Hedging Tools for mitigating Foreign Currency Risks
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Transcript of Hedging Tools for mitigating Foreign Currency Risks
Risk Management Tools
Odilia Business Advisors LLP
www.odilia.in
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• What is Currency Risk?
The risk is that there may be an adverse movement in the exchange rate of the denomination currency in relation to the base currency before the date when the transaction is completed. Investors and businesses exporting or importing goods and services or making foreign investments have an exchange rate risk which can have severe financial consequences; but steps can be taken to manage (i.e., reduce) the risk
Introduction
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Why we should manage risk• To manage adverse movement in exchange rates
• Need to protect operating profits
• For Maximising Gains
• For Minimising losses
• For Reducing the cost
• To achieve budgets and targets
• To Protect business sustainibility in light of stiff competition
Forex Risk Management Process
• Recognising the Risk
• Benchmarking of Goals
• Keeping targets for Profit and Loss
• Reporting and evaluation
Recognition• The Risk Management Exercise starts with recognition of
Risk .
Every business cycle has some inherent risks in it. It is very important to timely recognise the risk and take corrective actions.
We should be open to modify our risk strategies and adapt our self with ever-changing market scenario
How to Recognise
Risk can start
• At the stage of Budgeting
• At the stage of Receipt or Placing of Order
• At the stage of Shipment /Invoicing
• At the time of receipt of goods
Benchmarking of Goals Benchmarking is a process of deciding the
level which must be protected in order to save the profit margins of the business
There are many methods of deciding the Benchmark
• Invoicing / Costing rate.• The Forward rate prevailing on the order date or a
rate which is linked to the Forward rate like 1 Rupee below forward for Export and 1 rupee above forward for import.
Targets of Profit and Loss• We devise the Risk managing strategy keeping the Risk apetite of the
client in mind. So our Risk Management solution is a customised solution as per your requirements.
• Minimum CoverFirst step in Risk Management is to book a minimum percentage of Exposure as soon as it is recognised. This helps in absorbing shocks. This percentage can be obtained by analysing the business cycle and payment cycle of the client. The points considered are :
• How much of my payments always come on time• Which of my transactions have very thin margins and so risk
cannot be taken
Stop Loss
• We need to protect open positions from the possibility of the view on market variables going wrong
• It helps to minimise losses and protect the business profits from being eaten away by currency fluctuations.
We always maintain a ratio of 1 : 2 in Stop Loss V/s Take profit
Take Profit• Take profit at the target levels ensure that the gains are booked
at appropriate intervals and levels. This maximises profits in the business.
For example if we have kept our imports open and the currency has come down then we will book some part of the imports to ensure that book profits are converted into actual gains.
Control & Reporting
• Review of Risk Management Strategy at regular intervals.• Review of Stop Loss levels and Take Profit Levels and keeping a
track of gains / losses by following the strategy• Using new instruments/products for hedging.• Reporting of all the outcome to Top Management
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THANK YOU !!
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Odilia Business Advisors LLP
www.odilia.in
