Case study for For Derivatives

Course: PGPIBCM

Please refer to the Project assessment sheet for grading purpose

Assessment Process:

1. Trainer will distribute the case

2. Students will work on the following case and present their conclusions in a presentation format
with a supporting file (in case of any calculations)
3. The file must be uploaded by each participating student in their learning management system in
the project section
4. Student will be assessed for their performance individually during the presentation
5. The case needs to be presented within 7 days of case disbursement.

Project Details:

 Form a group of 3-4 members in the class

 Make a presentation with the supporting file of excel

Reliance Industries Limited (RIL) is an Indian conglomerate holding company headquartered

in Mumbai, Maharashtra, India. Reliance owns businesses across India engaged in energy,
petrochemicals, textiles, natural resources, retail, and telecommunications. RIL’s one of main
business area is oil extraction, refining and exports

It exports Oil to more than 100 countries and accepts payments in three main foreign currencies
USD, EURO and GBP. Post Fed’s announcement of reduction in BS and possible hike in Dec 17,
the INR has depreciated about 1.5% against USD. Due to uncertainty over Brexit, GBP fell against
USD and consequently the depreciation of INR against GBP was lessor in magnitude. All these FCY
ex rate movement impacts the revenues of RIL which is computed and reported in INR.

RIL has exported about 1000 barrel crude oil to Russia at $50 per barrel today. Export proceeds will
come after 3 month. The company would not need this money for next 9 month from the date of
receipt. Hence, it wants to invest today the money for 9 months on receipt of money for which it
wants to know the interest rates and lock in that for investment with further value date. The USD
LIBOR for 3 month, 9 month and 1 year period is 2%, 3% and 4% respectively.

Given the mammoth size of its operations, RIL has dedicated separate Treasury team which
manages the funds movements and invests the idle funds into various financial instruments available
India Financial Market. The RIL treasury has recently bought fixed rate 15% bond of Infosys at INR
200. Now they have fear of decline in price due to uncertainty over company’s management and
increasing unfavorable US policy which may impact revenue adversely.

While tracking India equity market, one of Treasury member mentioned that share price of NTPC (a
PSU unit involved in power generation and transmission) which is currently at INR 150, will increase
significantly over next 5 years period and it would be good investment from RIL long term strategy.
However, RIL does not have permission of buy security in spot market and can only have non-
funded exposures in derivatives.

1) How can RIL hedge its exposure to risk of exchange rate movements on revenues which are
reported in INR (local currency)?

2) Which type of derivative instrument RIL will use for deploying money from exporting Crude
oil to Russia and at what rate? Assume, if RIL did not invest today and wait till receipt of
money, it could earn about 3.5% rate. Compute gain or loss to RIL due to derivative
instrument.

3) Which type of instrument RIL treasury should buy in order to limit the loss on account of
possible fall in bond price of Infosys? Discuss the possible payoff of this strategy (share +
potential instrument)

Suppose, one of the treasury member has opposite view on bond price moment and he
suggested to sell Call on Infosys bond at INR 205 for a premium of INR =3. If RIL do this,
what can be potential gain or loss, BEP for shorting a call?

4) Is it possible to transfer the risk of default on Bond for bond investor without selling? Explain
in details.

5) Given the view of treasury member on NTPC’s share price, which type of instrument you
suggest among available derivatives? Explain the MtM implication in future Vs Forward
market, in case Market price goes down to INR 100 and Initial Margin and Maintenance
margin requirement mentioned by NSE is 40% and 25% respectively.