You are on page 1of 59

SUMMER PROJECT ON

FOREIGN EXCHANGE MANAGEMENT

SUBMITTED BY SARIKA M. PHADTARE

Page | 1

LALA LAJPATRAI INSTITUTE OF MANAGEMENT

CONTENTS
1. ACKNOWLEDGMENT04

2. EXECUTIVE SUMMARY05 3. OBJECTIVES06 4. RESEARCH METHODOLOGY.06 5. INDUSTRY PROFILE..........07 6. COMPANY PROFILE..........08 7. COMPANY HISTORY.11 8. INTRODUCTION TO FOREIGN EXCHANGE...14 9. HISTORY OF FOREIGN EXCHANGE16 10. FOREIGN EXCHANGE MARKET.18 11. MARKET PARTICIPANTS..........21 12. FOREIGN EXCHANGR RATE25 13. MAJOR CURRENCIES.29

Page | 2

14. FOREX AND ITS ROLE PLAY IN ONGC....31 15. PROCEDURE FOR PURCHASE OF FX BY ONGC........32 16. APPROVAL SHEET OF FOREX TRANSACTIONS OF ONGC.37 17. REMITTANCES REPORT....38 18. HEDGING42 19. FORWARD CONTRACTS47 20. CURRENCY FUTURES.55 21. CONCLUSION58 22. BIBLIOGRAPHY59

Page | 3

ACKNOWLEDGEMENT

It is a matter of great pleasure for me to have the opportunity to do my summer project in your highly esteemed organization. It is a great pleasure to present this report of summer training in Oil And Natural Gas Corporation Limited. At first, I would like to express my deep sense of gratitude to my training guide, Mr. A. C. Andotra [DGM (F&A)] for his Valuable guidance, advice, suggestion and constant encouragement rendered to me at every stage which helped me in completing the project work, in time. I am falling short of words for expressing my feelings of gratitude towards him for extending their valuable guidance about market and critical reviews of project. I am extremely thankful to my Faculty Guide Prof. Raj Wadhwa at Lala Lajpatrai Institute Of Management for his invaluable Guidance and Suggestions during my Training. Finally, I am thankful to all my group members and all others who helped me directly or indirectly towards the successful completion of this summer internship project in ONGC.

Sarika M. Phadtare
.

Page | 4

EXECUTIVE SUMMARY
Foreign exchange (FX) is the process of trading the currency of one country for the currency of a another. This process is necessary for international trade to take place in a world of different currencies. The value of one currency versus another is determined by the international exchange rate and, in most cases, is subject to fluctuations based on open trading of currency in foreign exchange markets. Foreign exchange is the process of conversion of one currency into another currency.Transactions conducted in the foreign exchange market determine the rates at which currencies are exchanged for one another, which in turn determine the cost of purchasing foreign goods and financial assets. The main participants in foreign exchange markets are importers, exporters, commercial banks, foreign exchange brokers and the nations central bank. Foreign exchange market is primarily an over the counter market, the exchanges trade futures and option (more below) but most transactions are OTC. When demand for the currency of one country goes up in relation to that of another, the first currency is said to be more valuable (or stronger) in terms of the second currency. Some of the factors that increase demand for a country's currency are an increase in exports (more currency is needed to pay for these exports), an increase in interest rates (the currency now earns more for the holder), and anything that improves political stability (the risk of holding that currency has decreased). Hedging is a risk management technique, primarily done to protect the foreign exchange exposures against the volatility of exchange rate by using derivatives like Currency Options, Currency Futures, forward Contracts, etc. by taking off-setting positions against underlying asset. RBI does not allow PSUs to write a currency options and to trade in oil futures market because of risk of incurring a huge loss due to extreme volatility in the crude oil prices.

Page | 5

OBJECTIVES
The main objective of the project is to understand the FOREX MARKET IN INDIA and devise a hedging strategy for ONGC, based on the availability of various hedging tools available in the INDIAN FOREX DERIVATIVE MARKET. The sub-objectives are as follows:

To understand the INTERNATIONAL FOREX MARKETS. To study FOREX MARKET IN INDIA. To study and analyze the DERIVATIVE MARKET in INDIA with respect to the instruments available for hedging of FOREX effectively.

To analyze the FOREX payments made by ONGC and carry out a back dated analysis to show the net impact of hedging.

RESEARCH METHODOLOGY
For understanding the concept, procedure, operations, strategies of ONGC LTD, the following approach was adopted: The foreign exchange purchase procedure of the year 2009-10 was studied. Guidance from the senior executives was obtained in the study of the forex operations of ONGC LTD. Information regarding the FOREX operations of ONGC LTD was obtained from the senior executives.

The derivative market in India was studied to analyze whether the hedging strategies can be effective or not.

Page | 6

INDUSTRY PROFILE
The Oil & Gas (Petroleum Industry) is usually divided into three major components: UPSTREAM SECTOR The upstream oil sector is a term commonly used to refer to the searching for and the recovery and production of crude oil and natural gas. This sector is also known as the Exploration and Production (E&P) Sector. The upstream sector includes the searching for potential underground or underwater oil & gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and/ or raw natural gas to the surface.

MIDSTREAM SECTOR The midstream industry processes, stores, markets and transport commodities such as crude oil, natural gas, natural gas liquids (NGLs mainly ethane, propane and butane) and sulphur. Midstream operations are included under the downstream category.

DOWNSTREAM SECTOR The downstream oil sector is a term commonly used to refer to the refining of crude oil and the selling and distribution of natural gas and products derived from crude oil. Such products include Liquefied petroleum gas (LPG), gasoline or petrol, jet fuel, diesel oil, and other fuel oils. The downstream sector includes oil refineries, petrochemical plants, petroleum products distribution, retail outlets and natural gas distribution companies. The downstream industry touches consumers through thousands of products such as gasoline, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas and propane.

Page | 7

COMPANY PROFILE
ONGC is Asias best Oil & Gas company, as per a recent survey conducted by US-based magazine Global Finance. Ranks as the 2nd biggest E&P company (and 1st in terms of profits), as per the Platts Energy Business Technology (EBT) Survey 2004 . Ranks 24th among Global Energy Companies by Market Capitalization in PFC Energy 50 (December 2004). [ONGC was ranked 17th till March 2004, before the shares prices dropped marginally for external reasons. It Is placed at the top of all Indian Corporate listed in Forbes 400 Global Corporate (rank 133rd) and Financial Times Global 500 (rank 326th), by Market Capitalization. It Is recognized as the Most Valuable Indian Corporate, by Market Capitalization, Net Worth and Net Profits, in current listings of Economic Times 500 (4th time in a row), Business Today 500, Business Baron 500 and Business Week. It Has created the highest-ever Market Value-Added (MVA) of Rs. 24,258 Crore and the fourthhighest Economic Value-Added (EVA) of Rs. 596 Crore, as assessed in the 5th Business TodayStern Stewart study (April 2003), ahead of private sector leaders like Reliance and Infosys. ONGC is the only Public Sector Enterprise to achieve a positive MV A as well as EVA. It Is targeting to have all its installations (offshore and onshore) accredited (certified) by March 2005. This will make ONGC the only company in the world in this regard. Owns and operates more than 11000 kilometers of pipelines in India, including nearly 3200 kilometers of sub-sea pipelines. No other company in India operates even 50 per cent of this route length. It has paid the highest-ever dividend in the Indian corporate history. Its 10 per cent equity sale (India's highest-ever equity offer) received unprecedented Global Investor recognition. This was a landmark in Indian equity market, establishing beyond doubt, the respect ONGC's professional management commands among the global investor community. According to a report published in 'The Asian Wall Street Journal (Hongkong)', ONGC's Public Issue brought in 20 Foreign Institutional Investors (FIls) to India, as (it was reported), 'they could not ignore the company representing India's energy security'.

Page | 8

The Market Capitalization of the ONGC Group (ONGC & MRPL) constitutes 10 per cent of the total market capitalization on the Bombay Stock Exchange (BSE). ONGC has an equity weightage of 5 per cent in Sensex; 15 per cent in the Nifty (the only Indian corporate with a two-digit presence there); ONGC commands a 7 per cent weightage in the Morgan Stanley Capital International (MSCI) Index. The growth in ONGC's Market Capitalization (from Rs. 18,500 Crore before May 2001 to Rs. 1,25,000 Crore in January 2004) is unprecedented and except Wipro (who had a higher market capitalization temporarily), no other Indian company (either in public or private sector) has seen such a phenomenal growth. ONGC has come a long way from the day (a few years back) when India and ONGC did not figure on the global oil and gas map. Today, ONGC Group has 14 properties in 10 foreign countries. Going by the investments (Committed: USD 2.708 billion, and Actual: USD 1.919 billion), ONGC is the biggest Indian Multinational Corporation (MNC). ONGC ended the sectoral regime in the Indian hydrocarbon industry and benchmarked the globally- established integrated business model; it took up 71.6 per cent equity in the Mangalore Refinery & Petrochemicals Limited (MRPL), and also took up a 23 per cent stake in the 364-kmlong Mangalore-Hasan-Bangalore product Pipeline, connecting the refinery to the Karnataka hinterland. By turning around MRPL in 368 days, ONGC has set standards of public sector companies reviving joint (or private) sector companies, proving that in business, professionalism matters, not ownership. The Indian petroleum industry is one of the oldest in the world, with oil being struck at Makum near Margherita in Assam in 1867 nine years after Col. Drakes discovery in Titusville. The industry has come a long way since then. For nearly fifty years after independence, the oil sector in India has seen the growth of giant national oil companies in a sheltered environment. A process of transition of the sector has begun since the mid-nineties, from a state of complete protection to the phase of open competition. The years since independence have however, seen the rapid growth of upstream and downstream oil sectors. The sector in recent years has been characterized by rising consumption of oil products.

