Risk and Exposure

Dipak Abhyankar
 Classifications
Exposures Risks
• Transaction Exposure • Transactions Risk
• Position Risk
• Economic Exposure
• Mismatch Risk
• Translation Exposure
• Pre-settlement Risk
• Settlement Risk
• Contingent Exposure • Operations Risk
• Competitive Exposure • Sovereign Risk
• Cross Country Risk
Exposures
• Transactions Exposure

• Translation Exposure

• Economic Exposure

• Contingent
• Competitive
 Risk
Transactions Risk Position Risk

Mismatch Risk Pre settlement Risk

Settlement Risk Operations Risk

Sovereign Risk Cross Country Risk

 Hedging and Speculation
Hedging Speculation

• Covering Risk • Deliberate position

with profit motive
• Open position i.e
Uncovered Risk
 Forward Contract
• Tailor Made
• Value Specific
• Date Specific
• Non Transferable
• Available to long term customers
• Security and Risk aspects
 Futures
By Draft and Spirit- Forward Contract Only
• Standardized
• Size 37500 or 62500 or 100 Thousand
• Dates 31 March, 30 June, 30 Sept, 31 Dec
• Traded on exchanges
• Not one to one answerable
• Good for speculators
• Good for small exporters
• Delivery 5%
 Options
• Commitment on writer’s (Issuer’s) Side
• Option for buyer
• Put Option
• Call Option
 Options
O p t io n W r it e r ( I s s u e r )

I s s u e s a n O p t io n
1 C a ll a n d 1 p u t
S t r ik e P r ic e R s . 5 0 / - p e r $

P u t O p t io n C a ll O p t io n
O p t io n t o S e ll a d o lla r t o O p t io n t o b u y a d o lla r
W r it e r fr o m
W r it e r
 Options
O p t io n W r it e r
(Is s u e r)

P r ic e o n 9 0 t h d a y
R s . 5 1 /-
per $

P u t O p t io n C a ll O p t io n
N O T E x e r c is e d
E x e r c is e d
M a r k e t R a t e is B e t t e r

W r it e r m a k e s lo s s o f
R s. 1
H is T o t a l C o lle c t io n w a s R s . 4
H e n c e , N e t G a in R s . 3
To hedge or not to hedge
 Natural Hedging
• Netting and Offsetting
• Leads and Lags
Cross Currency Hedging
Thank You