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1. Introduction
1.1 Organization Description
ICICI Bank is India's second-largest bank with total assets oI Rs. 3,562.28 billion
(US$ 77 billion) at December 31, 2009 and proIit aIter tax Rs. 30.19 billion (US$
648.8 million) Ior the nine months ended December 31, 2009. The Bank has a
network oI 1,668 branches and about 4,883 ATMs in India and presence in 18
countries. ICICI Bank oIIers a wide range oI banking products and Iinancial
services to corporate and retail customers through a variety oI delivery channels
and through its specialized subsidiaries and aIIiliates in the areas oI investment
banking, liIe and non-liIe insurance, venture capital and asset management. The
Bank currently has subsidiaries in the United Kingdom, Russia and Canada,
branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and
Dubai International Finance Centre and representative oIIices in United Arab
Emirates, China, South AIrica, Bangladesh, Thailand, Malaysia and Indonesia. Its
UK subsidiary has established branches in Belgium and Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the
National Stock Exchange oI India Limited and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE).
Rural, Micro banking and Agribusiness Group (RMAG)
ICICI Bank`s rural, micro banking and Agribusiness group (RMAG) provides
various services such as Forex and derivatives, Iactoring, mid cap credit, and Agri
Investment Banking Solutions.


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Forex and derivatives
In less than three decades oI their coming into vogue, derivative markets have
become an extremely important component oI Iinancial markets in world over, and
is growing tremendously everyday. Derivatives have evolved as a low-cost,
eIIective method Ior users to hedge and manage their exposures to interest rates,
commodity prices, or exchange rates. Over time, as Iinancial markets have
developed, derivatives have assumed the role oI eIIective risk-management tools
Ior the market participants, while also helping in substantially reducing their cost
oI debts. By providing investors and issuers with a wider array oI tools Ior
managing risks and raising capital, derivatives improve the allocation oI credit and
the sharing oI risk in the global economy, lowering the cost oI capital Iormation
and stimulating economic growth.
In their endeavour to provide Iinancial solutions at every stage oI an agri-business
value chain, Agri-SME caters to a host oI exporters and importers. ICICI Bank
oIIer products that not only help their clients who have any kind oI Iorex exposure
by way oI exports or imports to protect their exposure against market Iluctuations,
but also substantially reduce the cost oI debt and leverage upon income earning
potential through customised derivative structures. Rapid Forex is one such
Iacility, which will help our clients to hedge their Ilows and also to reduce their
cost oI debt. Under the program, Iorex and derivatives Iacilities would be
sanctioned to speciIic borrowers who meet certain predeIined eligibility criteria.





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Features
O Specialized , parameterized program Ior sanctioning Iorex and derivative
Iacilities to Agri-SME
O Enables Iacilities Ior hedging oI Iorex exposure Ior exporter/importer
community.
O !er client limit oI upto Rs 20 million.
O Unsecured-no security/collateral requirement.
O Minimal documentation; only business proIiles and Iinancials required.
O Speedy sanction.
O Specialized products Ior shorter term Ioreign exchange borrowings.
O Instant booking oI deals on phone.

Factoring

ICICI Bank's Factoring perIorms an important trade Iinance service by helping you
convert your receivables into cash - thus helping you tide over constraints oI cash
Ilow and working capital.

Factoring relies on the Iinancial strength, creditworthiness oI your customers. Your
account receivables in the Iorm oI invoices and bills are purchased by ICICI Bank
at a discount. Thus, the onus oI collection too Ialls on ICICI Bank and you can
Iocus your attention and eIIort on the growth oI your business.

Services
Domestic Iactoring - discounting oI non-LC backed domestic invoices/ bills
Export Iactoring - discounting oI non-LC backed export invoices/bills.


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Benefits
O Flexible Iinancial solution.
O Improves client`s cash Ilow.
O Improves client`s credit rating.
O Reduces client`s credit risk.
O Improves supplier`s discount.
O EIIicient management oI client`s Receivables

Mid Cap Credit
ICICI Bank has specialized programmes to cater to Small and Medium
Agribusiness Enterprises (SMAEs) to meet their speciIic Iinancing needs. Indian
SMAEs are increasingly Iocusing on improved production methods, penetrative
marketing strategies and modern management tools to sustain and strengthen their
operations. Our in-house sector experts have made extensive Iield visits, studied
sectors and interacted with all stakeholders to design customized bouquet oI
products Ior the SMAEs sector
.
Agri Investment Banking Solutions
In ICICI Bank, through their Iocus on Investment Banking, It oIIers Strategic
advisory services Ior Agri Inc's. Their strong team oI advisors and analysts oIIers
end-to-end solutions Ior inorganic growth aspirations oI clients Irom target search
to merger & acquisition Iinancing, Strategic alliances/ Joint ventures and property
development advisory & placements.





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1.2 Description of Project in Brief
The Iirst phase and second phase oI study includes collection oI the secondary
data which includes major trade industries in Rajasthan in trade with special
Iocus on agriculture trade, statistics Ior total trade happening in Rajasthan in
last ten years and the share oI the products that is being exported. The
secondary data would also include the list oI major players in the industry Ior
export and import and the means oI transport oI export /import Irom Rajasthan
with its share in the goods transport.
The third phase and the Iourth phase oI the project would start with study oI
diIIerent Iactors which exporters and importers considers beIore choosing a
bank, Iinancial institutions Ior IulIilling their Iinancial needs in export/import
business. A survey would be conducted to collect the primary data through
questionnaire to Iind out which Iactors are more important according to
exporters/importers Ior choosing Iinancial institution based on their responses
analysis would be done with the help oI various research tools. The Iollowing
are the Iactors which exporters/ importers considers Ior choosing Iinancial
institution
!ast relationship-V1
Quantum oI lending V2
Security asked by the bank-V3
Interest rate-V4
Costing oI hedging tool-V5
Transparency in derivative margin-V6
Ease oI operation-V7
!rocessing time at the time oI requirement-V8
Finance in Ioreign currency-V9
!roximity oI the branch Irom the oIIice-V10
InterIace with treasury manager-V11


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Strategic advisory services Irom the bank-V12

The IiIth phase oI the study includes study oI the currency risks involved in the
Ioreign exchange and mitigation oI the currency risk through hedging.

1.3 Scope of the project
1. To identiIy the major trade Industries in Rajasthan in trade with special Iocus
on Agriculture Trade.
2. To identiIy the major hubs oI trade business.
3. To identiIy means oI transport oI export /import Irom Rajasthan with its share
in the goods transport
4. To identiIy the countries in relation to export/import origination.
5. To identiIy various Iinancial needs oI industries in trade business with reIerence
to Currency Conversion and Credit needs by ICICI Bank`s trade Services.
6. To study the ICICI Bank and Non ICICI Banks clients.

1.4 Methodology
O Primary Data: It will be collected through structured questionnaire which
comprises oI open and closed ended questions.
O Secondary Data: It will be collected through various departments,
published and unpublished resources.
O Sampling Technique: Convenient Sampling (sometimes known as grab or
opportunity sampling is a type oI non-probability sampling which involves
the sample being drawn Irom that part oI the population which is close to
hand. That is, a sample population selected because it is readily available
and convenient.)


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O Sample Size: 50 Importers/Exporters
O Scope of Study: Jaipur, Jodhpur & Kota city oI Rajasthan
O Data Analysis: Data will be analyzed through S!SS soItware, where
questionnaire will be analyzed and various test will be perIormed on it to
reach to the Iinal conclusion.
1.5 Limitations
O The data collected Irom various clients through questionnaires may be
subjected to subjectivity.
O The data collected is primary and secondary and have chances oI
discrepancy.
O Company policy: No access to secret and conIidential reports and data oI the
company.
O Some respondents are reluctant.
O Area is conIined to three cities (Jaipur, Jodhpur & Kota) oI Rajasthan.
O Cross veriIication oI question is not possible.












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2. Main Text
2.1 Concept of trade finance
Trade Iinance is related to international trade. Where a seller (the exporter) can
require the purchaser (an importer) to prepay Ior goods shipped, the purchaser
(importer) may wish to reduce risk by requiring the seller to document that the
goods have been shipped. Banks may assist by providing various Iorms oI support.
Players in trade finance
Buyers are the primary drivers oI Trade Iinance. They are largely responsible Ior
shaping consumer demand Ior the products they wish to sell. They are also the Iirst
in the chain to Ieel the pressure to reduce costs in a market. The raw material prices
keep rising but consumers expect prices to keep Ialling in this new world oI large
retail chains.
Suppliers need good trade Iinance in place. As the company that manuIactures the
goods, they not only Ieel the current increases in the raw materials, energy, and
labor costs but are traditionally hurt the most since they need to bear the brunt oI
the cost and typically go the longest between the initial outlay Ior raw materials,
overhead, labor and the day they Iinally get paid Ior producing the product.
Financing Institutions play the role oI lender in global trade Iinance and oIIer
various types oI Iinancing. This includes a number oI trade Iinancing services
including Letter oI Credit, Collections, Stand-by Letter oI Credit, !re and !ost
shipment Iinance, Bill Discounting and !urchase, Bank Acceptances.
Transporters or Logistics providers cater to the physical movement oI goods, and
can provide visibility to all the constituents by updating the transit records oI the
goods shipped. Their internal systems when integrated to a trade Iinance solution


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can give an authenticated record oI the goods shipped. Their current location and
expected delivery time enables not only buyers and sellers to update their records
but will also act as a risk mitigation tool Ior a Iinancial institution on the Iinance
provided.
2.1.1 Instruments of Trade Financing
Documentary credit (Letter of Credit)
This is the most common Iorm oI the commercial letter oI credit. The issuing bank
will make payment, either immediately or at a prescribed date, upon the
presentation oI stipulated documents. These documents will include shipping and
insurance documents, and commercial invoices. The documentary credit
arrangement oIIers an internationally used method oI attaining a commercially
acceptable undertaking by providing Ior payment to be made against presentation
oI documentation representing the goods, making possible the transIer oI title to
those goods. A letter oI credit is a precise document whereby the importer`s bank
extends credit to the importer and assumes responsibility in paying the exporter.
A common problem Iaced in emerging economies is that many banks have
inadequate capital and Ioreign exchange, making their ability to back the
documentary credits questionable. Exporters may require guarantees Irom their
own local banks as an additional source oI security, but this may generate
signiIicant additional costs as the banks may be reluctant to assume the risks.
Allowing internationally reputable banks to operate in the country and oIIer
documentary credit is one way to eIIectively solve this problem.




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How does a letter of Credit Work? | Steps 1 - 4 |



Applicant(buyer/Importer)

The buyer completes a contract with the seller and Iills in a letter oI credit
application Iorm and sends it to his or her bank Ior approval.

Issuing Bank(Buyer's Bank)

The issuing bank approves the application and sends the letter oI credit details to
the seller's bank (advising bank).

Advising Bank

The advising bank authenticates the letter oI credit and sends the beneIiciary
(seller) the details by post or Iax.

Beneficiary(seller/Exporter)

The seller examines the details oI the letter oI credit to make sure that he or she
can meet all the conditions. II necessary, he or she contacts the buyer and asks
Ior any necessary amendments to be made.





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Counter trade
Most emerging economies Iace the problem oI limited Ioreign exchange holdings.
One way to overcome this constraint is to promote and encourage countertrade.
Today`s modern counter trade appears in so many Iorms that it is diIIicult to devise
a deIinition. It generally encompasses the idea oI subjecting the agreement to
purchase goods or services to an undertaking by the supplier to take on a
compensating obligation. The seller is required to accept goods or other
instruments oI trade in partial or whole payment Ior its products. Some oI the
Iorms oI counter trade include:

Barter This traditional type oI countertrade involving the exchange oI
goods and services against other goods and services oI equivalent value, with no
Monetary exchange between exporter and importer.

Counter purchase The exporter undertakes to buy goods Irom the importer or
Irom a company nominated by the importer, or agrees to arrange Ior the purchase
by a third party. The value oI the counter purchased goods is an agreed percentage
oI the prices oI the goods originally exported.

Buy-back The exporter oI heavy equipment agrees to accept products
manuIactured by the importer oI the equipment as payment.

Factoring
This involves the sale at a discount oI accounts receivable or other debt assets on a
daily, weekly or monthly basis in exchange Ior immediate cash. The debt assets are
sold by the exporter at a discount to a Iactoring house, which will assume all


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commercial and political risks oI the account receivable. In the absence oI private
sector players, governments can Iacilitate the establishment oI a state-owned
Iactor; or a joint venture set-up with several banks and trading enterprises.

Pre shipping financing
This is Iinancing Ior the period prior to the shipment oI goods, to support pre-
export activities like wages and overhead costs. It is especially needed when inputs
Ior production must be imported. It also provides additional working capital Ior the
exporter. !re-shipment Iinancing is especially important to smaller enterprises
because the international sales cycle is usually longer than the domestic sales
cycle. !re-shipment Iinancing can take in the Iorm oI short term loans, overdraIts
and cash credits.

Post shipping Financing
Financing Ior the period Iollowing shipment. The ability to be competitive oIten
depends on the trader`s credit term oIIered to buyers. !ost-shipment Iinancing
ensures adequate liquidity until the purchaser receives the products and the
exporter receives payment. !ost-shipment Iinancing is usually short-term.

Buyer`s credit
A Iinancial arrangement whereby a Iinancial institution in the exporting country
extends a loan directly or indirectly to a Ioreign buyer to Iinance the purchase oI
goods and services Irom the exporting country. This arrangement enables the buyer
to make payments due to the supplier under the contract





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Supplier`s credit
A Financing arrangement under which an exporter extends credit to the buyer in
the importing country to Iinance the buyer`s purchases.


























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2.2 Trade scenario of Rajasthan
1- General
Exports hold the key not only Ior a healthy balance oI payments position and
macro-economic, but also Ior a planned and sustained economic development. In
the absence oI a strong perIormance on the export Iront. The balance oI payments
position oI the country comes under strain and retards economic progress. In Iact
exports serve as a mirror reIlecting the health oI a nation's economy. Rajasthan has
traditionally been an exporter oI primary goods. However Ior quite some time now,
the State has entered into the arena oI exporter manuIactured goods and value
added items.