Page | 9

ONGC Vision & Mission


To be a world-class Oil and Gas Company integrated in energy business with dominant Indian leadership and global presence.

World Class
Dedicated to excellence by leveraging competitive advantages in R&D and technology with involved people. Imbibe high standards of business ethics and organizational values. Abiding commitment to safety, health and environment to enrich quality of community life. Foster a culture of trust, openness and mutual concern to make working a stimulating and challenging experience for our people. Strive for customer delight through quality products and services.

Integrated In Energy Business


Focus on domestic and international oil and gas exploration and production business opportunities. Provide value linkages in other sectors of energy business. Create growth opportunities and maximize shareholder value.

Page | 10

ONGC HISTORY
Foundation
In August 1956 Oil and Natural Gas Commission was formed. Raised from mere directorate status to Commission, it has enhanced powers. In 1959, these powers were further enhanced by converting the commission into a statutory body by an act of Indian parliament. Major functions of ONGC accorded to this provision were to plan, promote, organize and implement programs for the development of petroleum resources and the production and sale of petroleum and its products.

1960-1990
ONGC since 1959 has made its presence noted in most parts of India and in overseas territories. ONGC found new resources in Assam and also established the new oil province in Cambay basin (Gujarat). In 1970 with the discovery of Bombay high (now known as Mumbai High), ONGC went offshore. Most important contribution of ONGC, however, is its self-reliance and development of core competence in exploration and production activities at a global competitive level.

Post 1990
Post 1990, the liberalized economic policy was brought into effect; subsequently partial disinvestments of government equity in PSUs were sought. As a result, ONGC was reorganized as a limited Company and after conversion of business of the erstwhile Oil & Natural Gas Commission to that of Oil & Natural Gas Corporation Ltd in 1993, 2% of shares through competitive bidding were disinvested. Further expansion of equity was done by 2% share offering to ONGC employees. Another big leap was taken in March 1999, when ONGC, OIL (Oil India Corporation) and GAIL (Gas Authority of India Ltd.) agreed to have cross holding in each others stocks. Consequently Government sold off 10% of its share holding in ONGC to IOC and 2.5% to GAIL. With this the Government holding in ONGC came down to 84.11%. In 2002-03 ONGC took over

Page | 11

Mangalore Refinery and Petrochemicals Ltd (MRPL) from Birla Group and announced its entrance into retailing business. ONGC also went into global fields, through its subsidiary ONGC Videsh Ltd (OVL). ONGC has major investments in Vietnam, Sakhalin and Sudan. Oil and Natural Gas Corporation (ONGC) incorporated on June 23, 1993, is an Indian Public Sector petroleum Company. It is a Fortune Global 500 Company. It is highest profit making corporation in India. It was set up as a commission on August 14, 1956. Indian Government holds 74.14% equity stake in this Company.

ONGC Today
ONGC ranks as the Numero Uno Oil & Gas Exploration & Production (E&P) Company in the world, as per Platts 250 Global Energy Companies List for the year 2008 based on assets, revenues, profits and return on invested capital (ROIC)
ONGC ranks 20th among the Global publicly-listed Energy companies as per PFC Energy

50 (Jan 2008). ONGC is the only Company from India in the Fortune Magazines list of the Worlds Most Admired Companies 2007. Occupies 152nd rank in Forbes Global 2000 2009 list (up 46 notches than last year) of the elite companies across the world; based on sales, profits, assets and market valuation during the last fiscal. In terms of profits, ONGC maintains its top rank from India. ONGC ranked 335th position as per Fortune Global 500 - 2008 list; up from 369th rank last year, based on revenues, profits, assets and shareholders equity. ONGC maintains top rank in terms of profits among seven companies from India in the list.

Indias Most Valuable Public Sector Enterprise

Page | 12

Ranked as the most respected Public Enterprise in India in 2007 Business World Survey, with 19th position in the league of the most-respected Indian Corporate(s). Rated Excellent in MOU Performance Rating for 2006-07 by the Department of Public Enterprises, Ministry of Heavy Industries in Public Enterprises, GOI. Golden Peacock Global Award 2007 for Excellence in Corporate Governance 2007, for the 3rd consecutive time, conferred by World Council for Corporate Governance. Bagged the coveted winners trophy of the maiden Earth Care Award for excellence in climate change mitigation and adoption under the category of GHG mitigation in the small/medium and large enterprises. Conferred with Infraline Energy Excellence Award for its services to the Nation in Oil & Gas Exploration and Production category. Bestowed with Amity Award for Excellence in Cost Management.

Sourcing Equity Oil Abroad


ONGCs overseas arm ONGC Videsh Limited (OVL) continued to maintain robust growth during 2007-08. It acquired 11 E&P Projects in 6 countries during the year. The company now has participation in 44 projects in 18 countries. Out of 44 Projects, OVL is operator in 18 projects and joint operator in 2 projects in 11 countries. Block BC-10 in Brazil is currently under development with production expected to being in 2009-10, Block A-1 and A-3 in Myanmar, North Ramadan Block and NEMED in Egypt and Farsi Offshore Block in Iran have discoveries and appraisal work is being carried out. The remaining projects are in exploration phase. ONGCs strategic objective of sourcing 20 million tonnes of equity oil abroad per year is likely to be fulfilled well before 2020.

INTRODUCTION TO FOREIGN EXCHANGE

Page | 13

Any type of financial instrument that is used to make payments between countries is considered foreign exchange. The list of instruments includes electronic transactions, paper currency, checks, and signed, written orders called bills of exchange. Foreign exchange is essential to coordinate global business. Foreign exchange management is associated with currency transactions designed to meet and receive overseas payments. Beyond these transactions, foreign exchange management requires you to understand the relevant factors that influence currency values. From that point, you may execute the proper strategy to manage risks and improve potential earnings. Foreign exchange management begins with trading currencies to exchange goods and services overseas. International businesses convert overseas profits back into their domestic currency to spend at home. Meanwhile, consumers exchange domestic currency for foreign banknotes to buy overseas goods. These transactions occur within the foreign exchange markets, where networks of private individuals, banks and organized financial exchanges provide the infrastructure to trade international banknotes. Foreign exchange occurs at rates that are associated with currency valuations. Foreign exchange rates describe the amount of one currency that must be given up to receive one unit of another currency. Foreign exchange rates parallel the political and economic environment of a particular country. For example, domestic foreign exchange rates appreciate when the economy is strong and the currency is in high demand to buy the nation's stocks and real estate. Conversely, currency values fall amidst political and social instability. Foreigners generally liquidate business assets in war-torn nations that struggle with development.

Effective foreign exchange management requires you to preserve purchasing power by staying current on any events affecting rates and operating accordingly. You will exploit the buying power of high exchange rates to acquire overseas goods. Alternatively, low exchange rates are an opportunity to boost overseas sales, as your wares become relatively cheaper overseas.

Government officials manage foreign exchange reserves to influence the domestic economy. On the national level, low exchange rates are ideal for exporters, while strong currency valuations

Page | 14

benefit consumers with increased purchasing power for imports. Treasury leadership may spend domestic currency to buy large amounts of foreign exchange, which effectively devalues the home currency. As of April 2010, China has purchased more than $900 billion in U.S. Treasuries, which devalues its yuan and supports its export economy. Foreign exchange risks describe lost profits and purchasing power related to adverse currency movements. Canadian businessmen that hold reserves of Japanese yen suffer when the yen falls. Alternatively, Canadian exporters lose out on sales when Canadian dollars strengthen and make their goods more expensive for foreign buyers. Foreign exchange risk management calls for diversification. Large corporations expand multinationally to balance currency risks. For example, elevated energy costs benefit resource-rich nations and currencies, while industrialized energy importers are subject to recession and inflation. Caterpillar is a multi-national corporation whose profits in oil-rich Russia may exceed any lost sales in America at that point. Smaller investors, however, that lack the finances to set up multinational enterprises can diversify accordingly with global mutual funds.

HISTORY OF FOREIGN EXCHANGE

Page | 15

Initially, the value of goods was expressed in terms of other goods, i.e. an economy based on barter between individual market participants. The obvious limitations of such a system encouraged establishing more generally accepted means of exchange at a fairly early stage in history, to set a common benchmark of value. In different economies, everything from teeth to feathers to pretty stones has served this purpose, but soon metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value. Originally, coins were simply minted from the preferred metal, but in stable political regimes the introduction of a paper form of governmental IOUs (I owe you) gained acceptance during the Middle Ages. Such IOUs, often introduced more successfully through force than persuasion were the basis of modern currencies. Before World War I, most central banks supported their currencies with convertibility to gold. Although paper money could always be exchanged for gold, in reality this did not occur often, fostering the sometimes disastrous notion that there was not necessarily a need for full cover in the central reserves of the government. At times, the ballooning supply of paper money without gold cover led to devastating inflation and resulting political instability. To protect local national interests, foreign exchange controls were increasingly introduced to prevent market forces from punishing monetary irresponsibility. In the latter stages of World War II, the Bretton Woods agreement was reached on the initiative of the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes suggestion for a new world reserve currency in favour of a system built on the US dollar. Other international institutions such as the IMF, the World Bank and GATT (General Agreement on Tariffs and Trade) were created in the same period as the emerging victors of WW2 searched for a way to avoid the destabilising monetary crises which led to the war. The Bretton Woods agreement resulted in a system of fixed exchange rates that partly reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other main currencies to the dollar - and was intended to be permanent. The Bretton Woods system came under increasing pressure as national economies moved in different directions during the sixties. A number of realignments kept the system alive for a long time, but eventually Bretton Woods collapsed in the early seventies following president Nixon's

Page | 16

suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the sole international currency at a time when it was under severe pressure from increasing US budget and trade deficits. The following decades have seen foreign exchange trading develop into the largest global market by far. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values. But the idea of fixed exchange rates has by no means died. The EEC (European Economic Community) introduced a new system of fixed exchange rates in 1979, the European Monetary System. This attempt to fix exchange rates met with near extinction in 1992-93, when pent-up economic pressures forced devaluations of a number of weak European currencies. Nevertheless, the quest for currency stability has continued in Europe with the renewed attempt to not only fix currencies but actually replace many of them with the Euro in 2001. The lack of sustainability in fixed foreign exchange rates gained new relevance with the events in South East Asia in the latter part of 1997, where currency after currency was devalued against the US dollar, leaving other fixed exchange rates, in particular in South America, looking very vulnerable. But while commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have found a new playground. The size of foreign exchange markets now dwarfs any other investment market by a large factor. It is estimated that more than USD 3,000 billion is traded every day, far more than the world's stock and bond markets combined.

