A presentation by ICICI Bank Treasury Team on Currency Hedging

Volex Interconnect Pvt. Ltd.

Presented To

Volex Interconnect Pvt. Ltd

A leading global producer of electrical power cords, electronic and optic cable assemblies. 15 manufacturing facilities with 19 sales and support offices As a Total Solution to its customers with
superior quality and wide variety of assembly and supply services.

Contents
Forward Contract Option Contract Scenario Analysis Option Pricing

Forward Contract
Forward contract is an obligation to buy or sell - a fixed amount of currency - at a future date - at a fixed rate

It helps to fix up import payment rate and export realization rate.

Let us consider an example: USD/INR spot 49.90 2 month forward premium 50 p So today you can fix up a rate of 50.40

Purchased Forward Contract

Gain

Gains 0 Losses Forward Rate at Rs50.40

Loss
Prices decline

Spot price

Prices rise

Option Contract

An option contract gives a right but not an obligation to buy/sell

a fixed amount of currency at a future date at a fixed rate

Option Premium
This depends on the following factors: The price at which you want to buy/sell dollars (the favorable this price more will be the value of the option). The maturity longer the maturity more will be the option premium. The volatility in the market more fluctuations make an option costlier. The current market rate

Pay-off for buying a Call option

Gain

Gains 0
Cost of premium Break Even at Rs50 Strike price at Rs49.9

Losses

Loss
Prices decline

Spot price

Prices rise

Option Cost - Scenario Analysis

USD Spot Strike Option (notional) (on maturity) 1000000 48.5 49.9 0 1000000 49 49.9 0 1000000 49.9 49.9 0 1000000 49.92 49.9 20000 1000000 50 49.9 100000 1000000 51 49.9 1100000 1000000 51.5 49.9 1600000 1000000 52 49.9 2100000 Premium Net (in INR) -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -100000 -80000 0 1000000 1500000 2000000

Break Even

Option Pricing
( In 000 INR for 1mio notional )

Strike dec jan feb

49.5 1619 1948 2194

50 1372 1714 1971

50.43 1186 1533 1797

51 1041 1344 1609

51.5 866 1202 1466

52 747 1075 1337

Thank You
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