The signiIicance oI exports Irom the State lies not only in earning Ioreign
exchange Ior the country's exchequer but also in indirect beneIits to the State such
as:
(a) Expansion oI market opportunities Ior its produce;
(b) Improvement in product quality and subsequent handling techniques:
(c) Technological up gradation in terms oI plant, machinery and manuIacturing
process.
(d) Greater employment opportunities
(e) Exposure to the international marketing and technological environment etc.
Since independence, exports have been given high priority and the country has
worked to achieve growth in exports.
Rajasthan has been an exporter oI traditional goods. However, Ior quite some time
now, the State has entered into the arena oI export oI manuIactured goods and
value-added items.
The State Government had identiIied exports as one oI the thrust areas.


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Export !romotion Cell has been set up in the State Commissioner ate oI Industries.
The Rajasthan Small Industries Corporation Ltd. has been recognized as an Export
House. !romotional eIIorts Ior export growth are also being made by the Bureau oI
Industrial !romotion and the Rajasthan State Industrial Development and
Investment Corporation Ltd. The manuIacturers and exporters have given an
excellent account oI themselves in export eIIorts which is evident Irom the sharp
increase in the volume oI exports in the recent years.

Initial thrust boosting exports in the State was provided by the Industrial !olicies
oI the State announced in 1994, 1998. This incorporated several incentives Ior
industries in general and export-oriented units, in particular.
The incentives were both in the Iorm oI Iiscal as well as administrative measures.
This and the Foreign Trade !olicy oI Government oI India announced accelerated
the growth oI exports Irom Rajasthan.

Keeping in view the vital role oI exports, considerable emphasis was laid on
development oI export sector in the Industrial !olicies declared in 1994,1998.
In which several new incentives were announced Ior exporting units. Also
wherever possible, procedural simpliIications were made Ior exporting units, as a
result oI which an export Iriendly environment is sought to be created.

A comparative study oI export Iigures oI Rajasthan and the Country as a whole
reveals that Rajasthan's contribution towards exports in 2006-07 was
approximately Rs. 15186.41 chores in the All India Iigure oI Rs. 571779.00 crores
which is approximately Rs. 2.66 .Though this is a very small share oI the
country s total exports, this has to be viewed in the context oI the historical Iact
that Industrial Development was virtually non-existent in the State at the time obits


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Iormation.

However, since then, Industrial Development has witnessed a sea-change and the
number oI large and medium scale industries has risen to about 370 and go to the
number or SSI units has gone up to 2.60 lacs. The increase in exports Irom the
State has kept pace with the tempo oI Industrial Development in recent years.

Thus, exports Irom the State have risen Irom Rs. 31 .14 chores in 1973-74 to about.
15186.41 crones in 2006-07.With the onset oI economic reIorms, the approach
towards Export and Import is changing Iast. The State Government has also shiIted
its role Irom being a 'Regular to a 'Iacilitator and promoter.

Incentives forepart Oriented Units
Government oI Rajasthan has provided several incentives like over-riding priority
in release oI power connections to units set up in Export/Import !rocessing Zone,
exemption Irom power cuts, purchase tax exemption depending on the level oI
investment and entry tax exemption to help promote export-oriented units. The
policy oI encouraging already started paying rich dividend and in turn exports have
led to the overall industrial Development oI the State. State has also declared its
SEZ !olicy and act lot oI concessions and Iacilities has been incorporated.

2.2.1 Export Performance
The entrepreneurs oI Rajasthan are exporting a wide variety or products, which
include handicraIts, carpets, readymade garments, printed Iabrics, make ups,
leather goods, chemicals, minerals, stones, viz. marble, granite, slate, sand stones,
Engineering goods, precious and semi precious stones and jewelers etc.



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As per the inIormation collected Irom the DGCI&S in the State, goods worth:
688.86 cr. in the year 1991-92, 1051.00 cr. in 1992-93, Rs. 1432.28 cr. in 1993-94,
2820.37 cr. in 1994-95, 3300 cr. in1995-96, 901. 67 cr. in 1997-98, Rs. 4228.79 cr.
in 1995-96, Rs. 3480.55 cr. in 1996-97,Rs. 4228.79 cr in 1998-99, Rs. 4623.43 cr.
in 1999-2000, Rs. 4534.36 cr. in 2000-01,Rs. 4647.81 cr. in 2001-02, 5150.96 cr.
in 2002-03, Rs. 6433.30 cr. in 2003-04, Rs. 8002 .03 cr. in 2004-05, Rs. 12355.97
cr. in 2005-06 and Rs. 15186.41 cr. in 2006-07 were exported Irom Rajasthan.

The expel perIormance oI Rajasthan in the recent past with regard to manuIactured
good: points towards the competitiveness oI these products abroad, The buoyancy
in exports has been particularly evident since 1992-93 a when the policy Ior export
promotion adopted a measure oI selectivity in products whose export potential
could easily be identiIied. Among the manuIactured goods, Gems & jewellery
worth Rs.l4957 cr. Woolen Carpets worth Rs. 309.21 chores, Agro-based and
Ioods products worth Rs.762.07 chores, HandicraIts valued Rs 1960.23 chores.
Readymade Garments worth Rs.657.95chores.Textiles worth Rs.1864.54,
engineering.
goods worth 3301 .49 chores, Dimensional Stones worth Rs. 923.43 chores and
Chemical !roducts worth Rs.1367.23 chores Irom the State during 2006- 07.

An Export !romotion Cell has been working in the Commissioner ate oI Industries
Ior the last 14 years. In about Iourteen years oI its existence, the expel Cell has
been playing the role oI catalyst in promoting the growth oI export Irom Rajasthan
The cell compiles detailed inIormation about the exporters oI the State and exports
Irom the State and it has created a systemic obtain this inIormation on a regular
basis. Contacts have been established with various Export !romotion Councils and
other agencies involved in the Iield oI Ioreign trade. With a view to recognizing the


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services oI outstanding exporters, the State Government Re-launched a Rajasthan
Export Award Scheme organized Ior the year 2003-04 when 22 exporters has been
honored by the hobble ChieI Minister oI Rajasthan on 7 December 2004. The
training programmes on Export !rocedure, Documentation and Marketing in
Foreign Market are also being organized. 13 !rogrammes at diIIerent potential
centers were conducted. 2 programmes are also being organized in current years
shortly.

Advisory committee on Foreign Trade
To coordinate the eIIorts oI various agencies and to assist the State Government in
Iormulating the strategy Ior export promotion, Advisory Commit-tee on Foreign
Trade' at the apex level under the Chairmanship oI Hon`ble Industries Minister oI
Rajasthan has been constituted. The Committee has been constituted to given
wider representation to various Associations/organizations connected with exports.
!eriodic meetings oI this Committee are being held to resolve the problems oI
exporters by Rajasthan Small Scale Corporation.

State level Export Promotion Committee
To approve & Monitoring oI the projects under centre Assistance to the States Ior
Developing Export InIrastructure and Allied Activities'' (ASIDE) Scheme oI the
State Government has constituted and Export !romotion.
Committee under the chairmanship oI ChieI Secretary oI Rajasthan. Export
InIrastructure project with cost (including 2 years maintenance and Ior E!I!
Sitapura, Jaipur) worth Rs.188.30 Crore have been sanctioned by committee.
The total assistance oI Rs. 1 10.05 chore shall be provided under the scheme.
Commissioner Industries has been nominated as Commissioner Exports under the
Scheme.


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2.2.2 Export Infrastructure
RIICO plays a catalytic role in industrial development oI Rajasthan.
Keeping in view the speciIic requirements oI export oriented units, RIICO has
given emphasis Ior developing special packs corset-ting up oI such units.

(l) Export !romotion Industrial !arks (E!I!s)
This E!I!S have been developed/are being developed under a scheme oI
Department oI Commerce, Government oI India. In E!I!S, only those units.
which undertake to export minimum 33 oI their production. are allot-ted land.
The BrieI details oI these three E!I!S are as under:

(i) E!I! at Sitapura, Jaipur
This Iirst E!I! oI the State was developed by RIICO at Sitapura, jaipur over an
area oI 365 acres (409 plots). The park is Iunctional since March, 1997 with 62
units (96 plots) being in production and 25 plots are under construction.

(ii) E!I! at Boranada, Jodhpur
This second E!I! oI the State has been developed by RIICO at Boranada, Jodhpur
over an area oI 207 acre on which an expenditure approximately Rs. 18 crone has
already been incurred. !lots are allotted mainly to, handicraIt units. /ill basic
inIrastructure Iacilities Irom July 2003.

(III) E!I! at Neemrana, Alwar
This third E!I! oI the State is being developed at Neemrana located on NH8,
(Delhi Jaipur Road). The park comprises 169 saleable industrial plots oI which 150
plots have been allotted. This E!I! is being developed with and estimated project


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cost oI about Rs.3scrore and expenditure oI Rs. 18 chore (has already been
incurred.
2.2.3 Special Economic Zones
SEZS are speciIically delineated duty Iree enclaves treated as a Ioreign territory Ior
the purpose oI industrial, service and trade operations, with exemption Irom
custom duties and a more liberal regime in respect oI other levies, Ioreign
investment and other transactions. Domestic regulations, restrictions and
inIrastructure inadequacies are sought to be eliminated in the SEZS Ior creating a
hassle-Iree environment. The SEZ Scheme seeks to create a transparent system by
introducing simpliIied procedures Ior enhancing productivity and making it easier
to do business.
Three SEZS have been developed/ are being developed by RIICO. The brieI '
details oI these SEZS are as under:-

I SEZ for jems and jewellery units at Sitapura, 1aipur (phase I)
This SEZ (!hase 1) Ior Gems & Jewellery units, being set up at Sitapura, Jaipur
has been planned over 21 .50 acres oI land .All 51 plots planned have already been
allotted. Roads, drainage, boundary wall, and power supply, street light work and
all other basic inIrastructure Iacilities have been developed.


II SEZ for Handicraft Units at Boranada, 1odhpur
This SEZ Ior handicraIt units at Boranada, Jodhpur has been planned over 180.94
acres oI land (287 plots). Basic inIrastructure Iacilities have been, created in this
SEZ,



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III SEZ for Gems and jewellery units at sitapura, jaipur (Phase-II).
This SEZ (!hase II) Ior Gems & jewellery units at Sitapura, Jaipur has been
planned over 89.39 acres oI land (186plots). Basic inIrastructure Iacilities have
been created in this SEZ.

IV Public- Private Partnership for SEZ
RIICO, on behalI oI the State Government is also promoting Iirst multi- product
SEZ in !ublic-private-partnership on Jaipur- Ajmer National ' Highway. The SEZ
would be developed on 2500 acres oI land and the Domestic TariII Area would be
developed on 550 acres oI land. The Government oI India has approved IT/ITes
SEZ in 49 hectare in phase I and has accorded in-principal approval Ior multi-
products, SEZ.
2.2.4 Other export Promotion Infrastructure Development Projects under
ASIDE Scheme
The Assistance to State Ior Developing Export InIrastructure and Allied Activities
(ASIDE) is a Government oI India Scheme. The objective oI the scheme is to
involve the states in the export eIIort by providing assistance to the State
Governments Ior creating appropriate inIrastructure Ior the development and
growth oI exports. Department oI Commerce has merged erstwhile schemes oI
Critical InIrastructure Balancing (CIB). E!I!, SEZ etc. under ASlDE Scheme.

RIICO has emerged as the leading organization in implementation oI ASIDE
Scheme.
Following projects, sanctioned by state Level Export !romotion committee headed
by ChieI Secretary oI Rajasthan under ASIDE Scheme, have been completed:


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O Improvement oI link roads to Jodhpur (Rs.169.34 Lacs).
O Improvement oI existing link road Irom N. H. 8 to Bhiwadi via Rathiwas
(Rs.102.45 lacs).
O Improvement oI Bhiwadi linking road via Akera (.100 lacs).
O Construction oI CET! at Bhiwadi (Rs.122.25 lacs).
O Link Road to 1CD Bhiwadi.
O Improvement link roads connecting to 1 A KHUSHKHERA to N H 8 and
1A chopanki to SH-25.
O Upgradation oI link road to 1CD, Bhiwadi (Rs.41 1.67 lacs).
O -ray machine at Air Cargo Complex Jaipur (32.00 lacs).
O Earth Station at Jodhpur (Rs. 365.00 lacs).
O Link Road to Agro Food !ark Sri Ganganagar.
O Improvement oI Link Roads Connecting 1 A Khushkhera to NH-8 & 1 A
Chopanki to SH-25.

The Iollowing projects, sanctioned by the Government oI India under ASIDE
Scheme, are under implementation.
O Export !romotion InIrastructure Ior Stones, Jaipur (Rs.600 lace).
O Improvement oI link roads connecting 1 A Khushkhera to Budibawal &1A
Sarekhurd with Nuh Road.
O Stone !ark at Sikandar.
O Link Road connecting Khushkhera to NH-8 via Kasaula chock.
2.2.5 Air Cargo Complex (Acc) And Inland Container Depot (ICD)
The Rajasthan Small Industries Corporation Limited (RSIC) has been operating at
Air cargo Complex at Sanganer, jaipur since 1979. This Iacility has provided many


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FMS IRM 1AIPUR 23
services required by the exporters under one rooI. The Iacility oI bonded trucking
has been started thereby Custom cleared shipment to the overseas destinations.

Rajasthan being a landlocked State, the RSIC has set up a chain oI Inland
Container Depots (ICD) at Jaipur/jodhpur/Bhiwadi/ Bhilwara Irom where Custom
cleared containerized cargo is sent to the ports oI Mumbai and Nava shiva,
!ipavav, Mundra. Kandla and Adani Ior loading on ships leaving Ior ports oI
destination.

The broad operations that are carried out at 1CD'S and Air complex are as
Iollows:-
O Receiving Cargo/ Container at the 1CD/ ACC
O Customs Inspection oI the material.
O StuIIing oI goods in the case oI exports and destuIIing oI goods in the case
oI imports.
O Movement oI setoII export/import containers between 1CD & postmaster
approval oI customs Department.
O Transportation oI export/import loaded container through road plus rail
Irom 1CD, laipur and Bhiwadi with CONCOR and shortly to be started at
Jodhpur.
O ACC has also been appointed Custodian oI Import and Export cargo Ior
Gems jewelers as personal carriage.