FOREIGN EXCHANGE MARKET

Page | 17

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. Retail traders (small speculators) are a small part of this market. They may only participate indirectly through brokers or banks and may be targets of forex scams. To invest in other countries or to buy foreign products, firms and individuals may first need to acquire the currency of the country with which they intend to deal with. In addition, exporters may demand to be paid for their goods and services either in their own currency or in U.S. dollars, which are accepted worldwide. The Foreign Exchange Market, or "Forex" market, is where the majority of buying and selling of world currencies takes place. The Forex market is by far the largest financial market in the world with trading volumes surpassing USD 1.5 trillion on some days. The very large commercial banks are the major traders in this market The five major centers of Forex trading are based in London, New York, Zurich, Frankfurt and Tokyo. The Forex market itself consists of a worldwide network of primarily interbank traders connected by telephone lines and computers. FX traders constantly negotiate prices between one another and the resulting market bid/ask price for a particular currency is then fed into computers and displayed on official quote screens. Forex exchange rates quoted between banks are referred to as Interbank Rates. There is no single unified foreign exchange market. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currency instruments are traded. This implies that there is no such thing as a single dollar rate - but rather a number of different rates (prices), depending on what bank or market maker is trading. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs. The main trading centers are in London, New York, and Tokyo, but banks throughout the world participate. As the Asian trading session ends, the European session begins, then the US session, and then the Asian begin in their turns. Traders can react to news when it breaks, rather than waiting for the market to open.

Page | 18

There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers order flow. Trading legend Richard Dennis has accused central bankers of leaking information to hedge funds. Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar

MARKET SIZE AND LIQUIDITY


The foreign exchange market is unique because of :
Its trading volume The extreme liquidity of the market The large number of, and variety of, traders in the market Its geographical dispersion Its long trading hours - 24 hours a day ( except on weekends ) The variety of factors that affect exchange rates

TYPES OF FOREIGN EXCHANGE MARKETS


Spot market

Page | 19

Spot market transactions involve immediate delivery and payment at the current exchange rate (spot rate).

Futures market
Futures market transactions involve future payment and delivery at an agreed exchange rate (future rate). Futures contracts are standardized. They are identical, with fixed amounts, fixed maturity dates, and fixed exchange rates.

Forward market
Forward market transactions involve future payment and delivery at an agreed exchange rate (forward rate). Forward contracts are specific (non-standardized). They are tailored to users' specific needs.

MARKET PARTICIPANTS
The difference of the Forex and stock market is in the levels of access that is the integral part of the Forex market. The highest level is designed for the inter-bank market (the participants are large

Page | 20

banks). The bid/ask spreads of this level are commonly not available to those traders outside this level. There is a certain trend, the lower the level of access the bigger the bid/ask spread (it can vary from 0-1 to 1-2 pips for most traded currencies). The main factor determining the amount of the spread is the volume. In case trader is able to provide many transactions for large sums then the spread of bid and ask price will be as low as possible. Such spread is considered to be a better one. As for the levels of access themselves the determining factor here is so called size of the line, i.e. the amount of money you deal with. The share of the inter-bank market is about 53% of all deals. After the inter-bank market there go other not so big large investment banks, international corporations hedging risks and paying employees, other hedging funds and several large retail forex traders. According to experts such bodies as pension and mutual funds, insurance companies are the important part of the Forex market and all financial markets. Moreover another important participants of the Forex market are the hedge funds and Central banks of different countries. Banks The most part of the every day speculative trading and commercial turnover relates to the interbank market as big and well-known banks can trade large sums of money every day. Sometimes the customers make these deals but usually so-called proprietary desks acting on behalf of the banks make them. Forex brokers were the main driving force of the market in the past that assisted inter-bank trading and searched for appropriate counterpart to this or that buyer or seller. Nowadays the great part of this business is done by the electronic systems. Now traders simply listen what is happening at the inter-bank trading but the turnover today is significantly lower then in a recent years.

Commercial companies A certain part of the inter-bank market relates to the work oh those companies that need foreign currency to make a certain payment. Such companies are not the constant players of the market and do not trade really large amounts of currency like banks do. However the currencys exchange rate in a long prospective is affected by the trade flows. Sometimes commercial companies cover large positions that are not known by the rest of market participants and thus having significant impact onto the market.

Page | 21

Central banks Another important players at the Forex are the Central banks of the different countries. Their purpose of taking part at the trades is to take control over such factors as supply of the money, inflation level and interest rates. Central banks sometimes use their reserves of the foreign currency to make the market more stable. According to Milton Friedman there is the most appropriate way of stabilizing the market for the Central banks by buying at low exchange rates and sell at high exchange rates. On the other hand we cannot be sure that this way will be a really effective one, as the Central banks cannot become a bankrupt in case they incur a great losses and it is not clear whether they are profitable or not. Only the talks about possible Central banks intervention may lead to currency stabilization, however the real banking intervention is also often used commonly in those countries with the so called dirty float regime of the currency. The aims Central banks have are not reached all the time, as the rest of the market assets are much bigger. And several similar situations have already occurred 1992-1993 European Exchange Rate Mechanism crisis and later several crunches in the Southeast Asia. Investment management firms Another participants of the Forex market are the investment management firms, like pension funds. Their aim in playing at the Forex is to ease deals in foreign securities. Let consider the example, investment management firms with an international equity portfolio participate in foreign currencies trades with an aim to pay for the foreign equities buying. The deals conducted at the Forex are not considered to be speculative or profitable ones. However sometimes such firms have speculative specialist currency overlay operations that trade the currency to get profit and limit the risks. At the same time there are not too much such firms, therefore those existing manage quite big amount of money and can get great profits. Hedge funds After the 1996 the hedge funds are considered to be quite aggressive at currency speculation. These funds deal with billions of dollars and so they are capable to have an appropriate reaction on any intervention of the Central bank with an aim to support the currency.

Page | 22

Retail forex brokers Forex market is also a place of work for such traders as retail forex brokers. Usually there are 2 types of them: those brokers offering speculative trading and those providing physical delivery of the assets. Forex brokers are also called market makers who are dealing with quite small part of the whole forex (about $25-50 billion a day). There are also retail traders who can only deal via retail brokers or banks Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. According to CNN, one retail broker estimates retail volume at $25-50 billion daily, which is about 2% of the whole market. CNN also quotes an official of the National Futures Association "Retail forex trading has increased dramatically over the past few years. Unfortunately, the amount of forex fraud has also increased dramatically." All firms offering foreign exchange trading online are either are market makers or facilitate the placing of trades with market makers. Many retail FX market makers claim to "offset" clients' trades on the interbank market (that is, with other larger market makers), e.g. after buying from the client, they sell to a bank. Nevertheless, the large majority of retail currency speculators are novices and who lose money, so that the market makers would be giving up large profits by offsetting. Offsetting does occur, but only when the market maker judges its clients' net position as being very risky. The dealing desk operates much like the currency exchange counter at a bank. Interbank exchange rates, which are displayed at the dealing desk, are adjusted to incorporate spreads (so that the market maker will make a profit) before they are displayed to retail customers. Prices shown by the market maker do not necessarily reflect interbank market rates. Arbitrage opportunities may exist, but retail market makers are efficient at removing arbitrageurs from their systems or limiting their trades. A limited number of retail forex brokers offer consumers direct access to the interbank forex market. But most do not because of the limited number of clearing banks willing to process small orders. More importantly, the dealing desk model can be far more profitable, as a large portion of

Page | 23

retail traders' losses are directly turned into market maker profits. While the income of a market maker that offsets trades or a broker that facilitates transactions is limited to transaction fees (commissions), dealing desk brokers can generate income in a variety of ways because they not only control the trading process, they also control pricing which they can skew at any time to maximize profits. The rules of the game in trading FX are highly disadvantageous for retail speculators. Most retail speculators in FX lack trading experience and capital (account minimums at some firms are as low as 250-500 USD). Large minimum position sizes, which on most retail platforms ranges from $10,000 to $100,000, force small traders to take imprudently large positions using extremely high leverage. Professional forex traders rarely use more than 10:1 leverage, yet many retail Forex firms default client accounts to 100:1 or even 200:1, without disclosing that this is highly unusual for currency traders. This drastically increases the risk of a margin call (which, if the speculator's trade is not offset, is pure profit for the market maker. SPECULATORS Another class of market participants involved with foreign exchange-related transactions is speculators. Rather than hedging against movement in exchange rates or exchanging currency to fund international transactions, speculators attempt to make money by taking advantage of fluctuating exchange-rate levels.

FOREIGN EXCHANGE RATE


An exchange rate is the current market price for which one currency can be exchanged for another. It is the value of a foreign nations currency in terms of the home nations currency.Exchange rates change every day. This is because currencies are traded on an open market, and the demand for them varies based on what is happening in that country. The interest rate paid by a countrys central bank is a big factor, since a higher interest rate makes that currency more valuable. Inflation is also taken into account, since high inflation in a country makes that currency worth less

Page | 24

the longer it is held. Finally, a countrys financial stability will also impact a currency over time, since investors want to be sure they will get paid back An Exchange Rate is the rate at which one nation's currency can be exchanged for that of another. Exchange rates impact, and are impacted by, international trade, in a free-market system that helps to maintain a balance of trade and balance of capital. For example, a skewed change rate can make a company's exports cheaper than their foreign counterparts, but for a country to achieve this artificially they must sell their own currency by borrowing against the nation's wealth to purchase another nation's currency. If exports or all capital are in high demand, a country's currency will rise in value because of the demand for that currency to pay for exported goods, services, and capital. Investors are impacted in two ways:
1.

