000

Net gain 90000

0.00


69/119

CHART:- 5.1.13(M)

INFERENCE:-



69


70/119

TABLE:- 5.1.14

Benefits gained by M/s KPS oils, Erode, during the period 2008-2009 , through one

month forward contract.

INFERENCE:-

The company gained an amount of Rs. 195000.00 through forward

contract.

INTERPRETATION:-


a lesser cost. For example the transaction dated17.12.08, if the company hadnt taken a

forward cover booking they might have paid Rs.2,43,80,000.00 but the company paid

Rs. 2,41,85,000.00 only.

70

DATE

BILL

AMOUN

T IN

USD

FORWARD

BOOKED

RATE

DATE OF

UTILIZATION

SPOT

RATE

DIFFERENCE IN

THE RATES

BENIFITS

IN INR

17.12.0

8 500000 48.37 05.05.09 48.76 0.39 195000

Net gain 195000.00


71/119

CHART:- 5.1.14(N)

INFERENCE:-



71


72/119


73/119

CHART:- 5.1.15(O)

INFERENCE:-



73


74/119

TABLE:- 5.1.16

Benefits gained by M/s Subramaniam Bros Pollachi, during the period 2007-

2008 through three months forward contract.

INFERENCE:-

The company gained an amount of Rs 2931518.00through forwardcontract.

INTERPRETATION:-


a lesser cost. For example the transaction dated11.01.08.00, if the company hadnt

taken a forward cover booking they might have paid Rs.4,35,94,320.00 but the

company paid Rs. 4,11,17,370.00 only.

74

DATE

BILL

AMOUN

T IN

USD

FORWARD

BOOKED

RATE

DATE OF

UTILZATION

SPOT

RATE

DIFFERENCE IN

THE RATES

BENIFITS IN

INR

11.01.0

8 1011000 40.67 21.03.08 43.12 2.45 2476950

11.01.0

8 136200 40.67 21.03.08 42.71 2.04 277848

11.01.0

8 376000 40.65 21.03.08 41.12 0.47 176720

Net Gain 2931518.00


75/119

CHART:- 5.1.16(P)

INFERENCE:-



75


76/119

TABLE:-5.2.1

Details of forward contract cancelled by M/s Jayajothi textile mill (Pvt) Ltd,

during the period 2009-2010 for one month.

INFERENCE:-

The company cancelled the forward contract to avoid incurring loss.

INTERPRETATION:-

For transaction dated 08.03.10 if the company didnt opt for cancellation of

the contract it had to pay Rs. 46.04 per Dollar, where as in the market a Dollar was

available at Rs.45.62. Due to unfavourable contract, the company cancels the existing

forward contract and may opt for talking a fresh contract for minimising its loss.

76

DATE

BILL

AMOUN

T IN

USD

FORWARD

BOOKED

RATE

SPOT RATE

ON THE DAY

OF

CANCELLATI

ON

HANDLING

CHARGES

CANCELLATION

CHARGES

08.03.1

0 73735.8 46.04 45.62 9795 552

11.03.1

0 60891.7 46.08 45.65 8496 552

26.03.1

0 142110 45.90 45.57 16695 552


77/119

TABLE:-5.2.2

Details of forward contract cancelled by M/s Jayajothi textile mill (Pvt) Ltd,

during the period 2009-2010 for two months.

INFERENCE:-


INTERPRETATION:-

For transaction dated 03.06.09 if the company didnt opt for cancellation of the

contract it had to pay Rs. 47.80 per Dollar, where as in the market a Dollar was

available at Rs.46.41. Due to unfavourable contract, the company cancels the existing

forward contract and may opt for talking a fresh contract for minimising its loss.

77

DATE

BILL

AMOUN

T IN USD

FORWARD

RATES

SPOT RATE ON

THE DAY OF

CANCELLATION

HANDLING

CHARGES

CANCELLATION

CHARGES

03.06.0

9

256425 47.8 46.41

29345.2

552

03.06.0

9

236954 47.8 46.41

27292.04

552

06.10.0

9

314537 47.55 46.85

35299.45

552

06.10.0

9

222816 47.5 46.68

25653.73

552

06.10.0

9

310915 47.5 46.68

34885.23

552


78/119

TABLE:- 5.2.3

Details of forward contract cancelled by M/s Uma Shankar Traders, during the

period 2009-2010 for one month.