O No ground rent is charged Ior storage oI empty container at 1CD, Bhiwadi
and Bhilwara.
O The storage charges oI import cargo is Iree Ior two days at 1CD, Jaipur,


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FMS IRM 1AIPUR 24
Jodhpur and Bhilwara and Iive days at Bhiwadi.
O !roper warehouse Iacilities Ior cargo.
O Computerized online operations at lCD, jaipur.
O SuIIicient space Ior parking empty containers.
O Fully equipped Ior handling cargo/containers.
O Competitive rates Iorwarding, storage and transportation.
O LCL Iacilities.
O All port related Iacilities with Custom clearance.
O Weigh bridge Iacility at 1CD, jaipur and jodhpur.
O -ray machine Iacility at Air Cargo Complex.
O Fast movement oI containers.
O !erIect co-ordination with customs Gateway ports. CHA, Shipping-lines,
Iumigator and with other agencies.
O Timely and saIely transportation oI cargo/container.
2.2.6 100 Export oriented units
The Government oI India has given approval Ior establishing oI 223 export,
oriented units, oI these 223 EOU projects, 62 units have already came in
production as detailed below-:

S.NO Category NO
1 Granite& Marble 11
2 Agro & Food products 12
3 Chemicals & Allied !roducts 2
4 Textiles 16
5 Engineering 6


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6 Leather & Leather products 1
7 Computer soItware and Electronics 3
8 Gems & Jewellery 2
9 !lastics & Linoleums 1
10 HandicraIts 3
11 Drugs & !harmacies 1
12 Others 4
Total 62

2.2.7 Special incentives to export in the state
A number oI incentives have been allowed Ior Exporting oI the State.
These are -:
1 !ublic utility status under section 2(n)oI the industrial Disputes Act,1956 has
been given to 100 EOU's and this has also been given to the exporting units
which exports 50 or more oI their production.
2 Entry Tax has been exempted to the 100 export units.
3 Over-siding priority is given in the release oI power connections to the units to be set up
in E!I!/ SEZ. Besides they have been exempted Irom powercuts.

4 State Government has declared its policy and Act regarding Special Economic
Zone. Following Iacilities/concessions are provided to the units established in SEZ
located in the state and their developer:

O Stamp Duty remission to the units in SEZ developed by RIICO.
O Exemption Irom !urchase Tax to the Units established within special


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FMS IRM 1AIPUR 26
Economic zone Developed by RIICO.
O Exemption Irom works contract Tax so the units established within special
Economic zone developed by RIICO.
O Sales-Iax Exemption to the units Established in the special Economic Zone
developed by RIICO.
O Entry Tax Exemption to the units in the SEZ developed by bitch at Jaipur &
Jodhpur.
O Exemption Irom Electricity duty.
O LBT Exemption to the units in SEZ developed by RIICO.
O Services oI Assistant Environmental Engineer.
O Exemption Electricity duty Ior the period oI 10 year Ior paper Generation
and distribution.
O !ublic utility status under the section (2n) oI Industrial dispute Act.
O Delegation oI !ower oI SSI Registration Ior the development
Commissioner oI SEZ.
2.2.8 Rajasthan Export Awards
State Govt. has relaunched the Scheme namely Rajasthan Export Award. 22
excellent exporters have been honored by hobble ChieI Minister oI Rajasthan.

Applications Ior Rajasthan Export Award are invited Irom the exporters or the
state through advertisement in state level local newspapers. InIormation is also sent
to DIC's, Export !romotion Councils and Exporters Associations.
The selection is made by a State Level Committee on the basis oI a inIormation
submitted by the applicant Ior export perIormance Ior the year oI award,
percentage increase in exports over last two consecutive years. New markets


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FMS IRM 1AIPUR 27
exploited, new products exported. Use oI local skill research & development
quality
control etc.




















S.No !roduct Group No oI
Awardees
1 Agro Based & Iood !rocessing 2
2 Electronic & Computer SoItware 2
3 Mineral Based 2
4 Engineering 2
5 Chemical 2
6 Merchant 2
7 Miscellaneous 2
8 Readymade Garments 2
9 Carpets, Durries and wool based 2
10 !recious and Semi precious Stones 2
11 Gold/Silver/!latinum Jewellery 2
12 HandicraIts 2
13 Textiles 2
14 Women Entrepreneurs 2
Total 28


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2.2.9 Items Exported from Rajasthan
Below is the list oI the items that is being exported Irom Rajasthan
O Cement
O Chemicals & Allied !roducts
O Drugs and !harmaceuticals
O Durries
O Electronics
O Engineering Goods
O Food !roducts/Agro !roducts
O Gems and Jewellery
O HandicraIts items
O Leather Goods
O Marble, Granite & Other Stones
O !lastics and Linoleums
O Readymade Garments
O Rice
O Textiles
O Woolen Carpets
O Wool and Woolen






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FMS IRM 1AIPUR 29
2.3 Mitigation of currency risk
The globalization oI business generates Ioreign currency risks which need to be
recognized. The globalization process is irreversible and will be critical to the
survival oI most industries and businesses. This process aIIords enormous
opportunities to diversiIy business risk, generate economies oI scale and capture
additional market share. Managing Ioreign exchange risk requires understanding
political, economic and Iinancial markets. It is not always possible Ior all
participants to have experience in the market options available. It is possible to
have suIIicient knowledge to mitigate most oI the risks that businesses can Iace.
Managing Ioreign exchange risk requires understanding currency convertibility--
with open or closed borders--when exchange rates are Iixed, Iloating or managed.
Knowing the appropriate hedging actions to take is essential in any oI these
complex situations.
A success global business proIessional may not actively participate in Ioreign
exchange risk mitigation; however, understanding the risks and opportunities is
essential to operating a proIitable international business. To master the concepts in
this Task, you must know and understand Ioreign exchange risk mitigation
techniques and required documentation: hedging tools, currency option contracts,
and transIer pricing.
The globalization oI business generates Ioreign currency risks. This process is
irreversible and critical to the survival oI most industries and businesses. The
'globalization process aIIords enormous opportunities to diversiIy business risk,
generate economies oI scale and capture additional market share.




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FMS IRM 1AIPUR 30
2.3.1 Types of Rates of Exchange
Fixed rate of exchange
A Iixed rate oI exchange is a ratio established by the government at which Ioreign
currencies can be exchanged. The value oI the national currency is based on parity
with other currencies. Sustaining the parity is the question: iI other Iactors Iorce a
market change to a Iloating rate, the impact could negatively impact the country.
Floating rate of exchange
A Iloating rate oI exchange allows open market conditions to determine the value
oI the currency in relationship to other currencies. Open market exchange rates are
highly volatile and change every 5 seconds or 18,000 times per day. Any given
currency typically Iluctuates 1 during a 24- hour period. The volatility oI the
market is inIluenced by political, economic and technical conditions that come into
play and cause Iluctuations that may exceed the typical movement. This volatility
translates into the need to manage the risk oI rising or Ialling exchange rates.
Managed rate of exchange
A managed rate oI exchange allows a central bank to intervene to adjust Ior market
conditions. It controls wide valuation swings that may occur due to adverse market
conditions.
2.3.2 Market Drivers
Speculative Trading
!olitical, economic and technical events are the drivers oI change in the Ioreign
exchange markets. Having a broad understanding oI these Iactors provides a
practical means oI Iorecasting Ioreign exchange rates. A Iorecast is static and not


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FMS IRM 1AIPUR 31
constant and thereIore must be monitored and adjusted based on market conditions.
Some key Iactors to consider are balance oI payment, inIlation rates, investor
conIidence and intervention in the Ioreign exchange market. Historically
businesses purchased Ioreign currencies to settle trade-related transactions. Today
there are many reasons to purchase Ioreign currencies. Investing in stock markets,
the purchase oI manuIacturing Iacilities, holding the currency Ior interest income
or speculation and the purchase oI bonds are some oI the ways investors utilize
Ioreign currency. Markets are now impacted by market makers as they assume a
high level oI risk by buying and selling in suIIicient quantities to aIIect market
prices.
Balance of Payments
!ayments that Ilow between one country and all other countries determine its
balance oI payments. It is deIined as the sum oI the current account, the capital
account and the change in oIIicial reserves. A current account is considered more
short-term in nature while the other two are more long-term.
Balance oI !ayments Current Account Capital Account Change in OIIicial
Reserves
O The current account is the net oI all goods and services between the United
States and all other countries. The current account is generally the most
volatile. The balance oI trade between the United States and all other
countries determines whether we are a net exporter or importer. Our need Ior
inexpensive goods over what we could buy locally has caused us to become
a net importer with a growing trade deIicit. The deIicit could be a severe
problem iI dollars were sold in mass quantities to the extent oI lowering the
value oI the dollar itselI.


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O The capital account is the purchase oI our currency or the repatriation oI our
currency Ior direct Ioreign investment in stocks, capital goods, land, etc.
Capital goods are holdings other than cash and have to be converted back to
cash in order to remove them Irom the country. This conversion process
takes more time and is less volatile than having a current account.
O OIIicial reserves are the holdings by Ioreign governments in the US dollar.
These reserves can be used to stabilize their currency by selling oII the
dollars and purchasing their local currency, creating an artiIicial demand and
driving the price oI their currency up. The impact oI this type oI selling,
which is generally short-term in nature, is done to prevent wide swings in
the value oI the local currency.
The balance oI payments has a signiIicant impact on the value oI a currency. While
movements in a current account have the biggest impact, they are oIten balanced
by the other two. The United States tries to entice Ioreign investors to invest in
capital goods; in doing so we repatriate some oI the dollars back into our country.
We also encourage governments to increase their reserves in the United States. The
impact oI making similar investments in dollars can oIIset the Iluctuations in the
current account. It is only when conIidence in all three areas is lacking that the
United States dollar will decline signiIicantly.
Inflation Rates
InIlation causes the value oI local goods to become more expensive, impacting the
ability oI other countries to buy local goods and services. It makes products less
competitive in a Iree-market economy. Time combined with market conditions will
cause the re-establishment oI purchasing power parity between two countries.


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FMS IRM 1AIPUR 33
!urchasing power parity (!!!), as deIined by the Swedish economist G. Cassel in
1918, is that natural market conditions will adjust the exchange rates between the
domestic currency and any Ioreign currency to reIlect diIIerences in the inIlation
rates between them, which means there is a direct correlation between the
movement oI inIlation rates between two counties and their respective Ioreign
exchange rates.
Investor Confidence
The typical Ioreign business model starts with the export oI goods. The eventual
success will lead to the establishment oI a manuIacturing plant with local
production. Eventually competition, iI unchecked, will Iorce the manuIacturing
costs to go down so that the once- exporter starts importing goods he exported. The
ability to Iollow this model is heavily dependent upon investor conIidence. Foreign
direct investment is dependent upon political stability, GD! (economic
perIormance) and government deIicits. Investors` expectations are Ior higher
returns with managed risk. !olitical stability is a key determinant oI investor
conIidence. Civil striIe in the Iorm oI strikes, riots or civil commotion and
expropriations by governments discourage investor conIidence and lower the value
oI a currency. High tax rates, high deIicits and poor overall economic perIormance
by a country contribute to poor investor conIidence. Investment will return should
investors believe that the country is in a recovery mode and these Iactors will
change to their beneIits.





PRO1ECT REPORT 2010
FMS IRM 1AIPUR 34
Intervention
Trading in Ioreign exchange can be very risky. There are arbitrageurs that beneIit
Irom price diIIerences based on time and place. Their ability to enter and exit the
market quickly can create a temporary price diIIerential. Their objective is to make
quick proIits; this Iorm oI derivative trading is considered the most risky.
Governments use their ability to intervene in the market to prevent wide swings in
their currency. Their ability to utilize their reserves to buy and sell their currency
can stabilize the market temporarily providing time to adjust any other market
conditions that impact the value oI their currency. Governments also determine
interest rates, thus creating an investment option that entices capital into the
country. These tools are temporary in nature: in order to keep long-term capital in a
country, there must be stability without political turmoil
2.3.4 Measuring Foreign Exchange Exposure
Transaction Exposure
Transactions in the Iorm oI purchase contracts or agreements denominated in a
Ioreign currency but not yet settled create transaction exposure. The Iluctuation oI
the currency will have an impact on the value until the transaction is completed.
The value oI an unsettled export receivable or an import payable is just one
example. There are multiple hedging techniques to help the investor minimize his
risk, including:
O Iorward contracts
O Iutures contracts
O use oI a money market hedge


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FMS IRM 1AIPUR 35
O contractual risk sharing
O pricing adjustments based on Iorward rates
O Ioreign currency accounts
O Ioreign currency options
Translation Exposure
The revaluation oI all Ioreign-denominated assets and liabilities oIten reIerred to as
transIer pricing is usually considered 'paper gains or losses. The conversion oI an
asset by selling it and converting the proceeds to the local currency would create a
realized gain or loss. This Iorm oI exposure is created when Iinancial statements
are prepared and converted to the local currency oI the owner or investor. This
Iorm oI exposure is considered an indication oI potential gains or losses.
Economic Exposure
The evaluation oI Ioreign governments Irom an economic standpoint determines
whether a translation exposure could be realized. The projected stability oI a
country, both politically and economically, impacts Iuture cash Ilows and can
adversely impact the proIitability oI an organization. Strategic planning Ior
operations must include economic exposure.
2.3.5 Business Needs for Foreign Currency
Accounts Payable and Accounts Receivable
Companies purchase raw materials or component parts Ior the manuIacturing oI
goods. When the transaction is conducted in a currency other than the local
currency, risk increases. In order to control the cost oI goods sold and reduce the
risk, using some Iorm oI hedge is necessary.


