ALFA Leather - Feb 1st, 201

Information about ALFA Leather - Feb 1st, 201

Published on August 5, 2014

Author: krishna08d



EXCHANGE RATE VOLATITLITY: DYNAMICS OF LEATHER INDUSTRY: EXCHANGE RATE VOLATITLITY: DYNAMICS OF LEATHER INDUSTRY DR.KRISHNA REDDY CHITTEDI ASSISTNAT PROFESSOR CENTRAL UNIVERSITY OF TAMIL NADU LEATHER INDUSTRY AT A GLANCE: LEATHER INDUSTRY AT A GLANCE India is the second largest producer of footwear and leather garments in the world India’s share in the global leather production. ~3% It is estimated to reach 4% by 2017 Exports ( US$ 4.86 billion in 2011-12 ) Recording a cumulative annual growth rate of about 8.22% (5 years). Employment (around 3 million people) Growth (10 th largest forex earner of India) Share of various countries in India’s Leather & Leather Products Exports (2012-13): Share of various countries in India’s Leather & Leather Products Exports (2012-13) INDIAN LEATHER INDUSTRY : INDIAN LEATHER INDUSTRY STRENGTHS Raw material base Skilled and cheap labour Technology Government’s policy stance WEAKNESSES International price fluctuations Increasing labour costs International standards – stringent norms INDIAN LEATHER INDUSTRY: INDIAN LEATHER INDUSTRY OPPORTUNITIES Rising per capita use of leather in India Growing fashion consciousness Leverage of IT in the production process E-commerce market THREATS Unorganised industry Funding constraints Huge competition (East European & Asian countries) High quality standard s Exchange Rates and Its relevance to Leather Industry : Exchange Rates and Its relevance to Leather Industry DETERMINANTS OF EXCHANGE RATES: DETERMINANTS OF EXCHANGE RATES Interest Rate Differential Balance of Payments Forward premium Relative output level Relative money supply Relative factor costs Real Effective Exchange Rate (REER) RBI’s intervention in the forex market Market Sentiments / Expectations / Positions WHY INR DEPRECIATED VIS-À-VIS USD DURING THE LAST ONE YEAR?: WHY INR DEPRECIATED VIS-À-VIS USD DURING THE LAST ONE YEAR? US is in crisis; Europe is in catastrophe. Growth outlook in Japan is negative; China is not positive. Prices of crude (very rude) Higher domestic interest rates Policy inertia Infrastructure projects – (delay or deny) Mounting CAD Downgrading of sovereign credit rating DERIVATIVES – A PRIMER: DERIVATIVES – A PRIMER Are they weapons of wealth destruction? (or) Tools of Risk Management? Derivatives – Condemned financial products OBJECTIVES OF DERIVATIVES: OBJECTIVES OF DERIVATIVES To minimise the risks (hedging) but not to maximise the profit Price discovery Providing liquidity to the market Increasing the breadth & depth of the market Gamblers’ / speculators’ tools FORWARD CONTRACT (IS IT FORWARD LOOKING?) : FORWARD CONTRACT (IS IT FORWARD LOOKING?) A plain vanilla OTC derivative product Price Quantity Delivery date Nil margin (of late, Banks are insisting) Settlement on due date by delivery in most of the cases Most suitable for exporters, importers, investors and borrowers in FC FORWARD SALE CONTRACT – AN ILLUSTRATION: FORWARD SALE CONTRACT – AN ILLUSTRATION An exporter booked a forward sale contract for his export receivables of Euro 1 million @ Rs.68 on 1.4.12 for delivery on 30.6.12. spot rate is 69. Scenario Rate on 30.6.12 Receivables Profit / (Loss) I 67.00 67,000,000 1,000,000 II 68.00 68,000,000 Nil III 70.00 70,000,000 (2,000,000) FORWARD PURCHASE CONTRACT – AN ILLUSTRATION: FORWARD PURCHASE CONTRACT – AN ILLUSTRATION An importer booked a forward purchase contract for his import payment of GBP 1 million @ Rs. 90 on 1.5.12 for delivery on 31.7.12. Spot rate is 87. Scenario Spot Rate on 31.7.12 Payable Profit / (Loss) I 88.00 88,000,000 (2,000,000) II 90.00 90,000,000 Nil III 91.50 91,500,000 1,500,000 FUTURES n FEATURES: FUTURES n FEATURES Futures is a