Businesses that rely on exports can find their products suddenly competitive - or

prohibitively expensive - in overseas markets as exchange rates fluctuate. Similarly, companies that rely on imports can see the costs of these imports rise and fall with the exchange rate. For companies impacted by changes in U.S. Dollar exchange rates, see The Dollar. 2. Exchange rates directly affect the realized return on an investment portfolio with overseas holdings. If you own stock in a foreign company and the local currency goes up 10%, the value of your investment goes up 10% even if the stock price doesn't change at all. The exchange rate between two countries' currencies depends upon many factors, including the Balance of Trade or Balance of Capital and the prevailing real interest rate in country as well as inflation. Imports and Exports are the main drivers of the balances of trade and capital. If the country imports more than it exports, it has to be supplied with capital from abroad. Relative interest rates greatly impact the exchange rate between any two countries. Typically as the central bank of a country makes a change in that country's interest rates, investors and trader will see the value of that country's currency - in relationship to other countries - change. An example of this is as the US Federal Reserve lowered interest rates in the fall of 2007, the value of the US dollar fell both in anticipation and in response. When the public perception starts to change to the

Page | 25

point of view that maybe "The Fed" will stop lowering rates or even increase rates, typically you will see the US Dollar stabilize or rise. Exchange Rates are very important for any country as they determine the level of imports and exports. If a domestic currency appreciates with respect to a foreign currency, imported goods will be cheaper in the domestic market and local companies would find that their foreign competitor's goods become more attractive to customers. If the country has a strong currency then its goods become more expensive in the international market, which results in lost competitiveness. This is the reason that China, despite much pressure from the United States, is not letting its Yuan appreciate. Exchange rate movements can have a significant impact on a company's returns. Multinational companies may see significant shifts in their profitability, as foreign exchange ("FX" "forex") rates may make locally held currency more valuable. Even local companies can be affected, as changing FX rates may substantially alter their material costs, or affect their ability to sell their goods in foreign countries at competitive prices.

FLUCTUATIONS IN EXCHANGE RATES


A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency). Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to

Page | 26

the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions. The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit). In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political unc ertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan was floating). Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. Currencies can be traded at spot and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates.

Page | 27

MAJOR CURRENCIES
U.S. DOLLAR The United States dollar is the world's main currency an universal measure to evaluate any other currency traded on Forex. All currencies are generally quoted in U.S. dollar terms. Under conditions of international economic and political unrest, the U.S. dollar is the main safe-haven currency, which was proven particularly well during the Southeast Asian crisis of 1997-1998.As it was indicated, the U.S. dollar became the leading currency toward the end of the Second World War along the Breton Woods Accord, as the other currencies were virtually pegged against it. The introduction of the euro in 1999 reduced the dollar's importance only marginally. The other major currencies traded against the U.S. dollar are the euro, Japanese yen, British pound, and Swiss franc.

Page | 28

Eurozone Euro The euro was designed to become the premier currency in trading by simply being quoted in American terms. Like the U.S. dollar, the euro has a strong international presence stemming from members of the European Monetary Union. The currency remains lagued by unequal growth, high unemployment, and government resistance to structural changes. The pair was also weighed in 1999 and 2000 by outflows from foreign investors, particularly Japanese, who were forced to liquidate their losing investments in euro-denominated assets. Moreover, European money managers rebalanced their portfolios and reduced their euro exposure as their needs for hedging currency risk in Europe declined. Japanese Yen The Japanese yen is the third most traded currency in the world; it has a much smaller international presence than the U.S. dollar or the euro. The yen is very liquid around the world, practically around the clock. The natural demand to trade the yen concentrated mostly among the Japanese keiretsu, the economic and financial conglomerates. The yen is much more sensitive to the fortunes of the Nikkei index, the Japanese stock market, and the real estate market. British Pound Sterling Until the end of World War II, the pound was the currency of reference. The currency is heavily traded against the euro and the U.S. dollar, but has a spotty presence against other currencies. Prior to the introduction of the euro, both the pound benefited from any doubts about the currency convergence. After the introduction of the euro, Bank of England is attempting to bring the high U.K. rates closer to the lower rates in the euro zone. Swiss franc The Swiss franc is the only currency of a major European country that belongs neither to the European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively small, the Swiss franc is one of the four major currencies, closely resembling the strength and quality of the Swiss economy and finance. Switzerland has a very close economic relationship with

Page | 29

Germany, and thus to the euro zone. Therefore, in terms of political uncertainty in the East, the Swiss franc is favored generally over the euro. Typically, it is believed that the Swiss franc is a stable currency. Actually, from a foreign exchange point of view, the Swiss franc closely resembles the patterns of the euro, but lacks its liquidity. As the demand for it exceeds supply, the Swiss franc can be more volatile than the euro. Australian Dollar The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos (Keeling) Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu. Within Australia it is almost always abbreviated with the dollar sign ($), with A$ or AU$ sometimes used informally to distinguish it from other dollar-denominated currencies. It is subdivided into 100 cents.The Australian dollar is currently the fifth-most-traded currency in the world foreign exchange markets behind the US dollar, the euro, the yen and the pound sterling.The Australian dollar is popular with currency traders due to comparatively high interest rates in Australia, the relative freedom of the foreign exchange market from government intervention, the general stability of Australia's economy and political system, and the prevailing view that the Australian dollar offers diversification benefits in a portfolio containing the major world currencies, especially because of its greater exposure to Asian economies and the commodities cycle

FOREX AND ITS ROLE PLAY IN ONGC


FOREX risk is one the major risks faced by most of the corporates. There is always an element of risks inherent in their transactions, as the exposure to the exchange risk volatility in the market can have significant impact on the returns. In India more than 90% of the trading is done in USD. The FOREX payments made in ONGC are done on TOM basis. ONGC imports crude oil and instruments such as pipelines, drill machines for its offshore operations. It exports Natural gas, Naphtha products, C2-C3, LSHS, aviation Turbine Fuel. That is why ONGC is required to purchase foreign exchange for remittance to the contractors and suppliers wherever such contract agreements are denominated in foreign currency. The Forex purchase is also resorted for servicing the foreign currency loans availed by ONGC for its operations in the past. The Forex purchase transactions are

Page | 30

carried out predominantly from MRBC (Mumbai Regional Business Centre) including entire debt servicing of the ONGC loans portfolio.

PROCEDURE FOR PURCHASE OF FOREIGN EXCHANGE BY ONGC


ONGC is required to purchase foreign exchange for remittance to the contractors and suppliers wherever such contract agreements are denominated in foreign currency. The forex purchase is also resorted for servicing the foreign currency loans availed by ONGC for its operations in the past. The forex purchase transactions are carried out predominantly from MRBC(Mumbai Regional Business Centre) including entire debt servicing of the ONGC loans portfolio. The aggregate value of forex purchases made by MRBC during the period 01.04.98 to 31.10.2000 has been of the order of Rs. 11,078,66 crores equivalent, including Debt servicing of Rs. 5,788,13 crores.

Page | 31

The procedure regarding purchase of forex, which was reviewed by, the board and its slient features are as follows: Forex will be purchased only from Scheduled Banks or Public Sector Financial Institutions approved by RBI as Authorized Dealers of Foreign Exchange. FOREX REMITTANCES ARE CLASSIFIED INTO 3 BROAD CATEGORIES(a) Remittance equal or ABOVE USD 1 Million equivalent

(Category A).

(b) Remittance equal to ABOVE USD 1, 00, 000 equivalent but BELOW USD 1

Million (Category B).


(c) Remittances BELOW USD 1,00,000 equivalent (Category C)

For all categories, competitive quotes shall be invited at least from 4 Authorized dealers. A panel of such Authorized Dealers shall be drawn by respective work centres by adopting a transparent short-listing procedure and roster system would be followed for inviting quotes from the panel of banks, who would be placed under suitable categories. The invitees will comprise of SBI, the previous successful bidder in the respective category, and other dealers by rotation. SBI (being the main banker of ONGC) would always be involved for such competitive quotes. Whenever justified by operational exigencies, forex remittances may be effected on single quotation basis through SBI with the approval of Head of Finance and for reasons to be recorded in writing. All forex purchase transactions would be carried out through the centralized Cash and Bank section at each work center who would be responsible for proper maintenance of records as well as the quotes approved for carrying out the transaction. A system of approval of all high value cases (above USD 100,000) at the level of at least E-7 shall be followed for calling of the quotes as well as for approval of the transactions carried out. Considering the fact that the forex market is quite volatile and moves fast, the quotes may be obtained over phone. However, to avoid any disputes at a later stage, two officers would be involved in collection of quotes and should sign the register so maintained for keeping the record of purchases.

Page | 32

In case of MRBC, where forex remittances are very large, electronic method of obtaining quotes would be desirable. Authorization levels for dealing in Foreign Exchange shall be approved by Director (Finance) who may also sub-delegate his powers to appropriate level officers at the work centers for practical operational reasons. Director (finance) is also authorized by the Board to modify/amend the procedure from time as may be considered appropriate for operational reasons.