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FMS IRM 1AIPUR 36
Companies that buy and sell in a Ioreign currency will oIten use a netting eIIect.
The company will maintain a Ioreign currency account to deposit Iunds Irom sales
and to withdraw Iunds to pay Ior purchases. The repatriation oI Iunds generally
results in the Iorm oI proIits which are converted and transIerred to the home
oIIice periodically, thus taking advantage oI Iavorable market conditions.
Interest rates vary widely Irom country to country. It oIten makes sense, depending
on the cash position oI the company, to take an equal and opposite Ioreign
exchange exposure position to complete a transaction at maturity. The company
could take out a loan in the amount oI a receivable in the Ioreign currency, convert
it to their local currency and use the proceeds Irom their receivable to pay oII their
loan. The company may also buy the Ioreign currency and place it on deposit with
a bank to earn interest and use it to pay oII the payable at maturity. This action will
enable the company to Iix the exchange rate and take advantage oI Iavorable
investment opportunities.
A buyer and seller may agree contractually to share the exposure risk. They can
establish diIIerent parameters based on market conditions to control the risk.
!arameters can include payment oI goods in the local currency, the splitting oI the
payment in both the buyer`s and seller`s currency, or the inclusion oI a price
adjustment clause iI the exchange rate changes substantially.
The most common means to control exposure risk is to engage in a Iorward
contract either in the Iorm oI a purchase or sale oI a currency. The Iorward contract
establishes a Iixed price to be paid at maturity on the date the contract is executed.
The general requirement is a small security deposit to secure the completion oI the
trade at maturity. Thus the company Iixes the price without using capital until the
maturity oI the contract. The Iixing oI the price oI the Ioreign exchange contract


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 37
also allows the company to make a decision today whether to proceed or not based
on current rates. The company can then price the product Ior sale based on the
actual cost oI the components.
Balance Sheet Hedging
Foreign currency options protect against adverse Ioreign exchange Iluctuations
while beneIiting Irom a positive movement in the exchange rate. The trader is
provided with the right but not the obligation to buy (call option) or sell (put
option) a speciIic amount oI Ioreign currency at a Iixed price within a set period.
!rotection is provided. II the rates are unIavorable to the trader, he will just
exercise the option; should the rates be Iavorable to the trader, then there is no
need to exercise the option. Because oI its advantages, this process Ior a right to
buy or sell can be expensive. It is generally used Ior large denominations.
Contingent obligations resulting Irom long contract negotiations could make this
an attractive means oI controlling exposure risk.
Acquisition Activity
Acquisitions take time to conclude and are oIten in large denominations. The
evaluation oI an acquisition is diIIicult enough without the worry oI Ioreign
exchange rate Iluctuations. Options provide a good hedge against rate Iluctuations
during the negotiation process.
2.3.6 Foreign Exchange Trading
The exchange oI one currency Ior another currency, dollars (USD) Ior Japanese
yen (J!Y), is the basic deIinition oI Ioreign exchange. There are two diIIerent
types oI quotations:


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FMS IRM 1AIPUR 38
O Indirect quotation - The price oI a national currency expressed in terms oI
one unit oI a Ioreign currency
O Quoting Japanese yen at a rate oI 110
O 1 USD 110.00 J!Y
O Direct quotation - The value oI one unit oI national currency in terms oI the
Ioreign currency
O Quoting USD at a rate oI .009091
O 1 J!Y .009091 USD.

2.3.6 Common Instruments to Offset Risk
Spot
Spot trades are priced and executed on the spot based on the current market rate
and are paid Ior immediately. Spot contracts are generally done verbally and
considered binding. When executing a trade, an oIIer price is provided; iI accepted,
the contract is considered done. Delivery oI the currency is generally two days
Iorward; the two-day`s time is used Ior the bank to receive the currency it
purchased and deliver the currency to the beneIiciary as provided by the buyer.
Forwards
Forward contracts are priced by combining the current spot price with the Iorward
points. Forward points are based on the diIIerential in interest rates oI the two
countries. The discount or premium points, once determined, are combined with
the spot rate to create the Iorward rate. Some currencies are not traded openly, but


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 39
there is a non-deliverable currency market. By hedging with a non-deliverable
Iorward, a purchaser can protect against rate Iluctuations rather than settling a
transaction at maturity using the exchange rate that is posted on that date.
Settlement would be in the local currency to provide additional local Iunds to settle
the transaction.
Swaps
Spot contracts are settled immediately while a Iorward contract has a Iixed
maturity and must be settled at maturity. Capital can be tied up when the need to
deliver the currency has been delayed. Swaps provide an opportunity to exchange
the Ioreign currency Ior the local currency Ior a Iixed period oI time and 'swap it
back when it is needed.
Options
Options provide protection Ior large denominations by taking advantage oI rate
improvements while protecting against the negative impact oI a rate change.
Alternatives Countertrade Iorms can and are oIten used when a currency cannot be
traded. Bartering is most commonly used, but other Iorms are counter purchase,
advance purchase, buy backs and bilateral arrangements.
The Iear oI encountering Ioreign exchange Iluctuations and exposing a company to
risk is oIten the deciding Iactor Ior a company to stay out oI the global market.
When international managers understand the risk and the tools available to manage
any potential risk, greater opportunities become available Ior the company.
Entering the global market and being willing to deal in Ioreign currencies may lead
to increased business opportunities.



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FMS IRM 1AIPUR 40
2.3.7 Letter of Credit as Risk Control
Import LC: Importer only required to pay iI compliant documents received by
bank proving goods shipped.

Confirmed export LC: Exporter receives guarantee oI payment Irom local bank
against compliant documents proving goods shipped.

Transferable LC: BeneIiciary can transIer LC to one or more new beneIiciaries.
Used when Iirst beneIiciary acts as middleman/does not supply goods himselI.

Back-to-back LCs: Two separate LCs where Iirst LC acts as 'security' Ior second
LC as potential source oI repayment. Used by traders who buy and on-sell goods

Standby LC: Enables open account trade, under bank guarantee to pay against
speciIied documents.















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2.4 Hedging and Derivative`s
Hedging is a position established in one market in an attempt to oIIset exposure to
price Iluctuations in some opposite position in another market with the goal oI
minimizing one's exposure to unwanted risk. There are many speciIic Iinancial
vehicles to accomplish this, including insurance policies, Iorward contracts, swaps,
options, many types oI derivative products, and perhaps most popularly, Iutures
contracts.

Derivative`s
A derivative is a Iinancial instrument whose value depends on the value oI the
underlying variables. There are broadly 4 types oI derivatives:
Forwards: A Iorward contract is a bilateral agreement in which the buyer
and the seller agree upon the delivery oI a speciIied quality and quantity oI
an asset on a speciIied Iuture date at a price agreed today. These are not
traded on the exchanges.
Futures: Future contracts are exchange-traded contracts to sell or buy
Iinancial instruments or physical commodities Ior Iuture delivery at an
agreed upon price.
Swaps: The word 'Swap literally means an exchange. A Swap may be
deIined as a contract whereby two parties (known as counter parties),
exchange two diIIerent streams oI cash Ilows over a deIinite period oI time,
usually through an intermediary like a Iinancial institution. The nature oI the
exchange Ilows to be exchanged is deIined in the contract.
Options: An option is an agreement between two parties one oI whom is
the buyer and the other is the seller. An option gives the holder or the buyer
oI the option the right but not the obligation, to buy or sell an asset at a
known Iixed price at a given point in the Iuture. The seller in turn has the
obligation (and not the right) to sell the asset to the buyer. For assuming this


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FMS IRM 1AIPUR 42
obligation the seller charges a premium called Option premium Irom the
buyer.
2.4.1 Forward and Future Contracts
Forward Contracts
A Iorward contract is traded in the Over the Counter Market, usually between two
Iinancial institutions or between a Iinancial institution and client. One oI the parties
assumes a long position and agrees to buy the underlying asset on a certain
speciIied Iuture date Ior a certain speciIied price. The other party assumes a short
position and agrees to sell the asset on the same date Ior the same price. The price
in a Iorward contract is known as the delivery price.
Future Contracts
Future contracts have evolved out oI Iorward contracts and are exchange-traded
versions oI Iorward contracts. In Iutures contract there is an agreement to buy or
sell a speciIied quantity oI Iinancial instrument/commodity in a designated Iuture
month at a price agreed upon by the buyer and seller. The contracts have certain
standardized speciIications with the date and time oI expiry oI the contract.
Types oI Future Contracts
The common underlying Ior which the Iutures are constructed, are:
Commodity Futures: Futures in which the underlying asset is a commodity.
It can be agricultural commodity like wheat, corn, soyabeans, perishable
commodities like pork or even precious assets like gold, silver etc.
Financial Futures: Futures in which the underlying assets are Iinancial
instruments like money market paper, notes, bonds. Currency Iutures on
major convertible currencies like the US dollar, !ound, Euro or Yen.
Security Iutures such as single stock Iutures and stock index Iutures.
Index Futures. Futures in which the underlying asset is an index. Most oI
these contracts are Ior stock indices. The more Iamous indices on which
Iutures are traded are Standard and !oor Composite 500, The New York
Stock Exchange Index.



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Long and Short Positions in a Forward/ Futures Contract
Long !osition
The party, who buys the contract, is considered, as assuming a long position
in the market with the expectation that price will go up. II the market goes
down the party with the long position tends to lose money.
The payoII Irom a long position in a Iorward contract Ior one unit oI an asset
is St-k. (Where, St is the spot price oI the asset at the time oI the maturity oI
the contract and K is the delivery price).
Short !osition
The party, who sells the contract, assumes a short position. Going short is
selling oII expecting the price to go down. At the time oI the maturity iI the
delivery price is higher than the spot price the seller makes proIit. II the
delivery price is less than the spot price at the time oI maturity oI the
contract the seller incurs a loss.
The payoII Irom a short position in a Iorward contract Ior one unit oI an
asset is K-St. (Where, St is the spot price oI the asset at the time oI the
maturity oI the contract and K is the delivery price).
Figure: !ay-oII in Forwards contracts
Forward contracts have linear/symmetric pay-oII proIiles, highlighting the Iact that
both the buyer and the seller oI these products have equal rights and obligations.
Consequently, the buyer pays no compensation to the seller, upIront. The pay-oIIs
to the buyer and seller are a linear Iunction oI the price underlying.

K is the delivery price oI the contract (the price at which the underlying
commodity or security moves Irom the seller to the buyer) and St is the spot price
oI the asset at the time oI the maturity oI the contract. This is because the holder oI
the contract is obligated to buy an asset worth S Ior K.



PRO1ECT REPORT 2010
FMS IRM 1AIPUR 44























roflL
Loss
8uyer's ay
off
SpoL prlce (SL) of Lhe commodlLy
aL Lhe Llme of Lhe maLurlLy
Seller's ayoff
uellvery rlce
(k)


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 45
Forward and Futures contract
i) Characteristics
Forward Contracts Future Contracts
Forward contracts are OTC (Over
the Counter) contracts.
They are bilateral contracts and
hence exposed to counter-party
risk.
Each contract is custom designed,
and hence is unique in terms oI
contract size, expiration date and
asset type and quality.
The contract has to be settled by
delivery oI the asset on expiration
date. In case, the party wishes to
reverse the contract, it has to
compulsorily go to the same
counter party.
Futures are essentially exchange
traded. Future contracts are
standardized in terms oI its
various characteristics like
quantity, quality, settlement dates
and market conventions etc., Ior
the easy and convenient access by
a large number oI market
participants.
It is a price Iixing contract. The
buyer/seller is obligated to
take/give delivery or closeout the
positions at the pre agreed price
Ior the purpose oI settlement.
In Iutures market actual delivery
oI goods takes place only in a
very Iew cases. Transactions are
mostly squared up beIore the due
date and are settled by payment oI
diIIerences without any physical
delivery oI goods taking place.










PRO1ECT REPORT 2010
FMS IRM 1AIPUR 46
ii) Determining !rices
Forward Contracts Future contracts
In principle the Iorward price
Ior an asset would be equal to
the spot or the cash price at the
time oI the transaction and the
cost oI carry. The cost oI carry
includes all the costs incurred
Ior carrying the asset Iorward in
time. Depending upon the type
oI asset or commodity the cost
oI carry takes into account
Iactors including payments and
receipts Ior storage, transport
costs, interest payments,
dividend receipts, capital
appreciation etc.
Forward price Spot or the cash price
Cost oI Carry
!rice discovery mechanism is
similar


iii) Functions oI the market

Forward Contracts Future contracts
Forward contract is a simple
agrrement to buy or sell an asset at a
certain Iuture time Ior a certain price.
Since, the Iorward contract is traded
in over the counter market and not in
an exchange the market/exchange
has no role to play in a Iorward
transaction.
Futures markets perIorm certain
important economic Iunctions.
They meet the needs oI three groups oI
Iuture market users.
1. Those who wish to discover
inIormation about the Iuture
prices oI commodities.
2. Those who wish to speculate
3. Those who wish to hedge

iv) Advantages


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 47
Forward Contracts Future contracts
Forward contract has no margin
system. This means the cost oI
entering into a transaction Ior both the
buyer and the seller is zero.
Absence oI credit risk. At any
point oI time the maximum
credit risk is limited to one-day
movement in Iutures prices.
High liquidity: Futures market
gives the participants the option
to come out oI their positions at
any time they want.
High Leverage: Futures are
highly leverages instruments,
which attracts large number oI
market participants who ensure
high liquidity at all times.
!rice stabilization: In times oI
violent price Iluctuations, the
Iutures mechanism enables to
reduce the price Iluctuations














PRO1ECT REPORT 2010
FMS IRM 1AIPUR 48
v) Limitations
Forward Contracts Future contracts
The contracts are private and are
negotiated bilaterally between
the parties. ThereIore, there are
no exchange guarantees,
The prices are not transparent,
as there is no reporting
requirement.
The proIit or loss is realized
only on the maturity date.
Settlement is only through
actual delivery or oIIsetting by
cash delivery. Closing out is not
possible.
Futures are not versatile Ior
hedging strategies due to
standardization oI commodities.
This limitation is overcome by
'options
Exact hedge is not possible.
Future contracts cannot be
tailored to the particular needs
oI Iirms and Iinancial
institutions.