78

DATE

BILL

AMOUN

T IN

USD

FORWA

RD

BOOKE

D RATE

SPOT RATE

ON THE DAY

OF

CANCELLATI

ON

HANDLI

NG

CHARGE

S

CANCELLATI

ON

CHARGES

02.04.09 300000 50.42 50.17 35673.9

6

552

02.04.09 300000 50.48 50.17 35713.6

6

552

02.04.09 200000 50.43 50.17 24555.7

2

552

03.04.09 875000 50.34 50.42 99474.7

9

552

10.09.09 200000 48.57 48 55305.1

5

552

10.09.09 300000 48.63 48 23735.0

8

552

15.09.09 200000 48.81 48 23840.9

7

552

16.09.09 412700 48.69 47.79 46634.1

6

552

16.09.09 39400 48.62 48 6531.87

5

552


79/119

INFERENCE:-


INTERPRETATION:-


contract it had to pay Rs.50.42 per Dollar, in the market a Dollar is available at

Rs.50.17. Due to unfavourable contract, the company cancels the existing forward

contract and may opt for talking a fresh contract for minimising its loss.

TABLE:- 5.2.4

79


80/119


period 2009-2010 for two months.

INFERENCE:-


INTERPRETATION:-

For transaction dated 18.05.09if the company didnt opt for cancellation of the

contract it had to pay Rs.48.61per Dollar, in the market a Dollar is available at



80

DATE BILL

AMOUN

T IN USD

FORWARD

BOOKED

RATE

SPOT RATE ON

THE DAY OF

CANCELLATION

HANDLING

CHARGES

CANCELLATIO

N

CHARGES

18.05.0

9

500000 48.61 48.27

55922.83

552

19.05.0

9

270600 47.86 48.57

30875.72

552

04.08.0

9

110010 47.85 46.96

13918.34

552

05.08.0

9

200000 48.02 47.79

23492.42

552

10.08.0

9

500000 48.05 46.96

55305.15

552

16.09.0

9

525000 48.67 48

58673.16

552

06.01.1

0

500000 46.43 44.77

53518.29

552

07.01.1

0

998400 46.22 44.75

104104.2

552

07.01.1

0

322300 46.28 44.79

35210.79

552

07.01.1

0

200000 46.27 45.9

22720.32

552


81/119

TABLE:- 5.2.5


period 2009-2010 for three months.

INFERENCE:-


INTERPRETATION:-


contract it had to pay Rs.47.92 per Dollar, in the market a Dollar is available at



81

DATE BILL

AMOUNT

IN USD

FORWARD

BOOKED

RATE

SPOT RATE ON

THE DAY OF

CANCELLATION

HANDLING

CHARGES

CANCELLATION

CHARGES

04.08.09 300000 47.92 46.96 34019.46 552

200000 48.06 46.96 23510.07 552

05.08.09 200000 48 48 23483.6 552

07.10.09 300000 47.1 45.96 33476.78 552


82/119

TABLE:- 5.2.6


period 2009-2010 for six months.

INFERENCE:-


INTERPRETATION:-





82

DATE BILL

AMOUN

T IN USD

FORWARD

BOOKED

RATE

SPOT RATE ON

THE DAY OF

CANCELLATION

HANDLING

CHARGES

CANCELLATION

CHARGES

21.05.0

9

500000 48.08 46.96

55338.24

552

21.05.0

9

100000 48.07 46.96

12910.24

552

22.05.0

9

100000 47.88 46.96

12868.33

552


83/119

TABLE:- 5.2.7

Details of forward contract cancelled by M/s KPS oils, during the period 2009-

2010 for two months.

INFERENCE:-


INTERPRETATION:-

For transaction dated 06.11.09if the company didnt opt for cancellation of the


83

DATE

BILL

AMOUNT

IN USD

FORWARD

BOOKED

RATE

SPOT RATE ON

THE DAY OF

CANCELLATION

HANDLING

CHARGES

CANCELLATION

CHARGES

06.11.09 200000 47.13 46.12 23099.76 552

09.11.09 500000 46.88 46.12 54014.64 552

09.11.09 300000 46.8 46.12 33278.24 55209.11.09 448700

1.5 Final - Edited

Documents

Transcript of 1.5 Final - Edited