FUNCTIONING OF THE APPROVED PROCEDURE


The approved procedure for purchase of forex was advised to all Work centres with authorizations from Director (Finance) in favour of nominated Principal Officers (Principal Officer is the senior most functional executive at each work centre for operating of the bank account) to identify and nominate concerned F & A Officers and carry out actual transactions relating to purchase of foreign exchange as per the approved procedure. The Reuters screen has also been installed at the Forex management cell, MRBC with a view to monitor movement of the exchange rate and accordingly approach the market for actual requirements. The Reuters screen provides online status about ongoing traders in the forex market as well as the indicative rates at which the Banks / Authorised Dealers are buying and selling the currency. As regards other normal FE requirements, there is a distinct merit from national perspective in RBI advice to avoid competitive quotes. Further, protection from Rupee depreciation due to window shopping, is also in commercial interests of ONGC. All the same it may not be advisable to

Page | 33

altogether dispense with the existing practice which provides better transparency regarding functioning of the system. A practical approach would be to go by the middle course whereby the company may continue to have competitive quotes in majority of the cases (upto USD 5 Million) and follow modified approaches for bigger remittances. The suggested procedure is as follows : REMITTANCES UPTO USD 5 MILLION (CATEGORY I ) : For transactions up to USD 5 Million, competitive quotes may be invited from 2 3 Banks, instead of 4 Banks for the normal requirements. A panel of Banks is to be drawn by the work centre for this purpose REMITTANCES OVER USD 5 MILLION UPTO USD 15 MILLION (CATEGORY II) : In the Indian forex markets, the inter-bank quotes are typically for transaction sizes of USD 1 Million. In case of larger transactions say over USD 5 Million, a strategic approach needs to be adopted. Corporate typically fill the large order in small quantities over the available time. In this strategy, the deal is carried out by splitting the transaction in smaller trenches (typically not more than USD 5 Million each) over the time available. As an alternative strategy, a number of banks are simultaneously approached and the deal is concluded at rates available at that time. As the levels in market are known to all participants due to screen based information systems, the rates are likely to be quite close and any differences may be ironed out to the extent practicable by discussion. In such an event a large ticket deal is put through quickly before the news of such transaction spreads. The market generally moves after deal is put through when the counter party banks approach the market for cover. Here speed of execution is of essence. The alternative strategy however requires a number of dealers operating at one time. Secondly, such alternative strategy is more successful when the counter party does not know the side company wants to deal in. Thus there would be two way quotes (bid and ask rates) in such cases. In case of companies like ONGC who are only buyers of foreign Exchange, the side of ONGC is known to the market and even asking for two way quote is not much of help.

Page | 34

Thus in case of ONGC, the preferred approach is considered to be splitting the remittance and asking competitive quotes from 2-3 Banks is considered desirable for medium to large transactions sizes (say USD 5-15 million). This strategy is similar to that adopted for remittances up to USD 5 million with the difference that the requirement is proposed to be split into smaller sized tranches. REMITTANCES OVER USD 15MILLION AND UPTO USD 50 MILLION (CATEGORY III) : When the size tend to be larger than USD 15 million, the approach of filling the demand through competitive bids in smaller tranches is not considered very effective. This is because of the fact that if the same corporate (ONGC) keeps revising the market, the market takes it as a signal of very large demand which pushes up the market. Hence it is strategically considered a better option, to put through transactions over USD 15 million through a bank on a single quote basis taking Reuters or similar information system ask levels as the reference. For the purpose of transactions above USD 15 million, a panel of top 10 Banks including SBI is to be drawn from amongst the Banks who have done maximum Business with ONGC during the last 12 months. The panel is to be updated on a rollover basis every quarter using the transactions during the immediately preceding 12 months. REMITTANCES OVER USD 50 MILLION: If the total foreign currency payment is above USD Fifty Million Foreign exchange coverage is carried out in smaller lots over a number of days through short dated forwards. The foreign exchange remittance or part thereof could be awarded to a single bank (such as SBI or 2-3 banks). Director (Finance) will be kept apprised of the methodology. Tom rates are obtained in one to two rounds from the banks telephonically by at least two designated officers. These are recorded in the daily booking sheet. Further, the Reuters ask rates are obtained, simultaneous to obtaining rates from the banks, from the Reuters software by adjusting the relevant discount / premium to arrive at the tom rates.

Page | 35

These are also documented in the daily booking sheet. Once the bank tom rates are obtained, a comparative analysis is done and the bank offering the lowest rate is selected. This rate is also compared with the Reuters tom rate for the purpose of drawing a reference to the international rates. The respective bank is then telephonically informed about the acceptance of the offer.

APPROVAL SHEET OF FOREX TRANSACTIONS OF ONGC


The following table highlights the transaction of ONGC as on 3rd August 2009 MR/F&A/FxMC/ Appr/09-10

3-Aug-09

The following payment vouchers have been received for payment which are proposed to be booked on 3-Aug-09 The details of the vouchers with the name of the parties, TT/DD, currency, amount and due dates are given hereunder :
Beneficiaries
LOT 1 1 BGEPIL TT JV USD 3,859,540. 00 3,859,540. 00 491,283. 00 2,094,997. 74 31/7/2009 Due 31/7/2009

Mode

Gr

Ccy

Amount

Voucher Date

Due Date

Received Date

LOT 2 2 3 Cairn Energy BGEPIL TT TT JV HP USD USD 31/7/2009 31/7/2009 Due Due 31/7/2009 31/7/2009

Page | 36

eProduction Solutions David Brown Gear Systems Clyde Union

TT

NA

USD

5 6

TT TT

NA BA Eqvl. USD for Sl. No. 5,6 =

GBP GBP

7,995. 56 2,594,276. 30 22,685. 30 58,303. 00 80,988. 30

31/7/2009

Due

31/8/2009

30/7/2009 31/7/2009

Due Due

31/8/2009 31/8/2009

USD

TOTAL

USD

135,452. 93 2,729,729. 23 6,589,269. 23

(1 GBP =

##### #

USD)

All payments are to be made for value TOM i.e.

4-Aug-09

As the total is between USD 5.00 and 15.00 million it falls under Category II of the Board approval dated Dec 16 2000. It is hence proposed that the amounts be booked in 2 lots.

REMITTANCES REPORT
The remittances report describes the total inflows and outflows for that particular month. It also includes the list o empanelled banks, bankwise summary which highlights no of bids sought and successful. It also includes the currencywise distribution for that particular month.

List of remittances made during the month : August 2009

Sl. No

Date of Booking

Value date

No. of quotes obtaine d

Exchange rate offered by Name of the Qualifying bank Curr


Qualifyin g Bank SBI

Amount in foreign Currency

Amo unt in INR (Rs. In crore s)


7.4 3

Remarks (to specifiy spot/tom/ forward)

31/07/2009

03/08/2009

State Bank of India

EUR

67.92 09

67.920 9

##########

TOM

Page | 37

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

31/07/2009 03/08/2009 03/08/2009 03/08/2009 04/08/2009 04/08/2009 04/08/2009 10/08/2009 10/08/2009 10/08/2009 10/08/2009 12/08/2009 12/08/2009 12/08/2009 12/08/2009 12/08/2009 12/08/2009 13/08/2009 13/08/2009 17/08/2009 17/08/2009 17/08/2009 20/08/2009 20/08/2009 20/08/2009 20/08/2009 21/08/2009

03/08/2009 04/08/2009 04/08/2009 04/08/2009 05/08/2009 05/08/2009 05/08/2009 10/08/2009 10/08/2009 11/08/2009 11/08/2009 13/08/2009 13/08/2009 13/08/2009 13/08/2009 13/08/2009 13/08/2009 14/08/2009 14/08/2009 18/08/2009 18/08/2009 18/08/2009 20/08/2009 20/08/2009 20/08/2009 20/08/2009 21/08/2009

3 3 3 3 1 1 1 1 1 3 3 1 1 1 1 1 1 1 3 3 3 3 1 1 1 1 1

State Bank of India State Bank of India State Bank of India State Bank of India Citibank HDFC Standard Chartered Bank State Bank of India State Bank of India State Bank of India Yes Bank State Bank of India State Bank of India State Bank of India Corporation Bank UTI Bank UTI Bank State Bank of India Corporation Bank ICICI Bank IDBI Bank IDBI Bank State Bank of India State Bank of India State Bank of India State Bank of India State Bank of India

USD USD USD GBP USD USD USD GBP USD USD GBP EUR USD USD USD GBP USD USD USD USD USD EUR USD EUR USD EUR USD 62 00

48.08 90 47.68 65 47.69 13 80.26 45 47.61

48.089 0 47.686 5 47.691 3 80.264 5

1.7 371,096.77 ########## ########## 80,988.30 ########## 8 18.4 0 12.3 7 0.6 5 34.8 9 25.9 ########## 0 26.9 ########## 0 0.0 8,867.00 ########## ########## ########## 7 193.2 9 22.3 6 13.2 3 10.8 ########## 317,164.56 ########## ########## 31,829.75 ########## 8 1.5 3 28.6 0 26.8 1 0.2 5 24.8 2 13.1 ########## ########## ########## ########## 60,662.46 2 23.3 1 22.2 7 13.4 5 0.4 2 6.1 ########## 714,954.90 ########## 466,804.18 ########## 0 4.9 6 94.1 6 3.2 4 101.6 4 TOM Cash adj against rec Cash adj against rec Cash adj against rec Cash adj against rec Cash adj against rec TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM Cash adj against rec Cash adj against rec TOM TOM TOM TOM TOM TOM

47.62 50 47.62 00 79.73 94 47.80 25 47.76 65 79.45 87 68.34 74 48.33 48.33 62 48.33 35 79.45 00 48.34 20 48.07 40 48.07 50 48.85 65 48.92 00 68.75 71 48.67 00 69.31 58 48.67 00 69.31 58 48.72 50 48.670 0 69.315 8 48.670 0 69.315 8 48.725 0 48.074 0 68.347 4 48.336 2 48.336 2 79.739 4 47.802 5 47.766 5

Page | 38

29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44

21/08/2009 21/08/2009 21/08/2009 21/08/2009 21/08/2009 21/08/2009 25/08/2009 25/08/2009 25/08/2009 26/08/2009 26/08/2009 27/08/2009 27/08/2009 28/08/2009 28/08/2009 28/08/2009