standardised forward contract. Its standard features are: Quantum (standard lots) Delivery date (last Thursday of every month) Marking to Market Margin (initial margin, maintenance margin) Exchange traded derivative (exchange is the counter party, so no default risk) CURRENCY FUTURES (USD/INR) – AN ILLUSTRATION: CURRENCY FUTURES (USD/INR) – AN ILLUSTRATION Date Price Initial margin Margin call Mnt. Margin MTM 01.8.12 55000 6000   2000   02.8.12 53000 4000    2000 -2000 03.8.12 54000 5000   2000 1000 06.8.12 56000 7000   2000 2000 07.8.12 55000 6000   2000 -1000 08.8.12 52000 3000   2000 -3000 09.8.12 50000 3000 2000 2000 -2000 10.8.12 49000 3000 1000 2000 -1000 13.8.12 49000 3000 2000 0 14.8.12 50500 4500   2000 1500     Net gain -4500 FORWARDS Vs FUTURES: FORWARDS Vs FUTURES FORWARDS A tailor-made contract Delivery date customised Quantum - flexibility Negotiation of price – OTC Credit risk Not Exchange traded FUTURES Standardised Fixed dates of delivery Standard quantum Fixed price No default risk Exchange traded and has liquidity during the contract period OPTIONS ARE OPTIONAL : OPTIONS ARE OPTIONAL A contract confers a right to buy or sell an asset at a pre-determined price on a future date by paying option premium, but there is no obligation to perform the contract. Call option – Right to buy Put option – Right to sell European options American options Black & Schoels Model - valuation CALL OPTION – AN ILLUSTRATION: CALL OPTION – AN ILLUSTRATION On April 1, 2012, ‘Bata India Ltd.’ purchased a European Call Option on GBP against USD at a strike price of USD 1.50 for a premium of USD 0.05. The spot rate is 1.57. Expiry date is June 30, 2012. Scenario Spot Rate on 30.6.12 Profit/loss Position I 1.68 0.13 ITM II 1.55 0.00 ATM III 1.44 (0.05) OTM PUT OPTION – AN ILLUSTRATION: PUT OPTION – AN ILLUSTRATION On July 1, 2012, Liberty Shoes Ltd. purchased a Put Option on Euro against USD at a strike price of USD 1.25 for a premium of USD 0.07. The spot rate is 1.20. Expiry date is July 31, 2012. Scenario Spot Rate on 31.7.12 Profit/loss Position I 1.06 0.12 ITM II 1.18 0.00 ATM III 1.35 (0.07 ) OTM INTEREST RATE SWAP – AN ILLUSTRATION: INTEREST RATE SWAP – AN ILLUSTRATION Zenith Exports borrowed an FC loan of Euro 5 million at Euro LIBOR + 450 bps for 5 years Enters IRS at 5% p.a.on. Pay fixed – Receive floating. Scenario Euro LIBOR Spread Floating Interest Fixed Interest I 0.25 4.5 +4.75 -5.0 II 0.5 4.5 +5.0 -5.0 III 2.0 4.5 6.5 5.0 Receive Pay SELL-BUY SWAP – AN ILLUSTRATION: SELL-BUY SWAP – AN ILLUSTRATION Relaxo has an inward remittance of USD 10 Mn. value spot. It also has an import payment due after 3 months for USD 10 Mn. Spot rate is USD/INR 55.70. Forward rate for 3 months is 56.00. Bank’s margin is 0.1%. Sell Spot – USD 10 Mn. & Buy Forward – 3 Mth Plus Bank’s margin 6 paise. So Relaxo has to pay 36 paise on USD 10 Mn.= Rs. 36 lacs CURRENCY SWAP – AN ILLUSTRATION: CURRENCY SWAP – AN ILLUSTRATION A US MNC wants to raise JPY 80 Mn. for its subsidiary in Tokyo for 3 years. Similarly, a Japanese MNC wants to raise USD 1 Mn. for its subsidiary in New York for 3 years. MNC Home (RoI) Foreign (RoI) Swaps US 2.00 3.00 Raises USD 1 Mn. at 2% and swaps (gain of 1%) Japan 1.00 2.50 Raises JPY 80 Mn. at 1% and swaps (gain of 1.5%) WHAT IS THE KEY TAKEAWAY?: WHAT IS THE KEY TAKEAWAY? Nobody can really guarantee the future. The best we can do is size up the chances, calculate the risks involved, estimate our ability to deal with them, and then make our plans with confidence. - Henry Ford II PowerPoint Presentation: “A dream is your creative vision for your life in the future. You must break out of your current comfort zone and become comfortable with the unfamiliar and the unknown”. Denis Waitley  

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