Forwards V/s Futures in a Nutshell
!articulars Forward Contracts Future Contracts
Trading Traded on a private basis
and bilaterally negotiated
Traded on the Iloor oI an
exchange through open
outcry or electronically
Nature They are customized by
the two counter parties
as per their requirements
They are exchange
traded standardized
contracts
!rocess !rivate and negotiated
bilaterally between the
parties with no exchange
guarantees
Transaction takes place
through a clearing house
which provides
protection Ior both the
parties
Margin Requirements Involves no margin Requires a margin to be
paid
Liquidity Less liquid as the
contract prices are not
transparent and there is
no reporting requirement
More liquid as their
prices are transparent
due to standardization
and market reporting oI
volumes and price
Settlement By actual delivery or Usually by closing out


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 49
oIIset with cash
settlement. A Iorward
contract can be reversed
only
through oIIsetting oI
positions
Credit Risk Credit risk is substantial
as the contracts are not
bound by strict rules and
regulations
Credit risk is largely
eliminated by the use oI
margins (initial,
additional, mark to
market margins etc.)

2.4.2 Options
There are two types oI Options
Call Option: A Call Option gives the buyer the right (option) to buy the underlying
asset by a certain date Ior a certain price. He can choose not to exercise the option.
The seller oI the call option has an obligation to sell the asset.
!ut Option: A !ut Option gives the buyer the right (option) to sell the underlying
asset by a certain date Ior a certain price. He can choose not to exercise the option.
The seller oI the call option has an obligation to buy the asset.
There are several speciIic terms used in the context oI options. They are:
Buyer/Holder/Owner
This reIers to the person who buys the option and as a result has the right (option)
to either buy/sell the underlying without the attendant obligation to do so.
Seller/Writer
The person who sells the option and as result has only the obligation to either
buy/sell the underlying, having surrendered his rights to the contract Ior a price
known as the option premium.
Option !remium
Amount paid by a buyer to the seller Ior acquiring the right to buy or sell an
underlying. Alternately, it is the price received by the seller Ior surrendering his


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 50
rights in an option contract. It is usually paid upIront, i.e. at the time oI entering
into the option contract.
Strike price
The price at which the right to buy or sell the underlying is exercisable, which is
agreed upon upIront. It is also known as the exercise/agreed price.
Expiry Date
The date on which the options contract expires or become invalid.
!ayoII in a call option
Options are non-linear in their pay-oIIs to the buyer and seller. Since the rights and
obligations are skewed in Iavor oI the buyer to the detriment oI the seller, the latter
is compensated upIront, by the way oI a Iee known as option premium. The pay-
oIIs to the buyer and seller are not linear vis-a-vis the price oI the
underlying/commodity.












roflL
Loss
8uyer's Call CpLlon

Seller's Call CpLlon
SpoL rlce of Lhe commodlLy
aL Lhe Llme of Lhe maLurlLy of
Lhe conLracL
SLrlke rlce


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 51
!ay-oII in a !ut Option









2.4.3 Margin System
Margin is the deposit money that needs to be paid to buy or sell each contract. The
margin required Ior a Iutures contract is better described as perIormance bond or
good Iaith money. The margin levels are set by the exchanges based on volatility
(market conditions) and can be changed at any time. The margin requirements Ior
most Iutures contracts range Irom 2 to 15 oI the value oI the contract.
The diIIerent types oI margins in Iutures that a trader has to maintain are:
Initial Margin: The amount that must be deposited by a buyer and seller at the time
oI entering into a contract is called initial margin. This margin is meant to cover
the largest potential loss in one day. The margin is a mandatory requirement Ior
parties who are entering into the contract.
Maintenance Margin: A trader is entitled to withdraw any balance in the margin
account in excess oI the initial margin. To ensure that the balance in the margin
account never becomes negative, a maintenance margin, which is somewhat lower
than the initial margin, is set. II the balance in the margin account Ialls below the
maintenance margin, the trader receives a margin call by the clearing house or
brokerage Iirm to deposit extra Iunds to bring it to the initial margin level within a
roflL
Loss
8uyer's uL CpLlon

SLrlke rlce
SpoL rlce of Lhe commodlLy
aL Lhe Llme of Lhe maLurlLy of
Lhe conLracL
Seller's Call
CpLlon


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 52
very short period oI time. The extra Iunds deposited are known as a variation
margin. II the trader does not provide the variation margin, the broker closes out
the position by oIIsetting the contract.
Additional margin: In case oI sudden higher than expected volatility, the exchange
calls Ior an additional margin, which is preemptive move to prevent breakdown.
This is imposed when the exchange Iears that the markets have become too volatile
and may result in some payment crisis, etc.
Mark-to-Market Margin: At the end oI each trading day, the margin account is
adjusted to reIlect the trader`s gain or loss. This is known as marking to market the
account oI each trader. All Iutures contracts are settled daily reducing the credit
exposure to one-day`s movement. Based on the settlement price, the value oI all
positions is marked-to-market each day aIter the oIIicial close i.e. the accounts are
either debited or credited based on how well the positions Iaired in that day`s
trading session. II the account Ialls below the maintenance margin level the trader
needs to replenish the account by giving additional Iunds. On the other hand, iI the
position generates a gain, the Iunds can be withdrawn (those Iunds above the
required initial margin) or can be used to Iund additional trades.













PRO1ECT REPORT 2010
FMS IRM 1AIPUR 53

2.5 Forex Derivatives in India
This tremendous growth in global derivative markets can be attributed to a number
oI Iactors. They reallocate risk among Iinancial market participants, help to make
Iinancial markets more complete, and provide valuable inIormation to investors
about economic Iundamentals. Derivatives also provide an important Iunction oI
eIIicient price discovery and make unbundling oI risk easier.
In India, the economic liberalization in the early nineties provided the economic
rationale Ior the introduction oI F derivatives. Business houses started actively
approaching Ioreign markets not only with their products but also as a source oI
capital and direct investment opportunities. With limited convertibility on the trade
account being introduced in 1993, the environment became even more conducive
Ior the introduction oI these hedge products. Hence, the development in the Indian
Iorex derivatives market should be seen along with the steps taken to gradually
reIorm the Indian Iinancial markets. As these steps were largely instrumental in the
integration oI the Indian Iinancial markets with the global markets.
The Iorex derivative products that are available in Indian Iinancial markets can be
sectored into three broad segments viz. Iorwards, options, currency swaps. We take
a look at all oI these segments in detail:
2.5.1 Rupee Forwards
An important segment oI the Iorex derivatives market in India is the Rupee
Iorward contracts market. This has been growing rapidly with increasing
participation Irom corporate, exporters, importers, banks and FIIs. Till February
1992, Iorward contracts were permitted only against trade related exposures and
these contracts could not be cancelled except where the underlying transactions
Iailed to materialize. In March 1992, in order to provide operational Ireedom to
corporate entities, unrestricted booking and cancellation oI Iorward contracts Ior
all genuine exposures, whether trade related or not, were permitted. Although due
to the Asian crisis, Ireedom to re-book cancelled contracts was suspended, which
has been since relaxed Ior the exporters but the restriction still remains Ior the
importers.


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FMS IRM 1AIPUR 54
RBI Regulations
The exposures Ior which the rupee Iorward contracts are allowed under the
existing RBI notiIication Ior various participants are as Iollows:
Residents:
O Genuine underlying exposures out oI trade/business
O Exposures due to Ioreign currency loans and bonds approved by RBI
O Receipts Irom GDR issued
O Balances in EEFC accounts
Foreign Institutional Investors:
O They should have exposures in India .
O Hedge value not to exceed 15 percent oI equity as oI 31 March 1999plus
increase in market value/ inIlows
Non-resident Indians/Overseas Corporate:
O Dividends Irom holdings in a Indian company
O Deposits in FCNR and NRE accounts
O Investments under portIolio scheme in accordance with FERA or FEMA
The Iorward contracts are also allowed to be booked Ior Ioreign currencies (other
than Dollar) and Rupee subject to similar conditions as mentioned above. The
banks are also allowed to enter into Iorward contracts to manage their assets -
liability portIolio. The cancellation and re-booking oI the Iorward contracts is
permitted only Ior genuine exposures out oI trade/business upto 1 year Ior both
exporters and importers, whereas in case oI exposures oI more than 1 year, only
the exporters are permitted to cancel and re-book the contracts. Also another
restriction on booking the Iorward contracts is that the maturity oI the hedge
should not exceed the maturity oI the underlying transaction.





PRO1ECT REPORT 2010
FMS IRM 1AIPUR 55

Some impediments
One oI the major issues that need to be addressed in the Iorward market relates to
depth and liquidity. The Iorward market in our country was active only up to six
months, where two-way quotes are available. As a result oI the initiatives oI the
RBI, the maturity proIile has elongated and now there are quotes available up to
one year. Understandably, in most oI markets where there are restrictions on
capital movements, liquidity across the spectrum as seen in the developed markets,
proves to be diIIicult at least in the early stages oI development oI the market. The
question that we would need to address is within these constraints, how can the
liquidity improve?
The liquidity in the Indian Iorwards market is mainly Ior the end maturity
contracts, where the bid-oIIer spread is also low. Standard maturity contracts like
Ior 3 months and 6 months are not quoted in the inter bank markets. Hence, the
cost oI entering into a standard maturity contract is much higher as compared to a
month end contract. Other eccentricities such as the tenuous links with the interest
rate diIIerential still prevail in a market driven primarily by supply/demand. The
Iorward premia has been gradually aligning to Iundamentals oI 'interest rate
parity, a process that should accelerate with increased convertibility on the capital
account. One oI the drivers Ior this could be that the integration between the
domestic market and the overseas market has been Iacilitated now by allowing Ads
to borrow Irom their overseas oIIices and invest Iunds in overseas money market
up to 25 percent oI Tier I capital.
Cross Currency Forwards
Cross currency Iorwards are also used to hedge the Ioreign currency exposures,
especially by some oI the big Indian corporates. The regulations Ior the cross
currency Iorwards are quite similar to those oI Rupee Iorwards, though with minor
diIIerences. For example, a corporate having underlying exposure in Yen, may
book Iorward contract between Dollar and Sterling. Here even though its exposure
is in Yen, it is also exposed to the movements in Dollar vis a vis other currencies.
The regulations Ior rebooking and cancellation oI these contracts are also relatively


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 56
relaxed. The activity in this segment is likely to increase with increasing
convertibility oI the capital account.

2.5.2 6urrency Futures

As mentioned earlier, Indian Iorwards market is relatively illiquid Ior the standard
maturity contracts as most oI the contracts traded are Ior the month ends only. One
oI the reasons Ior the market makers` reluctance to oIIer these contracts could be
the absence oI a well-developed term money market. It could be argued that given
the Iuture like nature oI Indian Iorwards market, currency Iutures could be
allowed.
Some oI the beneIits provided by the Iutures are as Iollows:
O Currency Iutures, since they are traded on organized exchanges, also conIer
beneIits Irom concentrating order Ilow and providing a transparent venue
Ior price discovery, while over-the-counter Iorward contracts rely on
bilateral negotiations.
O Two characteristics oI Iutures contract- their minimal margin requirements
and the low transactions costs relative to over-the counter markets due to
existence oI a clearinghouse, also strengthen the case oI their introduction.
O Credit risks are Iurther mitigated by daily marking to market oI all Iutures
positions with gains and losses paid by each participant to the clearinghouse
by the end oI trading session.
O Moreover, Iutures contracts are standardized utilizing the same delivery
dates and the same nominal amount oI currency units to be traded. Hence,
traders need only establish the number oI contracts and their price.
O Contract standardization and clearing house Iacilities mean that price
discovery can proceed rapidly and transaction costs Ior participants are
relatively low. However given the status oI convertibility oI Rupee whereby
residents cannot Ireely transact in currency markets, the introduction oI
Iutures mayhave to wait Ior Iurther liberalization on the convertibility Iront.

2.5.3 Options

Cross currency options

The Reserve Bank oI India has permitted authorised dealers to oIIer cross currency
options to the corporate clients and other interbank counter parties to hedge their
Ioreign currency exposures. BeIore the introduction oI these options the corporates
were permitted to hedge their Ioreign currency exposures only through Iorwards


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 57
and swaps route. Forwards and swaps do remove the uncertainty by hedging the
exposure but they also result in the elimination oI potential extraordinary gains
Irom the currency position. Currency options provide a way oI availing oI the
upside Irom any currency exposure while being protected Irom the downside Ior
the payment oI an upIront premium.

RBI Regulations

These contracts were allowed with the Iollowing conditions:
O These currency options can be used as a hedge Ior Ioreign currency loans
provided that the option does not involve rupee and the Iace value does not
exceed the outstanding amount oI the loan, and the maturity oI the contract
does not exceed the un-expired maturity oI the underlying loan.
O Such contracts are allowed to be Ireely re-booked and cancelled. Any
premia payable on account oI such transactions does not require RBI
approval
O Cost reduction strategies like range Iorwards can be used as long as there is
no net inIlow oI premia to the customer.
O Banks can also purchase call or put options to hedge their cross currency
proprietary trading positions. But banks are also required to IulIill the
condition that no stand alone` transactions are initiated.
O II a hedge becomes naked in part or Iull owing to shrinking oI the portIolio,
it may be allowed to continue till the original maturity and should be marked
to market at regular intervals.

There is still restricted activity in this market but we may witness increasing
activity in cross currency options as the corporates start understanding this product
better.

Rupee currency options
Corporates in India can use instruments such as Iorwards, swaps and options Ior
hedging cross-currency exposures. However, Ior hedging the USD-INR risk,
corporates are restricted to the use oI Iorwards and USDINR swaps. Introduction
oI USD-INR options would enable Indian Iorex market participants manage their
exposures better by hedging the dollar-rupee risk.