21/08/2009 24/08/2009 24/08/2009 24/08/2009 24/08/2009 24/08/2009 26/08/2009 26/08/2009 26/08/2009 27/08/2009 27/08/2009 28/08/2009 28/08/2009 31/08/2009 31/08/2009 31/08/2009

1 3 3 3 3 3 1 1 1 1 1 3 3 1 3 3

State Bank of India ING Vysya Bank State Bank of India State Bank of India State Bank of India State Bank of India IDBI Bank Indusind Bank Bank of India State Bank of India State Bank of India State Bank of India State Bank of India State Bank of India Standard Chartered Bank Standard Chartered Bank

EUR USD GBP EUR USD USD USD USD USD USD EUR USD USD USD USD JPY

69.34 54 48.60 75 80.45 20 69.61 17 48.61 15 48.61 15 48.77 00 48.76 45 48.76 25 48.85 15 69.8674

69.345 4

0.1 26,377.42 ########## 8 21.5 2 0.1 15,517.25 298,451.72 ########## ########## ########## ########## ########## 2 2.0 8 14.3 4 16.1 6 32.9 8 33.4 8 33.1 1 13.1 ########## 767,482.44 ########## ########## 806,014.16 ########## ########## Total Remittances 8 5.36 24.4 0 17.5 7 3.9 3 16.3 7 1.8 0 969.4 0

Cash adj against rec TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM TOM Crores

80.452 0 69.611 7 48.611 5 48.611 5

48.851 5 69.8674

48.91 00 48.91 40 48.73 00 48.71 75 0.51 85

48.910 0 48.914 0 48.730 0

The above table illustrates the outward remittances of August 2009. Value date indicates the date on which payments were made. For TOM, the value date is one ahead of the date of booking. For cash basis the value date is same as date of booking whereas in case of SPOT, the value date is date of booking plus two. No of Quotes obtained- number of banks called for booking a single lot payment. For exampleIn case of LSC payments, only one bank is called, since the payment is routed through SBI. For Category III transactions, no competitive bids are accepted. Thus only single quote is obtained

Page | 39

one bank is called for a single lot transaction so as to avoid artificial demand of foreign currency. Whenever there is an inflow, the transaction takes place on CASH basis i.e the amount is adjusted against receipts. The outflows are adjusted against inflows and the payment is routed through SBI.

List of inward remittances made during the month : August 2009


Exchange rate offered by Curr Qualify ing bank 47.8025 47.8025 48.6700 48.72 50 SBI Remarks (to specifiy spot/tom / forward) CASH CASH CASH CASH

Sl. No

Date of Realisation

Value date

No. of quotes obtained

Name of the qualifying bank State Bank of India State Bank of India State Bank of India State Bank of India

Amount in foreign Currency

Amount in INR(Rs. In crores) ###### ###### ###### ######

Received From

1 2 3 4

10/08/2009 10/08/2009 20/8/2009 21/08/2009

05/08/2009 07/08/2009 19/08/2009 20/08/2009

1 1 1 1

USD USD USD USD

47.8025 47.8025 48.6700 48.725 0

####### ####### ####### ####### Total Receipts

SHELL INT GLENCOR E INT S.K ENERGY VITOLASI A

######

Total Receipts

4 05.42

crores

The above table highlights the inward remittances of August 2009. A total receipt for the month of July is Rs 405.42 crores. ONGC sells naphtha products and receives USD from companies like SHELL INTERNATIONAL, GLENCORE INTERNATIONAL,S.K.ENERGY and VITOLASIA. The transaction of inflows is done through State Bank of India only. The transaction is done on Cash basis. The value date indicates the date on which the export credit was received. All the inflow transactions of ONGC are done with SBI. Thus the LSC payments which is routed through SBI is made out of the export credit through SBI on cash value. This would allow ONGC to save the BID/ASK spread on both the deals. The remaining outflow is done on TOM basis.

Page | 40

The above graph highlights the trend of cash inflows, outflows and for the year 2009-10

HEDGING
Hedging means reducing or controlling risk. This is done by taking a position in the futures market that is opposite to the one in the physical market with the objective of reducing or limiting risks associated with price changes.

Hedging is a two-step process. A gain or loss in the cash position due to changes in price levels will be countered by changes in the value of a futures position. For instance, a wheat farmer can sell

Page | 41

wheat futures to protect the value of his crop prior to harvest. If there is a fall in price, the loss in the cash market position will be countered by a gain in futures position. In this type of transaction, the hedger tries to fix the price at a certain level with the objective of ensuring certainty in the cost of production or revenue of sale.

The futures market also has substantial participation by speculators who take positions based on the price movement and bet upon it. Also, there are arbitrageurs who use this market to pocket profits whenever there are inefficiencies in the prices. However, they ensure that the prices of spot and futures remain correlated. A buying hedge is also called a long hedge. Buying hedge means buying a futures contract to hedge a cash position. Dealers, consumers, fabricators, etc, who have taken or intend to take an exposure in the physical market and want to lock- in prices, use the buying hedge strategy. Benefits of buying hedge strategy:

To replace inventory at a lower prevailing cost. To protect uncovered forward sale of finished products.

The purpose of entering into a buying hedge is to protect the buyer against price increase of a commodity in the spot market that has already been sold at a specific price but not purchased as yet. It is very common among exporters and importers to sell commodities at an agreed-upon price for forward delivery. If the commodity is not yet in possession, the forward delivery is considered uncovered. Long hedgers are traders and processors who have made formal commitments to deliver a specified quantity of raw material or processed goods at a later date, at a price currently agreed upon and who do not have the stocks of the raw material necessary to fulfill their forward commitment.

A selling hedge is also called a short hedge. Selling hedge means selling a futures contract to hedge. Uses of selling hedge strategy.

Page | 42

To cover the price of finished products. To protect inventory not covered by forward sales. To cover the prices of estimated production of finished products.

Short hedgers are merchants and processors who acquire inventories of the commodity in the spot market and who simultaneously sell an equivalent amount or less in the futures market. The hedgers in this case are said to be long in their spot transactions and short in the futures transactions. Usually, in the business of buying or selling a commodity, the spot price is different from the price quoted in the futures market. The futures price is the spot price adjusted for costs like freight, handling, storage and quality, along with the impact of supply and demand factors. The price difference between the spot and futures keeps on changing regularly. This price difference (spot - futures price) is known as the basis and the risk arising out of the difference is defined as basis risk. A situation in which the difference between spot and futures prices reduces (either negative or positive) is defined as narrowing of the basis. A narrowing of the basis benefits the short hedger and a widening of the basis benefits the long hedger in a market characterized by contango - when futures price is higher than spot price. In a market characterized by backwardation - when futures quote at a discount to spot price - a narrowing of the basis benefits the long hedger and a widening of the basis benefits the short hedger.

However, if the difference between spot and futures prices increases (either on negative or positive side) it is defined as widening of the basis. The impact of this movement is opposite to that as in the case of narrowing. Exchange rates are considered by corporate as a crucial important factor affecting their profitability. This is because exchange rate fluctuations directly impact the sales revenue of firms exporting goods and services. Future payments in a foreign currency carry the risk that the foreign currency will depreciate in value before the foreign currency payment is received and is exchanged into Indian rupees. Thus exchange risk is the effect that unexpected exchange rate changes have on the value of the firm. In order to minimize the losses due to exchange rate fluctuations, hedging is a tool which is used to manage foreign exchange risk.

Page | 43

ONGC is exposed to this foreign exchange risk because of their daily transactions in multiple foreign currencies. Hence I have tried to work on devising a hedging strategy for ONGC.

HEDGING TECHNIQUES
The following are some of the most common types of foreign currency hedging vehicles used in today's markets as a foreign currency hedge. Currency risks could be hedged mainly through forwards, futures and options. SPOT CONTRACTS A foreign currency contract to buy or sell at the current foreign currency rate, requiring settlement within two days. As a foreign currency hedging vehicle, due to the short-term settlement date, spot contracts are not appropriate for many foreign currency hedging and trading strategies.

Page | 44

FORWARD CONTRACTS A foreign currency contract to buy or sell a foreign currency at a fixed rate for delivery on a specified future date or period. Foreign currency forward contracts are used as a foreign currency hedge when an investor has an obligation to either make or take a foreign currency payment at some point in the future. If the date of the foreign currency payment and the last trading date of the foreign currency forwards contract are matched up, the investor has in effect "locked in" the exchange rate payment amount. FUTURES CONTRACTS A futures contract is similar to the forward contract but is more liquid because it is traded in an organized exchange i.e. the futures market. Depreciation of a currency can be hedged by selling futures and appreciation can be hedged by buying futures. Futures require a small initial outlay (a proportion of the value of the future) with which significant amounts of money can be gained or lost with the actual forwards price fluctuations.

CURRENCY OPTIONS A financial foreign currency contract giving the buyer the right, but not the obligation, to purchase or sell a specific foreign currency contract (the underlying) at a specific price (the strike price) on or before a specific date (the expiration date). The amount the foreign currency option buyer pays to the foreign currency option seller for the foreign currency option contract rights is called the option "premium." A foreign currency option can be used as a foreign currency hedge for an open position in the foreign currency spot market. Foreign currency options can also be used in combination with other foreign currency spot and options contracts to create more complex foreign currency hedging strategies. There are many different foreign currency option strategies available to both commercial and retail investors.

Page | 45

An FX call Option is a tool which simply allows you the right but not the obligation to buy currency at a specific rate. For example, You may buy $2m USD per annum to pay for stock bought from a Chinese supplier. You may protect your USD rate by purchasing a Call Option at 1.62 (GBP:USD). This means if the rate falls below 1.62 you are protected at 1.62, if the rate improves above 1.62 you can also benefit from the market upside. An FX Put option is a tool which simply gives you the right but not the obligation to sell a currency at a specific rate. For example, You may sell your products in Europe and receive 2m Euro per annum. A Put FX Option at 1.10 (GBP:EURO) would allow you to guarantee the income value when repatriating these EUROs back to sterling. If the rate worsens (as an exporter) above 1.10 you are protected. If the market rate improves above 1.10 you can also benefit from the upside.