The advantages oI currency options in dollar rupee would be as Iollows:
O Hedge Ior currency exposures to protect the downside while retaining the
upside, by paying a premium upIront. This would be a big advantage Ior


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 58
importers, exporters (oI both goods and services) as well as businesses with
exposures to international prices. Currency options would enable Indian
industry and businesses to compete better in the international markets by
hedging currency risk.
O Non-linear payoII oI the product enables its use as hedge Ior various special
cases and possible exposures. e.g. II an Indian company is bidding Ior an
international assignment where the bid quote would be in dollars but the
costs would be in rupees, then the company runs a risk till the contract is
awarded. Using Iorwards or currency swaps would create the reverse
positions iI the company is not allotted the contract, but the use oI an option
contract in this case would Ireeze the liability only to the option premium
paid upIront.
O The nature oI the instrument again makes its use possible as a hedge against
uncertainty oI the cash Ilows. Option structures can be used to hedge the
volatility along with the non-linear nature oI payoIIs.
O Attract Iurther Iorex investments due to the availability oI another
mechanism Ior hedging Iorex risk. Hence, introduction oI USD-INR options
would complete the spectrum oI derivative products available to hedge INR
currency risk.

Exotic options

Options being over the counter products can be tailored to the requirements oI the
clients. More sophisticated hedging strategies call Ior the use oI complex
derivative products, which go beyond plain vanilla options. These products could
be introduced at the inception oI the Rupee vanilla options or in phases, depending
on the speed oI development oI the market as well as comIort with competencies
and Risk Management Systems oI market participants.

Some oI these products are mentioned below:

O Simple structures involving vanilla European calls and puts such as range-
Iorwards, bull and bear spreads, strips, straps, straddles, strangles,
butterIlies, risk reversals, etc.
O Simple exotic options such as barrier options, Asian options, Lookback
options and also American options
O More complex range oI exotics including binary options, barrier and range
digital options, Iorward-start options, etc


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 59
O Some oI the above-mentioned products especially the structure involving
simple European calls and puts may even be introduced alongwith the
options


2.5.4 Foreign currency - rupee swaps
Another spin-oII oI the liberalization and Iinancial reIorm was the
development oI a Iledgling market in FC-RE swaps. A Iledgling market in
FC-RE swaps started with Ioreign banks and some Iinancial institutions
oIIering these products to corporates. Initially, the market was very small
and two way quotes were quite wide, but the market started developing as
more market players as well as business houses started understanding these
products and using them to manage their exposures. Corporates started using
FC-RE swaps mainly Ior the Iollowing purposes:
O Hedging their currency exposures (ECBs, Iorex trade, etc.)
O To reduce borrowing costs using the comparative advantage oI
borrowing in local markets (Alternative to ECBs Borrow in INR and
take the swap route to take exposure to the FC currency)
The market witnessed expanding volumes in the initial years with volumes
upto US$ 800 million being experienced at the peak. Corporates were
actively exploring the swap market in its various variants (such as principal
only and coupon only swaps), and using the route not only to create but also
to extinguish Iorex exposures. However, the regulator was worried about the
impact oI these transactions on the local Iorex markets, since the spot and
Iorward markets were being used to hedge these swap transactions.
So the RBI tried to regulate the spot impact by passing the below
regulations:
O The authorized dealers oIIering swaps to corporates should try and
match demand between the corporate
O The open position on the swap book and the access to the interbank
spot market because oI swap transaction was restricted to US$ 10
million


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FMS IRM 1AIPUR 60
O The contract iI cancelled is not allowed to be re-booked or re-entered
Ior the same underlying.

The above regulations led to a constriction in the market because oI the one-sided
nature oI the market. However, with a liberalizing regime and a buildup in Ioreign
exchange reserves, the spot access was initially increased to US$ 25 million and
then to US$ 50 million. The authorized dealers were also allowed the use oI
currency swaps to hedge their asset liability portIolio. The above developments are
expected to result in increased market activity with corporates being able to use the
swap route in a more Ilexible manner to hedge their exposures. A necessary pre-
condition to increased liquidity would be the Iurther development and increase in
participants in the rupee swap market (linked to MIFOR) thereby creating an
eIIicient hedge market to hedge rupee interest rate risk.
Foreign currency derivatives
There is some activity in other cross currency derivatives products also, which are
allowed to be used to hedge the Ioreign currency liabilities provided these were
acquired in accordance with the RBI regulations.
The products that may be used are:
O Currency swap
O Coupon Swap
O Interest rate swap
O Interest rate cap or collar (purchases)
O Forward Rate Agreement (FRA) contract
However the regulations require that:
O The contract should not involve rupee
O The notional principal amount oI the hedge does not exceed the outstanding
amount oI the Ioreign currency loan, and
O The maturity oI the hedge does not exceed the un-expired maturity oI the
underlying loan



PRO1ECT REPORT 2010
FMS IRM 1AIPUR 61
Some proposed products
Finally some innovative products may be introduced which satisIy speciIic
customer requirements. These are designed Irom the cash and derivative market
instruments and oIIer complex payoIIs depending on the movement oI various
underlying Iactors. Some oI the examples oI these products are provided below:
O Accrual Iorward: With an accrual Iorward, Ior each oI the daily Iixings up to
expiry that spot remains within the range, the holder gets longer 1 unit oI
USD/INR at the Forward Rate. For example, Ior each oI the daily Iixings up
to expiry that spot remains within the range let us say 48.50 to 48.60, the
holder accrues 1 unit at the Iorward rate oI 48.56.
O Enhanced accrual Iorward: Enhanced accrual Iorward is similar to accrual
Iorward, but this contract has two Iorward rates, which apply Ior diIIerent
ranges. For example, Accrue long 1 unit per Iixing at Iorward rates oI 48.56
(Range 1 - 48.50 to 48.60) or Long 1 unit per Iixing at 48.47(Range 2-
below 48.50). So Ior each oI the daily Iixings up to expiry that spot remains
within the 48.50 48.60 range the holder accrues 1 unit at 48.56. For each oI
the daily Iixings up to expiry that spot is below 48.50 the holder accrues 1
unit at 48.47. II spot is ever above 48.60 then nothing will be accrued on that
day. Note that the two ranges do not overlap, so the holder will never accrue
more than 1 unit per Iixing.
O Higher yield deposits: This product can be developed to oIIer a comparable
higher yield than on a traditional Rupee money market deposit. Exercise
price: 48.80 per 1 US$ Instrike: 48.70 per 1 US$
There are three possible scenarios at maturity:
O II spot never trades at or beyond the instrike beIore expiration, the
investment plus interest at certain rate r` will be paid in rupee.
O II spot trades at or beyond the instrike beIore expiration and closes above the
exercise price, the investor is paid the invested capital plus interest r` paid
in rupee.
O But iI spot trades at or beyond the instrike beIore expiration and closes
below the exercise price, the investor is paid in USD. The sum paid in USD


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 62
corresponds to the amount oI invested capital plus interest oI r` converted at
the exercise price.


3. Data Analysis and Interpretation
Factor analysis is a class oI procedure primarily used Ior data reduction and
summarization. In Iactor analysis relationship amongst sets oI many interrelated
variables are examined and represented in terms oI a new underlying Iactors.
Factor analysis is an exploratory tool and so it should be used to guide the
researcher to make various decisions. One important decision is the number oI
Iactors to extract. Factor analysis is a general name denoting a class oI procedures
primarily used Ior data reduction and summarization.
Uses Of Factor Analysis
O It helps in reducing the number oI variables being studied to a smaller
number by combining related ones into Iactors.
O Factor analysis is an interdependence technique in that an entire set oI
interdependent relationships is examined without making the distinction
between dependent and independent variables.
O It helps in reducing the number oI variables being studied to a smaller
number by combining related ones into Iactors.
O Factor is an underlying dimension that accounts Ior several observed
variables
O Factor analysis is an interdependence technique in that an entire set oI
interdependent relationships is examined without making the distinction
between dependent and independent variables.
Stages in Factor Analysis
Factor Extraction: It is a technique which is used to extract Iactors based
on the eigen values done through principle component analysis in which the
variables with eigen values greater than 1 are selected that determines the
no. oI Iactors. Higher the eigen value oI the Iactor, higher is the amount oI
variance explained by the Iactor. Maximum number oI Iactors that can be


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FMS IRM 1AIPUR 63
extracted equals no. oI variables. The number oI Iactors extracted is
determined so that cumulative oI variance extracted reaches a satisIactory
level (at least 60).
Scree plot. A scree plot is a plot oI the Eigen values against the number oI
Iactors in order oI extraction.
The Shape oI the plot is used to determine the number oI Iactors
The plot has a distinct break between steep slope oI Iactors with large eigen
values & a gradual trailing oII associated with rest oI the Iactors
The gradual trailing oII is reIerred to as Scree
The point at which scree begins denotes the No. oI Iactors
Generally number oI Iactors determined by scree plot is 1or 2 more than
determined by eigen values
Factor Rotation: AIter extraction the next task is to interpret & name the Iactors.
This is done by identiIying which Iactors are associated with which original
variables. The Iactor matrix is used Ior this purpose. The original Iactor matrix is
unrotated & comes as output oI stage I. The rotated Iactor matrix comes as output
oI stage II when computer package perIorms rotation & give a rotated Iactor
matrix. The popular method oI rotation is Orthogonal (varimax or quartimax)
Although the initial or unrotated Iactor matrix indicates the relationship between
the Iactors and individual variables, it seldom results in Iactors that can be
interpreted, because the Iactors are correlated with many variables.ThereIore,
through rotation the Iactor matrix is transIormed into a simpler one that is easier to
interpret. In rotating the Iactors, It is imperative that each Iactor have nonzero, or
signiIicant, loadings or coeIIicients Ior only some oI the variables. Rotation does
not aIIect communalities & percentage oI total variance explained. However
percentage oI variance accounted Ior by each Iactor does change. In Iactor rotation
smallest loadings tend towards 0 & largest loadings tend towards 1. The rotation is
called orthogonal rotation iI the axes are maintained at right angles.
The Iactor matrix (whether unrotated or rotated) gives the loadings oI each variable
on each oI the extracted Iactors. This is similar to correlation matrix with loadings


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FMS IRM 1AIPUR 64
having values between 0 to1. Values close to 1 represent high loadings & close to
0 low loadings. The objective is to Iind variables which have a high loading on one
Iactor low loadings on other Iactors. II Factor 1 is loaded highly by variables, say,
3.6 & 10, then, it is assumed that Factor 1 is a linear combination oI variables 3, 6
& 10. It is given a suitable name representing essence oI original variables (3, 6 &
10)
Statistics Associated With Factor Analysis
The key statistics associated with Iactor analysis are as Iollows
Correlation matrix
A correlation matrix is a lower triangle matrix showing the simple coorelation , r,
between all possible pairs oI variables included in the analysis. The diagonal
elements, which are all 1, are usually omitted.
Eigen value
It represents the total variance explained by each Iactor
Percentage of variance
This is the percentage oI total variance attributed to each Iactor
Scree plot
A scree plot is a plot oI the eigen values against the number oI Iactors in order oI
extraction
Method Of Factor Analysis
Principle component analysis
In principle component analysis, the variance in the data is considered. The
diagonal oI the correlation matrix consists oI utilities, and Iull variance is brought
into Iactor matrix. !rinciple component analysis is recommended when the primary
concern is to determine the minimum number oI Iactors that will account Ior
minimum variance in the data Ior use in subsequent multivariate analysis. The
Iactors area called principle components.


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Common factor Analysis
In common Iactor analysis Iactors are estimated based only on the common
variance. Communalities are inserted in the diagonal oI the correlation matrix. This
method is appropriate when the primary concern is to identiIy the underlying
dimensions and the common variance is oI interest. This method is also known as
principal axis Iactoring.
The objective oI the research is to categorize the 12 attributes on the basis oI some
common Iactors. Thus to IulIill the objectives oI the research, applying principle
component analysis method is appropriate.
















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uL1L8MlnL 1PL nuM8L8S Cl lAC1C8S
8C1A1L 1PL lAC1C8S
ln1L88L1 1PL lAC1C8S
CALCuLA1L 1PL
lAC1C8S SCC8L
SLLLC1 1PL Su88CCA1L
vA8lA8LLS
uL1L8MlnL 1PL MCuLL ll1


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 66
PROBEM FORMULATION
The objective oI the analysis is to categorize the various attributes aIIecting the
client`s choice criteria Ior selecting a bank, on the basis oI some principle
components. A sample oI 50 respondents was interviewed. The respondents were
asked to rate the various variables on a scale oI 5 (1 not important at all, 5 very
important).
The various Iactors variables used Ior Iactor analysis are as Iollows:
!ast relationship-V1
Quantum oI lending V2
Security asked by the bank-V3
Interest rate-V4
Costing oI hedging tool-V5
Transparency in derivative margin-V6
Ease oI operation-V7
!rocessing time at the time oI requirement-V8
Finance in Ioreign currency-V9
!roximity oI the branch Irom the oIIice-V10
InterIace with treasury manager-V11
Strategic advisory services Irom the bank-V12











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FMS IRM 1AIPUR 67
3.1 Analysis
Correlation Matrix

!ast
Lendin
g
Securit
y
Int
ere
st
costi
ng
tran
s
eas
e
proces
s
Iorei
gn
proximit
y interIace advice
!ast
1.00 .229 .317
-
.11
4
.027
.12
8
.14
8
.299 -.243 -.004 .015 -.184
Lendin
g .229 1.000 .151
-
.18
2
-.005
-
.01
4
.00
7
.305 -.024 .029 .176 -.284
Securit
y .317 .151 1.000
.06
6
-.342
-
.30
9
-
.22
0
.005 .253 .183 .289 .213
Interest
-.114 -.182 .066
1.0
00
.053
.04
9
-
.07
9
-.167 .202 -.060 .096 .062
Costing
.027 -.005 -.342
.05
3
1.00
0
.81
1
.04
2
-.201 -.086 -.508 -.239 .091
Trans
.128 -.014 -.309
.04
9
.811
1.0
00
.26
1
-.019 -.256 -.462 -.283 -.161
Ease
.148 .007 -.220
-
.07
9
.042
.26
1
1.0
00
.618 -.373 -.007 -.254 -.282
!rocess
.299 .305 .005
-
.16
7
-.201
-
.01
9
.61
8
1.000 -.161 .224 .007 -.447
Foreign
-.243 -.024 .253
.20
2
-.086
-
.25
6
-
.37
3
-.161
1.00
0
-.069 .054 .350
!roximi
ty -.004 .029 .183
-
.06
0
-.508
-
.46
2
-
.00
7
.224 -.069 1.000 .399 -.087
InterIac
e .015 .176 .289
.09
6
-.239
-
.28
3
-
.25
4
.007 .054 .399 1.000 .119
advice
-.184 -.284 .213
.06
2
.091
-
.16
1
-
.28
2
-.447 .350 -.087 .119 1.000





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FMS IRM 1AIPUR 68



Determinant .014
Interpretation: The above table depicts the correlation matrix. These data represents
correlation among the 12 variables. The analytical process is based on a matrix oI
correlations between the variables. The above correlation matrix is a unit matrix with all
the diagonal elements being 1. Hence, it can be said that the above variables are
correlated.

b) KMO and Bartlett`s Test





Interpretation:
Kaiser-Meyer-Olkin (KMO) test
It is used to measure the sample adequacy. Small values oI the KMO statistic indicates
that the coprrelatio0ns between pair oI variables cannot be explained by other variables
and that Iactor analysis may not be appropriate. Here KMO measure oI sampling
adequacy is .557 which is greater than .500; this proves the authenticity and
appropriateness oI Iactor analysis. Hence the sample size is adequatec) Determination
of the no. of factors
Kaiser-Meyer-Olkin
Measure oI Sampling
Adequacy.
.557
Bartlett's
Test oI
Sphericity
Approx. Chi-
Square
193.3
34
DI 66
Sig. .000


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Total Variance Explained


Extraction Method: !rincipal Component Analysis.