FORWARD CONTRACTS
A forward contract is an agreement between two parties to buy or sell (obligation) a commodity or asset (underlying asset, underlying instrument) at a specific future date for an agreed upon price. Typically, the contract is between a producer and a merchant; a dealer and an end user; two financial institutions; or a financial institution and a client. A forward exchange contractalso called a forward currency contractis an agreement between you and your bank in which the bank agrees to buy or sell a certain amount in a foreign currency at a fixed rate of exchange on, or during a period up to, a particular date. As an exporter entering an export contract in a foreign currency, a forward exchange contract allows you to determine at the time you sign the contract the exchange rate which will apply to future payments from your buyer.

Page | 46

In a forward exchange contract, your bank quotes a forward exchange rate for buying a specified foreign currency from you and for paying you in Australian dollars. The Forward Market is the over the counter market for future delivery or, in the case of physical commodities, for later shipment. In the United States it can also mean trading outside a commodities exchange for delivery at a future date. A fixed forward exchange contract states the type and amount of foreign currency the bank will buy, the agreed exchange rate and the specific date on which youll pay the foreign currency to the bank.A forward option contract states a period of time, rather than a specific date, during which the bank will exchange the foreign currency for Australian dollars. Your bank may quote different exchange rates in a fixed forward exchange contract and a forward option contract.The term of a forward exchange contract can range from a few days to more than 12 months.A forward exchange contract can state a series of agreed exchange dates, with corresponding exchange rates, in order to match the payment dates under your export contract (for example, if youre receiving payments from your buyer in instalments).If you have several export sales contracts in a particular foreign currency, a forward exchange contract can cover payments under all of those contracts. Forward contracts have a buyer and a seller, who agree upon a price, quantity, and date in the future in which to exchange an asset. On the delivery date, the buyer pays the seller the agreed upon price and receives the agreed upon quantity of the asset. If the contract is cash settled, the buyer would have a cash gain (and the seller a cash loss) if the spot price, or price of the asset at expiry, is higher than the agreed upon Forward price. If the spot price is lower than the Forward price at expiry, the seller has a cash gain and the buyer a cash loss. In cash settled forward contracts, both parties agree to simply pay the profit or loss of the contract, rather than physically exchanging the asset. There is no initial payment to enter into a forward contract and no payment is made during the term of the contract. A forward contract can be cash settled or settled by actual delivery of the underlying asset.

Page | 47

Forward contracts offer users the ability to lock in a purchase or sale price without incurring any direct cost. This feature makes it attractive to many corporate treasurers, who can use forward contracts to lock in a profit margin, assist in cash planning, or ensure supply of a scarce resources. Speculators also use forward contracts to make bets on price movements of the underlying asset. Many corporations and banks will use forward contracts to hedge price risk by eliminating uncertainty about prices. For instance, coffee growers may enter into a forward contract with Starbucks (SBUX) to lock in their sale price of coffee, reducing uncertainty about how much they will be able to make. Starbucks benefits from contract because it is able to lock in their cost of purchasing coffee. Knowing what price it will have to pay for its supply of coffee ahead of time helps Starbucks avoid price fluctuations and assists in planning.

FORWARD CALCULATIONS :
Value Date
02/04/2009 02/04/2009 02/04/2009 02/04/2009 02/04/2009 02/04/2009 02/04/2009 02/04/2009 02/04/2009 02/04/2009

Rate
50.8394 50.8394 50.8394 50.8315 50.8315 50.8284 50.8284 50.8284 50.8284 50.8284

Forward factor
0.3500 0.3500 0.3500 0.3500 0.3500 0.3500 0.3500 0.3500 0.3500 0.3500

Amt FX
1,714,606.4 3 5,000,000.0 0 2,687,404. 22 4,888,370. 26 3,546,169.6 1 5,000,000.0 0 1,868,963. 20 1,333,815. 65 31,367. 89 2,260.0 0

Ant in INR
87169562.14 254197000 136626018.1 248483192.9 180257120.5 254142000 94996409.11 67795715.38 1594379.66 114872.184

Clubbed Amount
26,217,764. 38

Spot Rate
50.83

Forward Rate 1
51.08

Profit bcoz of hedging


-6466820.327 0 0 0 0 0 0 0 0 0

Page | 48

8,952.6 02/04/2009 02/04/2009 02/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 06/04/2009 08/04/2009 08/04/2009 50.8284 50.8284 50.8284 50.2990 50.2990 50.3098 50.3098 50.2900 50.2900 50.2900 50.2900 50.2900 50.2900 50.3098 50.3098 50.1100 50.1250 0.3500 0.3500 0.3500 0.3075 0.3075 0.3075 0.3075 0.3075 0.3075 0.3075 0.3075 0.3075 0.3075 0.3075 0.3075 0.2850 0.2850 3 11,731.9 9 124,122. 50 5,000,000.0 0 4,369,390.9 1 1,259,684. 84 4,837,440. 06 5,000,000.0 0 500,371.2 0 12,074.7 2 51,133. 33 20,705.0 5 23,248. 08 79,068.2 5 8,721,400. 00 5,000,000.0 0 3,490,905.0 0 6308948.079 251495000 219775993.4 63374492.36 243370641.9 251450000 25163667.65 607237.6688 2571495.166 1041256.965 1169145.943 3977907.844 438771889. 7 250550000 174981613.1 11,345,118. 26 50.1086 51.83 29,874,516. 44 50.30 51.87 0 -48613106.41 0 0 0 0 0 0 0 0 0 0 0 -19408906.38 0 596318.2805 0 455047.8587 0

63,331. 08/04/2009 08/04/2009 08/04/2009 08/04/2009 08/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 50.1250 50.1250 50.1250 50.0750 50.0750 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 0.2850 0.2850 0.2850 0.2850 0.2850 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 88 69,827.2 7 42,140.7 8 1,980,171. 14 698,742. 19 400,507.0 7 5,625.2 9 76,035.3 1 226,346.6 7 21,075.0 0 27,066.3 0 84,137. 00 353,025.0 2112306.598 99157069.84 34989515.16 2,364,373. 20095842.74 282254.551 3815147.715 11357170.51 1057459.2 1358078.669 4221658.112 17713382.4 38 50.1760 51.83 -3915454.514 0 0 0 0 0 0 0 0 0 0 3500091.909 0 3174510.485 0

Page | 49

0 22,719.3 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 09/04/2009 15/04/2009 15/04/2009 15/04/2009 15/04/2009 16/04/2009 16/04/2009 16/04/2009 16/04/2009 16/04/2009 16/04/2009 17/04/2009 17/04/2009 17/04/2009 17/04/2009 17/04/2009 20/04/2009 20/04/2009 20/04/2009 20/04/2009 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 50.1760 49.8940 49.8940 49.8940 49.8940 49.7835 49.7750 49.7390 49.7390 49.7290 49.7290 49.7650 49.7650 49.7650 49.7650 49.7650 49.8291 49.8291 49.8360 49.8360 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.2900 0.2900 0.2900 0.2900 0.2858 0.2858 0.2858 0.2858 0.2858 0.2858 0.2900 0.2900 0.2900 0.2900 0.2900 0.2775 0.2775 0.2775 0.2775 7 421,741. 75 417,338. 53 2,601.6 8 2,601.6 8 222,677. 19 5,823.9 6 46,569.1 8 7,685. 81 3,842. 89 16,953.7 0 35,401.5 7 760,861.4 9 813,627. 74 35,486. 47 5,325,800. 00 5,000,000.0 0 2,949,392.1 2 1,337,921. 91 1,618,226. 99 1,739,201. 36 40,378. 50 25,865. 10 64,865.1 0 985,325. 38 706,396.0 0 2,917,722. 19 5,000,000.0 0 2,635,695.2 0 199,968.3 5 1770561.934 265136964.3 248875000 146699814.7 66546897.88 80472809.99 86488744.4 3 1,822,830. 2009436.053 1287176.702 3228011.702 49034717.54 35153796.94 145387470.8 249145500 131352506 9965622.691 19,863,672. 86 49.8339 50.67 08 49.7650 51.65 -3390754.717 0 0 0 0 -16576503.03 0 0 0 17,970,542. 38 49.7491 51.82 0 -37189312.15 0 0 0 0 0 40595142.46 0 37962423.18 0 1766325.934 27 850668.8512 1,645,377. 49.8940 51.82 -3172917.877 0 192820.8486 0 385643.2026 0 2336655.176 0 292223.017 0 11173050.69 0 130541.8957 0 130541.8957 0 20940378.08 0 21161314.05 0 1139967.109 0

Page | 50

20/04/2009 20/04/2009 20/04/2009 20/04/2009 21/04/2009 21/04/2009 21/04/2009 21/04/2009 21/04/2009 21/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009

49.8360 49.8355 49.8355 49.8355 50.2600 50.2600 50.2600 50.2600 50.2600 50.2600 50.2860 50.2860 50.2860 50.2860 50.2860 50.2860

0.2775 0.2775 0.2775 0.2775 0.2850 0.2850 0.2850 0.2850 0.2850 0.2850 0.2775 0.2775 0.2775 0.2775 0.2775 0.2775

3,211,402. 53 5,000,000.0 0 864,756.0 6 34,128. 53 2,400.0 0 668,045. 86 206,047.9 5 17,340.1 6 260,900.7 0 520,067.0 4 418,800. 00 347,205. 44 5,000,000.0 0 5,000,000.0 0 436,660.7 7 1,208,643. 44