Determination based on Eigen value
In this approach, only Iactors with eigen value greater than 1 are retained. An eigen
value represents the amount oI variance associated with the Iactor. Hence Iactors
with a variance greater 1.0 are included. Factors with variance less than 1 are no
better than single variable, since due to standardization each variable has a
variance oI 1.0. II the no.
From the above table oI eigen values, Iour components are extracted as there are 4
component whose total eigen value is more than 1.
Determination Based on percentage of Variance
Component Initial Eigen values
Extraction Sums oI Squared
Loadings
Total
oI
Varianc
e
Cumul
ative
Total
oI
Varianc
e
Cumulati
ve
1 2.785 23.205 23.205 2.785 23.205 23.205
2 2.473 20.611 43.816 2.473 20.611 43.816
3 1.387 11.556 55.372 1.387 11.556 55.372
4 1.031 8.588 63.959 1.031 8.588 63.959
5 .996 8.297 72.256
6 .950 7.918 80.175
7 .753 6.274 86.448
8 .492 4.103 90.551
9 .416 3.465 94.016
10 .395 3.292 97.308
11 .202 1.687 98.995
12
.121 1.005
100.00
0



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FMS IRM 1AIPUR 70
In this approach the no. oI Iactors extracted is determined. So that the cumulative
percentage oI variance extracted by the Iactors reaches a satisIactory level (60 or
above).
From the above table oI Extraction Sum oI Squared Loadings, the cumulative
percentage oI Iour components reaches to a satisIactory level oI 63.959. Thus
Irom this basis also, Iour components are extracted.

d) Scree Plot


12 11 10 9 8 7 6 5 4 3 2 1
Component Number
3.0
2.5
2.0
1.5
1.0
0.5
0.0
E
i
g
e
n
v
a
I
u
e
Scree PIot


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FMS IRM 1AIPUR 71
Interpretation
A scree plot is a plot oI the Eigen values against the number oI Iactors in order oI
extraction. The Shape oI the plot is used to determine the number oI Iactors. Since
the plot has a distinct break between steep slope oI Iactors with large eigen values
& a gradual trailing oII associated with rest oI the Iactors. The gradual trailing oII
is reIerred to as scree . The point at which scree begins denotes the No. oI Iactors.
Here the scree begins at point (4,1) which indicates Iour Iactors are extracted.

e) Rotated Componant matrix
Rotated Component Matrix


Extraction Method: !rincipal Component Analysis.
Rotation Method: Varimax with Kaiser Normalization.
a Rotation converged in 5 iterations.





Component
1 2 3 4
!ast .295 .724
Lending .632 -.387
Security -.339 -.273 .667 .273
Interest .866
Costing .896
Trans .874
Ease .835
!rocess .790 .270
Foreign -.536 .360
!roximity -.755
InterIace -.451 .357
Advice -.668


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 72

3.2 Interpretation
From the above rotated component matrix, these Iactors are extracted:
Factor 1 has high coeIIicients Ior
V4: Interest rate
V5: Costing oI Hedging Tools
V6: Transparency in derivate margins
V7: Ease oI operation
Factor 1 related to as bank`s sphere.
It includes Interest rate, Costing oI Hedging Tools, Transparency in derivate
margins, Ease oI operation. These Iactors are related with a single component
services provided by the bank. Observing these Iour Iactors it can be said that
beIore choosing a bank the client looks at them Iirst.
Factor 2 has high coeIIicients Ior
V1: !ast Relationship
V8: !rocessing Time
V10: !roximity oI the branch Irom the oIIice
Factor 2 related to as Client`s Sphere.
It includes !ast Relationship, !rocessing Time, !roximity oI the branch Irom the
oIIice. These Iactors deIine the client`s perception towards a bank and its services.
Factor 3 has high coeIIicients Ior
V2: Quantum oI Lending
V3: Security asked by the bank
V12: Strategic advisory services Irom the bank


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FMS IRM 1AIPUR 73
Factor 3 related to Bank Client Relationship. It includes Quantum oI Lending,
Security asked by the bank, Strategic advisory services Irom the bank. It reIlects
how the bank presents itselI inIront oI the client. DiIIerent clients will have
diIIerent needs, they may get satisIied with the services oI the bank or not also
depending upon how the bank providing these services.
Factor 4 has high coeIIicients Ior
V9: Finance in Foreign Currency
V11: InterIace with Treasury Manager
Factor 4 related to Bank`s assistance to Client. It includes Finance in Foreign
Currency, InterIace with Treasury Manager. This is the assistance provided to the
client by the bank to segregate themselves Irom the other Iinancial institutions and
detainment oI their clients.
Selection of Surrogate Variables
By examining the Iactor matrix, one could select Ior each Iactor the variable with
the highest loading on that Iactor. That variable could then be used as a surrogate
variable Ior the associated Iactor. II two or more variables have similarly high
loadings. In such a case, the choice between these variables should be based on
theoretical and measurement considerations.
Variable 4: Interest Rate Irom Factor 1 bank`s sphere.
Variable 8: !rocessing Time Irom Iactor 2 client`s Sphere.
Variable 3: Security asked by the bank Irom Iactor 3 Bank-Client`s Relationship
Variable 9: Finance in Foreign Currency Irom Iactor 4 Bank`s assistance to Client.







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FMS IRM 1AIPUR 74
3.3 Interactive Graphs of each variable
Past Relationship


Interpretation
The pie chart above shows that 19.61 oI the sample size considers past
relationship as a very important Iactor, 29.41 considers it as important, Ior
35.29 its neutral and not important Ior 15.69 people, while selecting a Bank.




2
3
4
5
past
Pies show counts
2
15.69%
3
35.29%
4
29.41%
5
19.61%


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FMS IRM 1AIPUR 75
Quantum of lending


Interpretation
The pie chart above shows that 9.80 oI the sample size considers Quantum of
lending as a very important Iactor, 29.41 considers it as important, Ior 29.41
its neutral and not important Ior .31.37 people, while selecting a Bank.





2
3
4
5
Iending
Pies show counts
2
31.37%
3
29.41%
4
29.41%
5 9.80%


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FMS IRM 1AIPUR 76
Security asked by the Bank

Interpretation
The pie chart above shows that 74.51 oI the sample size considers Security
asked by the bank as a important Iactor, Ior 25.49 its neutral while selecting a
Bank.






3
4
security
Pies show counts
3
25.49%
4
74.51%


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FMS IRM 1AIPUR 77
Interest rate




Interpretation
It is one oI the most important Iactor Ior the people to select the bank as we can see
that Ior 88.24 oI people it`s the most important Iactor and 11.24 oI people
considers it as important while selecting a Bank.



4
5
intrest
Pies show counts
4
11.76%
5
88.24%


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FMS IRM 1AIPUR 78
Costing of Hedging tool




Interpretation
In the above pie chart we can observe that Ior 47.06 oI the people costing oI
hedging tool is very important, 23.53 thinks it`s important, 27.45 thinks its
neutral Ior them and Ior 1.96 its not important at all .While selecting a Bank.



1
3
4
5
costing
Pies show counts
1 1.96%
3
27.45%
4
23.53%
5
47.06%


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FMS IRM 1AIPUR 79

Transparency in Derivative margin



Interpretation
In the above pie chart we can observe that Ior 35.29 oI the people transparency
in derivative margin is very important, 31.37 thinks it`s important, 29.41 thinks
it,s neutral Ior them and Ior 1.96 its not important and Ior 1.96 its not
important at all.



1
2
3
4
5
trans
Pies show counts
1 1.96%
2 1.96%
3
29.41%
4
31.37%
5
35.29%


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FMS IRM 1AIPUR 80
Ease of Operation



Interpretation
It is also one oI the most important Iactors as Irom the above pie chart we can see
that ease oI operation is very important Ior 60.78 oI the peoples and 31.37
peoples think that they are important and Ior 7.84 oI the people it`s neutral.




3
4
5
ease
Pies show counts
3 7.84%
4
31.37%
5
60.78%


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FMS IRM 1AIPUR 81

Processing time at the time of requirement


Interpretation
The pie chart above shows that 31.37 oI the sample size considers processing
time as a very important Iactor, 60.78 considers it as important, and Ior 7.84
it`s neutral, while selecting a Bank




3
4
5
process
Pies show counts
3 7.84%
4
60.78%
5
31.37%


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FMS IRM 1AIPUR 82

Finance in Foreign Currency



Interpretation
The pie chart above shows that5.58 oI the sample size considers Finance in
foreign currency as a very important Iactor, 25.49 considers it as important, Ior
33.33 it`s neutral and not important Ior 9.80 people, while selecting a Bank



1
2
3
4
5
1oreign
Pies show counts
1 9.80%
2
25.49%
3
33.33%
4
25.49%
5 5.88%


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FMS IRM 1AIPUR 83

Proximity of the branch from the office


Interpretation
The pie chart above shows that3.92 oI the sample size considers proximity of
the branch from the office as a very important Iactor, 15.69 considers it as
important, Ior 23.53 it`s neutral, not important Ior 39.22 people, and 17.65
thinks it`s not important at all while selecting a Bank.




1
2
3
4
5
proximity
Pies show counts
1
17.65%
2
39.22%
3
23.53%
4
15.69%
5 3.92%


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FMS IRM 1AIPUR 84
Interface with treasury manager




Interpretation
The pie chart above shows that1.96 oI the sample size considers interface with
the treasury manager as a very important Iactor, 3.92 considers it as
important, Ior 11.76 it`s neutral, not important Ior 47.06 people, and 35.29
thinks it`s not important at all while selecting a Bank.



1
2
3
4
5
inter1ace
Pies show counts
1
35.29%
2
47.06%
3
11.76%
4 3.92%
5 1.96%


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FMS IRM 1AIPUR 85

Strategic advisory services from the bank



Interpretation
The pie chart above shows that7.84 oI the sample size considers Strategic
advisory services from the bank as a very important Iactor,7.84 considers it as
important, Ior 33.33 it`s neutral, not important Ior 45.10 people, and 5.88
thinks it`s not important at all while selecting a Bank.



1
2
3
4
5
advice
Pies show counts
1 5.88%
2
45.10%
3
33.33%
4 7.84%
5 7.84%


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 86
4. Case Study

1. Constitution Rajasthan Gum !vt. Ltd.
2. Names OI !romoters Mr. Dinesh Dhoot, Mr. Ashish Dhoot, Mr.
Satyanarayan Dhoot, Mr. Walter M White
3. Sharing !attern As !er Table Given Below
4. Date OI Incorporation 31-07-1998
5. Location/Address/Telephone
No.
OIIice- S 272 F-I, M.I. Area, !hase IInd,
Basni, Jodhpur, Rajasthan, 0291-
2746192,2746992
6. Line OI Activity Deals In Guar Gum Split And !owder
7. Main !roducts Guar Gum Split And !owder
8. !rocessing
Capacity/Facilities
Guar Gum Splits 6,900 M.T.
Guar Gum !owder 14,400 M.T.

Rajasthan Gums !vt. Ltd. (RG!L) is one oI the leading and renowned guar gum
processor, located at Jodhpur (Rajasthan). The company was incorporated on July
31, 1998. The 80 oI their products are being exported across the countries like
USA, Australia and GulI countries. The company is also engaged in trading oI
Cumin (Jeera) occasionally in a very smaller quantity.
The company is procuring its raw material requirements Irom diIIerent cities oI
Rajasthan i.e. Jodhpur, Bikaner, Nagore, Nokha, Barmer etc. For qualityassurance
oI the products, gthe company uses latest technology. Machine like Destoner is
exclusively used to remove dust Iiber, broken splits and unwanted material.
Quality gained Irom Destoner is unique, neat and clean.
WRF Funding Preposition
Commodity: - Guar
Trigger Margin:- 20-25
Initial Margin:- 10
Designated Warerhouses: CWC/SWC in case commodity iss stocked in
CWC/SWC warehouse; in case commodity is stored in !rivate warehouse,


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 87
Rajasthan Gum !vt. Ltd., F-35-37, Agro Food !ark, Borananda, Jodhpur (!vt.
Unlicensed Warehouse)
Collateral Manager: As appointed by the bank.