160043456.5 249177500 43095550.63 1700812.357 1,674,801. 120624 33575984.92 10355969.97 871516.4416 13112869.18 26138569.43 21059776.8 17459572.76 251430000 251430000 21957923.48 60777844.02 25,809,455. 27 50.3726 50.91 71 50.2600 50.67

0 0 0 0 -673146.9581 0 0 0 0 0 -15562561.05 0 0 0 0 0

5,489.9 22/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009 22/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 50.2860 50.2860 50.2860 50.2600 50.3325 50.3310 50.3310 50.8800 50.8800 50.2934 50.2934 50.2934 50.2751 50.2751 0.2775 0.2775 0.2775 0.2775 0.2775 0.2775 0.2775 0.2775 0.2775 0.2874 0.2874 0.2874 0.2874 0.2874 9 3,686.8 1 1,500,666.1 6 5,000,000.0 0 3,890,507.6 5 2,920,515.6 6 65,879.3 5 5,700.0 0 5,700.0 0 5,000,000.0 0 5,000,000.0 0 22,848. 02 4,586,750. 82 4,738,973. 185394.9277 75462498.52 251300000 195818976.3 146992473.7 3315773.565 290016 290016 251467000 251467000 1149104.609 230599356.2 238252360.6 27,866,712. 61 50.2799 50.91 0 0 0 0 0 0 0 0 -17494547.07 0 0 0 0 276069.6371 0

Page | 51

23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 23/04/2009 27/04/2009 27/04/2009 27/04/2009

50.2771 50.2771 50.2771 50.2771 50.2771 50.2771 50.2771 50.2771 50.2771 50.2771 50.2771 49.8360 49.8360 49.8360

0.2874 0.2874 0.2874 0.2874 0.2874 0.2874 0.2874 0.2874 0.2874 0.2874 0.2874 0.2800 0.2800 0.2800

38 1,073,478. 43 238,742. 31 818,866. 50 1,144,876. 31 1,694,082.6 0 612,427. 77 9,919.9 9 2,992.6 1 2,892,936. 13 3,779.5 2 26,038.2 2 2,119,717. 40 8,712. 86 14,932.0 3

53971382.37 12003270.99 41170232.91 57561060.73 85173560.29 30791092.24 498748.3292 150459.7522 145448439.1 190023.305 1309126.191 105638236.3 434214.091 744152.6471 13,511,091. 94 49.8360 51.04

0 0 0 0 0 0 0 0 0 0 0 -16205519.47 0 0

27/04/2009 27/04/2009 27/04/2009 27/04/2009 27/04/2009 27/04/2009 28/04/2009 28/04/2009 28/04/2009 28/04/2009 28/04/2009 28/04/2009 28/04/2009 29/04/2009

49.8360 49.8360 49.8360 49.8360 49.8360 49.8360 50.1860 50.1860 50.1860 50.1750 50.1750 50.1750 50.1800 50.4950

0.2800 0.2800 0.2800 0.2800 0.2800 0.2800 0.2975 0.2975 0.2975 0.2975 0.2975 0.2975 0.2975 0.3026

667,329.7 0 5,000,000.0 0 2,767,140. 12 1,672,858. 06 1,083,729. 69 176,672.0 8 5,000,000.0 0 5,000,000.0 0 4,656,468. 36 1,836.4 1 8,735.9 6 1,361,994.7 3 4,874,807. 40 326,920.1 2

33257042.93 249180000 137903195 83368554.2 8 54008752.83 8804629.779 250930000 250930000 233689521.1 92141.87175 438326.793 68338085.5 8 244617835.3 16507831.46 22,727,637. 06 50.4920 51.04 20,903,842. 86 50.1804 51.04

0 0 0 0 0 0 -16405075.73 0 0 0 0 0 0 -13560124.17

Page | 52

29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009 29/04/2009

50.4775 50.4775 50.4775 50.4950 50.4950 50.4950 50.4950 50.4950 50.4970 50.4970 50.4970 50.4970 50.4970

0.3026 0.3026 0.3026 0.3026 0.3026 0.3026 0.3026 0.3026 0.3026 0.3026 0.3026 0.3026 0.3026

5,000,000.0 0 5,000,000.0 0 954,399.4 9 1,947,101. 56 891,321. 11 114,646.1 3 543,935. 72 1,508,419. 76 145,240. 26 1,819.2 0 27,368. 55 5,000,000.0 0 1,266,465.1 6

252387500 252387500 48175700.26 98318893.27 45007259.45 5789056.334 27466034.18 76167655.78 7334197.409 91864.1424 1382029.669 252485000 63952691.18

0 0 0 0 0 0 0 0 0 0 0 0 0

These calculations highlights the profit/loss incurred by ONGC for 1 month using the forward hedging strategy. The profit/loss incurred due to forward contract was calculated for last five years and the trend was observed.

Page | 53

CURRENCY FUTURES
Futures markets were designed to address certain problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard

Page | 54

features of the contract. A futures contract is standardized contract with standard underlying instrument, a standard quantity of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. Future Contracts are legally binding accords in which one agrees to either buy or sell a certain financial commodity or instrument at a later date in time. Future contracts are standardized depending on what is being traded, the quantity, delivery time and delivery location for each specific commodity. Future contracts consist of secondary markets and can also be dealt numerous times much like a bond and opposed to a bank loan. Unlike forex spot transactions which are short term contracts conducted through the inter-bank system, currency futures are longer term contracts Future contracts are regulated commitments that detail the important features of a transaction such as: - Both the quality and quantity of what is being exchanged - The date the exchange is destined to occur - The method in which the commodity will be delivered - The buying price of whatever will be exchanged. For Example: British Pound Contracts: 62,500 (approx. $112,500), Japanese Yen contracts: 12.5m (approx $116,000), The Euro: 125,000 (approx $160,000), SF: 125,000 (approx $104,000), etc. Expiration dates may include: The third Wednesday of March, June, September, and December. Currency future trading dates back to 1972 where they began at the Chicago Mercantile Exchange (CME), which began trading in 1898. It is currently the largest future exchange in the U.S. in four different product areas: interest rates, stock indexes, commodities and currency. How can one explain this new trend in which trading in many derivative markets blew up in the 1970s. The following are some explanations. - Prior to 1973 there were fixed exchanges rates which meant that there was no currency risk. - Interest rates for saving accounts (Reg Q.) checking accounts (i=0%) and some mortgages (this lead to "points") became fixed by federal law. - Inflation was consistently low and stable, ranging between 2 and 3% from the 50s, through the 70s.

Page | 55

- T-bills interest rates were low and stable ranging between 1 and 2%. - The price of oil also was low and stable. Today's futures market is a global marketplace for not only agricultural goods, but also for currencies and financial instruments such as Treasury bonds and securities (securities futures). It's a diverse meeting place of farmers, exporters, importers, manufacturers and speculators. Thanks to modern technology, commodities prices are seen throughout the world, so a Kansas farmer can match a bid from a buyer in Europe. There were several participants of currency future markets First there were Speculators who were exclusively involved with speculative bet/investment, while lacking any financial interest of what was happening with regards to the underlying commodity/currency involved. There were also hedgers who were people with more of a business/financial interest in understanding what is happening with the underlying currency, using future trading to control minimize, or eliminate currency risk, e.g., MNCs, exporters, importers, banks, etc. If a hedger is interested in the short term picture (long) and a speculator is interested in the long term picture(short), then one can say that the hedger is "selling" risk to the speculator or alternatively the speculator is buying "risk" from the hedger.

Hedgers:
The details of hedging can be somewhat complicated but the principle itself is simple to understand. By either buying or selling commodities in the future market at the moment, individuals and firms can familiarize themselves with an approximate known price for something they will want deal (buy or sell) at a later point in the cash market. Buyers are thus able to offer themselves protection, also understood as hedging against-higher prices whereas sellers are now able to hedge against smaller prices. Futures can also be used by Hedgers to fix an acceptable boundary between their purchase cost and their selling price. Whether the hedging strategy is to buy or sell, all hedgers in principle, are happy to give up the opportunity for large benefit that comes from favorable price changes in order to defend and protect themselves from large disadvantageous price changes.

Page | 56

Speculators:
Speculators often work opposite hedgers. If one were to speculate about future contracts by either buying in hopes to profit from a price increase or by selling in hopes of profiting from a price decrease, the opposite party would probably be known as a hedger or possibly another speculator who holds the exact opposite position from you about whether the price of what is at stake will increase or decrease. Buying future contracts while expecting them to increase in value allowing you to sell them at a higher price is what's called "going long". Alternatively, selling futures contracts expecting them to lose value in the future thus allowing you to buy back identical and future contracts at a lesser price is called "going short." One attractive feature of future trading is that it is possible to profit as much by going short and selling your product as it is to go long and profit from buying a product. Both hedgers and speculators employ currency futures contracts in the marketplace. However, both entities due to their differing motivations, view the forex market from a different perspective. Hedgers utilize currency futures as a defensive mechanism, to protect themselves from risk, while speculators purposely assume risk in order to make a profit by predicting the trends and movements of the currencies relative to one another.

CONCLUSION
Many corporate risk managers attempt to construct hedges on the basis of their outlook for interest rates, exchange rates or some other market factor. However, the best hedging decisions are made when risk managers acknowledge that market movements are unpredictable. A hedge should always seek to minimize risk. It should not represent a gamble on the direction of market prices. A well-designed hedging program reduces both risks and costs. Hedging frees up resources and

Page | 57

allows management to focus on the aspects of the business in which it has a competitive advantage by minimizing the risks that are not central to the basic business. Ultimately, hedging increases shareholder value by reducing the cost of capital and stabilizing earnings.

BIBLIOGRAPHY

1. www.rbi.org.in 2. www.fxstreet.com

Page | 58

3. www.sbi.com 4. www.ongcindia.com 5. www.bloomberg.com 6. www.investopedia.com

Page | 59