Shareholding Pattern
Category oI Share
Holding
!romoters 35.76
M/s Economy Mud !roducts Co. 49.87
Indian !ublic (Family Members and relatives oI Dhoot Iamily) 14.37


Physical Performance
Guar Gum !owder
!articulars Financial Year 2008 Financial Year
2009
Installed Capacity (units)# 6,000.00 MT 14,400.0 MT
!roduction (units) 4,508.59 MT 5,079.3 MT
Capacity utilization () 75.14 35.27

Opening Stock OI Finished Goods 183.6 MT 32.7 MT
!urchases 218.2 MT 823.6 MT
Sales (units) 4,877.1 MT 5,766.6 MT
Sales (Rs in million) 361.5 455.4
Average Sales Realization (Rs/MT) 74,113.4 78,966.7

Total operating Income (TOI) 500.9 692.9

!AT 93.4 120.9




PRO1ECT REPORT 2010
FMS IRM 1AIPUR 88
Working Capital (For Export Business)
The company avails working capital Iacility Irom Canara Bank including Iund
based limits oI Rs. 400.0 million and non Iund based limits (Forward Contract
limit) oI Rs. 6.0 million to the company. The BiIurcation oI Iund based limit is as
Iollows:-
Rs. 150.0 million Ior !acking Credit (!C) and Rs. 250.0 million Ior Ioreign
documentary bills (FDB) with one way interchangeability Irom !C to FDB/FBE.
Rajasthan Guar gums are one the major exporters oI Guar gum and Guar gum
splits powder their products are exported to countries like USA and Europe. For
exporting the products they avail Iacilities oI Canara Bank. Facilities taken by
them are mainly preshipment, postshipment credit they are also involved in
hedging through derivatives and in their organization hedging is generally done
with the help oI Iorward contracts and Iuture contracts.
While opting Ior Iinancial institution Rajasthan Guar Gums !vt Ltd generally looks
out Ior the Iactors like interest rate, costing oI hedging tool, and past relationship
these are the Iactors which the Iirm gives utmost importance.
Except these Iactors the Iirm also considers Iactors like Transparency in derivative
margins, !rocessing time at the time oI requirement.
The Iirm doesn`t give importance to Iactors like Stratergic advisory services oI the
bank as they take their own decisions.






PRO1ECT REPORT 2010
FMS IRM 1AIPUR 89

5.0 Observations
O Exporters generally preIer Bank oI Baroda, State Bank oI India, Citibank Ior
taking trade Iinance services.
O The Share oI ICICI Bank is very minute as exporters don`t take services oI
the Bank.
O Most oI the Exporters takes pre shipment, post shipment services oI the bank
Irom which they are aIIiliated.
6.0 Findings
O The major trade industries in Rajasthan are textiles, Gems and Jewellery and
Agro and Food products. (reIer Annexure 1)
O Major hubs Ior the export are Jodhpur and Jaipur.
O Major hubs Ior trade especially in Agri sector is Jodhpur.
O Major means oI transport Irom Rajasthan is through Air where by the goods
go to various ports in Mumbai such as kandla, Adani etc.
O The most important Iactor exporters take into consideration while opting Ior
Bank is interest rate.
O The major Iactor that exporter considers while opting Ior a bank are interest
rate, costing oI hedging tool, transparency in derivative margin, processing
time.
O From the statistics available (Annexure 1) we can say that the amount oI
trade Irom Rajasthan has increased upto 43 in last 10 years specially in the
Agriculture sector. This suggests that the potential Ior trade is increasing in
Rajasthan and the state is becoming one oI the major trade centers oI India.


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 90

7.0 Recommendations
O Automation oI trade should be done by using commercial Iunctions such as
MR!, CRM, ER!, e- !rocurement.
O A holistic Open Account Management model should be used by the banks
which allow increased visibility oI transactions and supplementing
documents to all parties in the trade world.
O Traditional silo Iunctions viz. operations and treasury should be integrated to
oIIer expected cross-organizational processes enabling smoother operations,
an ability granted by the visibility virtue. The phenomenon, addressed as
transactional trade Iinance is where every document in the trade Iinance and
supply chain process can be associated with a Iinancing event.

8.0 References
Rajasthan State Industrial Development And Industrial Corporation Limited,
2009.Concessions and Iacilities to industries, jaipur, Rajasthan.
Rajasthan State Industrial Development and Industrial Corporation Limited, 2009.
Industrial Land in Rajasthan.
OIIice oI the Commissioner oI industries, 2008. State Award Ior Export
Excellence,Jaipur, Rajasthan.
NCDE-Gateway to Iuture-A guide to commodity Iuture
Apte !.G, 2007 International Iinance
Sundaramoorthy, Shankar & K, Harishankar, Trade Iinance revolution I Gate
Global solutions, whiteIeild Bangalore


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 91
Gambhir, Neeraj and Goel, Manoj, Ioreign exchange market in india


Websites

hLLp//www.icicibank.com
hLLp//www.rajchamber.com
hLLp//www.rIconline.org
http://www.tradeIinancemagzine.com
http://www.iibI.org.in/documents/sylctI.pdI
http://www.trade.gov/media/publications/.../tradeIinanceguide2007.pdI
http://www.iie.com/publications/papers/cline0209.pdI
http://www.rajasthan.gov.in












PRO1ECT REPORT 2010
FMS IRM 1AIPUR 92
9.0 Annexure 1
Total Export Irom Rajasthan in Irom 1996 -2000 ( in Crore`s)
S.No. !roduct Year
1996-97 1997-98 1998-99 1999-00
1 Textiles 537.47 765.38 804.55 954.74
2 Agro & Iood
products
533.27 623.48 614.14 738.01
3 Gems &
Jewelley
472.61 612.38 706.46 811.90
4 Engineering 175.54 279.83 260.39 295.98
5 Marble Granites
& Dimensional
stones
87.13 93.93 121.52 174.26
6 Mineral Iuels,
Mineral oils
products,
Bituminous
substances,
mineral waxes
ores, slags, Ash
- - - -
7 Electrical,
Electronics &
Computer
SoItware
73.23 30.43 57.36 58.49
8 Wool &
Wollen`s
3.50 3.63 1.71 3.35
9 Chemical &
Allied
234.13 285.47 283.56 228.22
10 Drugs &
!harmaceuticals
18.00 7.17 11.24 6.78
11 !lastics &
Linoleums
28.00 7.11 7.94 15.17
12 HandicraIts 176.24 270.21 364.74 440.0
13 Leather &
Leather
products
37.19 20.35 33.88 16.54
14 Readymade
Garments
370.04 290.24 380.00 409.83
15 Car pets( Durries) 134.00 79.78 80.70 223.05
16 Handlooms 0.20 0.22 0.22 0.20
17 Diamonds 600.00 531.46 500 146.91
18 Others 0.00 0.00 0.00 0.0
Total 3480.55 3901.67 4228.79 4623.43


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 93






Total Export Irom 2000-2007

S.No
.
!roduct Year
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
2005-06 2006-07
1 Textiles 1145 1162.2
2
1170 1389.2
5
1589.0
1
1807. 1864.54
2 Agro & Iood
products
354.67 321.93 344.62 368.42 545.60 579.10 762.07
3 Gems &
Jewelley
871.95 895.29 1265.5
0
1342.2
4
1520.3
6
1724.32 1497.25
4 Engineering 329.12 382.66 350 496.34 684.81 1104.43 3301.49
5 Marble
Granites &
Dimensional
stones
198.11 259.51 265 307.45 470.42 581.59 923.43
6 Mineral Iuels,
Mineral oils
products,
Bituminous
substances,
mineral waxes
ores, slags, Ash
- - - - - 2113.37 2181.01
7 Electrical,
Electronics &
Computer
SoItware
113.06 106.99 90 85.47 90.44 96.11 98.23
8 Wool &
Wollen`s
0.81 2.54 3.50 14.93 24.22 32.11 22.25
9 Chemical &
Allied
316.81 300.45 280 661.59 780.41 1373.20 1367.23
10 Drugs &
!harmaceutical
s
13.02 16.61 22.19 63.91 45.34 59.58 90.48
11 !lastics &
Linoleums
7.95 4.63 15.85 65.06 39.44 85.07 84.25
12 HandicraIts 430 551.62 650 803.76 1321.2
8
1609.05 1960.23


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 94
13 Leather &
Leather
products
14.55 18.01 25.01 11.69 19.91 56.16 46.90
14 Readymade
Garments
395 287.08 335.25 388.17 414.23 812.24 657.95
15 Car pets( Durries) 243.46 275.03 260 228.11 258.51 304.95 309.21
16 Handlooms .18 0.25 0.30 0.35 0.35 0.40 0.60
17 Diamonds 102.67 62.99 73.74 N.A N.A N.A N.A
18 Others 0.00 0.00 0.00 106.56 197.67 16.77 19.29
Total 4534.3
6
4647.8
1
5150.9
6
6433.3
0
8002.0
3
12355.9
7
15186.4
1
Source: OIIice oI the Commissioner oI industries, 2008. State Award Ior Export Excellence,Jaipur, Rajasthan.







Annexure II
Table to show various commodities being exported/imported Irom rajasthan in the year 2006-
2007 in (tons)
Ended
Mar'06
Ended
Mar'07

Inwar
d
Outwar
d
Net Inward Outwar
d
Net
Rice In The Husk 4877 -4877 2475 -2475
Rice not in the husk 35553 2767 32786 500229 500229
Gram & gram products 300 17064 -
16764
24730 24730
!ulses other than Gram &
Gram products
390 5880 -5490 0
Wheat 48368
59
211908
9
27177
70
250164
7
250164
7
Wheat Flour 0 0
Jowar & Bajra 36540 2400 34140 6198 -6198
Maize & Millets 49120 49120 72090 2410 69680
Other sorts oI grain 1430 10735 -9305 20318 -20318
Oil-seed cotton 0 0
Oil-seed (other than cotton) 192980
5
-
19298
05
188151
7
-
188151
7
Raw cotton- !ressed 0 14881 -14881
Raw cotton- Loose 10 44430 -
44420
0


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 95
Jute Raw 0 0
Fruits & Vegetables Fresh 12208 -
12208
2831 24542 -21711
Sugar Cane 0 0
Oil Cakes 23656
6
569090 -
33252
4
159431 111600
6
-
956575
Tobacco raw (un-
manuIactured)
0 0
Animal Live stock 36492 -
36492
0
Hides & Skins 0 0
Bones 11080 -
11080
5500 -5500
Coal & coke 95957
164
95957
164
107244
013
107244
013
Marble & marble stone 0 929 4966 -4037
Lime & lime stone 23467 479040
7
-
47669
40
13733 368228
2
-
366854
9
Magnese Ore 610 610 610 610
Iron Ore 7274 7274 0
Other ores 0 29886 26530 3356
Mineral Oils (excluding
Kerosene)
58052
18
41 58051
77
458756
2
94190 449337
2
Kerosene 86994
7
86994
7
329048 173060 155988
Bamboo 0 94850 94850
Teak Wood 0 14152 14152
Other timber 12560
5
12560
5
27665 27665
Lac & Shallac 0 0
Bidi leaves 0 0
Sugar 96496 2498 93998 18700 18700
Gur Jaggery & Gur Shakkar 0 0
Molasses 0 0
Salt 16824
0
605714 -
43747
4
171364 677502 -
506138
Tea 0 0
Tobacco (manuIactured) 0 0
Groundnut Oil 2463 2463 31276 31276
Mustard oil 90262 -
90262
69138 -69138


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 96
Coconut oil 46200 46200 0
Castor oil 620 620 0
Other edible oil 3984 3984 15450 15450
Cotton (ManuIactured) &
other piece goods
0 0
Gunny bags & cloth 0 116 116
Other jute (manuIactured) 0 0
Leather & its products 0 0
Rubber products 615 615 0
!iece goods (Woolen & silk) 0 40669 -40669
Coir pdts 0 0
Cement 38493 305334
0
-
30148
47
393241 184539
10
-
180606
69
Cement manuIactured 21566 6649 14917 50135 20842 29293
Iron & steel 36271
59
9993 36171
66
386850
4
386850
4
Machinery & transport
equipment
19051
4
19051
4
329087 4617 324470
Metal & Metal pdts 4920 -4920 24980 -24980
Electrical goods 610 610 1120 1120
!aper 28729
2
28729
2
195740 195740
Colour & dyes 0 0
Fertilizer & organic manure 20405
92
177385
73
-
1.6E
07
209085
1
179731
03
-
158822
52
Spices 88401 -
88401
878651 -
878651
Source: Statistics Ior Trade, 2007, Yojna Bhawan, Jaipur















PRO1ECT REPORT 2010
FMS IRM 1AIPUR 97
Annexure III

In the phase two a questionnaire is being prepared to conduct survey
Questionnaire for research
Sir/ madam
This questionnaire is a part oI our research project in which we are doing an analysis on
We request your kind co-operation
Personal information
Name :
Sex : Male Female
Age :
Address :

Contact inIormation :

1. What is the name oI organization?

2. What is the type oI your organization

!roprietorship Firm
!artnership Firm
!rivate Limited Company
!ublic Limited Company
Government Entity


PRO1ECT REPORT 2010
FMS IRM 1AIPUR 98
3. In which trade practice you are presently involved?

Import
Export

4. Do you deal with Agri commodity/Iood item?
Yes
No

5. Which currency is involved in your international trade?
USD
Yen
Euro
!ound Sterling
Any other (please speciIy)

6. What kind oI Iacilities is availed Irom banks by your organization?
Transaction (currency exchange and money transIer)
Hedging (please speciIy the tool)
Forward
Option
Natural hedging

!re shipment credit (INR/Ioreign currency)
!ost shipment credit (INR/Ioreign currency)
Letter oI Credit
Buyer`s Credit





PRO1ECT REPORT 2010
FMS IRM 1AIPUR 99
7. !lease rate the criteria you take into consideration while deciding Ior Iinancial institution
on the scale oI 5 where 1 means not important at all & 5 means very important.
Not
important
at all

1
Not
Important


2
Neutral



3
Important



4
Very
Important


5
I. !ast relationship
II. Quantum oI
lending

III. Security asked by
the bank

IV. Interest rate
V. Costing oI hedging
tool

VI. Transparency in
derivative margins

VII. Ease oI operation
VIII. !rocessing time at
the time oI
requirement

I. Finance in Ioreign
currency

. !roximity oI the
branch Irom the
oIIice

I. InterIace with
treasury manager



PRO1ECT REPORT 2010
FMS IRM 1AIPUR 100
II. Strategic advisory
services Irom the
bank

8. Name the bank/s you are presently involved with?

9. Are you satisIied with the services provided by the bank?
Yes
No