Subject: International Finance (18JBS309)

Faculty: Dr. Batni Raghavendra Rao

Class: 3rd Sem CF1

CIA 2: Case writing on Foreign Exchange Risk Management

Main Company: Reliance Industries

Peer Companies: HPCL and BPCL

Team Members:

Name Reg No
Aniket Mishra 19MBAR0633
Anil Kumar Reddy Annavarapu 19MBAR0256
Anushka Deepesh Govil 19MBAR0136
Anurag Chetia 19MBAR0072
Aparna Ravichandran 19MBAR0198
Ashna Parveen 19MBAR0609
Ashutosh Nahar 19MBAR0243
1. Introduction

Reliance Industries Limited (RIL) is an Indian multinational conglomerate

company headquartered in Mumbai, Maharashtra, India. Reliance owns businesses across
India engaged in energy, petrochemicals, textiles, natural resources, retail, and
telecommunications. Reliance is one of the most profitable companies in India, the
largest publicly traded company in India by market capitalization, and the largest company
in India as measured by revenue after recently surpassing the government-controlled Indian
Oil Corporation. On 22 June 2020, Reliance Industries became the first Indian company to
exceed US$150 billion in market capitalization after its market capitalization hit
₹11,43,667 crore on the BSE. The company is ranked 96th on the Fortune Global 500 list of
the world's biggest corporations as of 2020.
Reliance continues to be India's largest exporter, accounting for 8% of India's total
merchandise exports with a value of ₹1,47,755 crore and access to markets in 108
countries. Reliance is responsible for almost 5% of the government of India's total revenues
from customs and excise duty. It is also the highest income tax payer in the private sector in
India

Hindustan Petroleum Corporation Limited (HPCL) is an Indian oil marketing company and a

subsidiary of ONGC with its headquarters in Mumbai, Maharashtra. It has a 25% market-
share in India among public sector undertakings (PSUs) coupled with a strong marketing
infrastructure. Its parent company is ONGC which owns a 51.11% stake in the company. The
company is ranked 367th on the Fortune Global 500 list of the world's biggest corporations
as of 2016.  On 24 October 2019, the company became a Maharatna PSU
The crude oil import for HPCL’s refineries is approx. 220 thousand barrels per day (11.0
Million tons per annum). The requirement is partly met through term contracts with
National Oil Companies and the balance thru spot procurement.
HPCL manages it’s exposure to Oil price risk by entering into derivatives transactions in the
OTC markets. Derivative positions are being taken in the OTC market on Dubai, Brent crude
and Singapore products (Gas Oil, Kerosene, Fuel Oil and Naphtha).
Derivative deals are concluded through a tendering process, involving only the registered
counter parties. HPCL follows an internally approved methodology for registration of
counter parties. Once registered, HPCL prefers to enter into ISDA agreements before
initiating trade.
 Bharat Petroleum Corporation Limited (BPCL) is an Indian public sector oil and gas company
headquartered in Mumbai, Maharashtra. The Corporation operates two large refineries of
the country located in Kochi and Mumbai.[4] The company is India's 2nd largest
downstream oil company and is ranked 275th on the Fortune list of the world's biggest
corporations as of 2019.[5] BPCL ranked 672 in the Forbes 2018 list.
The total crude oil requirement of BPCL group Refineries (Mumbai, Kochi, Bina, Numaligarh)
is approximately 39 MMTPA. Approximately 20 % of crude oil is available indigenously and
balance crude is imported. The Crude Oil desk of BPCL International Trade department
arranges for crude oil imports, FOB as well as on CFR/DES basis, to meet the periodic
processing requirements of the Refineries.

Crude Oil imports are on term and spot basis, keeping in mind the following broad
requirements:
 Design parameters of refinery units
 Techno-economic considerations of different grades of crude oil
 Processing needs of refineries based on demand projection for different
petroleum products, during a given period
 Adequate availability of preferred crudes on term/spot basis

2. Forex Exposure

Foreign Currency Exposure

  RIL (in Cr) HPCL(in Cr) BPCL(in Cr)
  USD ERU JPY USD USD ERU JPY
Borrowings 125212 18820 10717 20198.07 7666.75    
Trade and 70625.3
other payables 77663 855 17 4140.8 2 171.32 26.79
Trade and
other
Receivables -11499 -1738 -7 174.28 1305.88 0.19  
Derivatives              
Forwards &
Futures -52219 -16558 -10704   -503.25    
Currency Swap -3712            
Options -3620 -1929          
Net Exposure 131825 -550 23 24513.15 -33578.1 -171.13 -26.79
 3. Risk Mitigating Strategies
 Reliance Industries: Simple foreign exchange derivatives are used by the company in
managing foreign exchange exposure. The strategy of the company appears appropriate in
the given situations- nature, type and duration of foreign currency revenues and expenses-
to manage forex exposures.
Reliance Industries Limited uses futures, forwards, options and swaps to manage its
foreign exchange exposures. Since the company has foreign currency liabilities, use of
swaps is appropriate in such cases. However, it uses forwards and futures on a larger scale
to mitigate foreign exchange risk on the net foreign currency payables relating to import of
crude oil feedstock and foreign debt.
The company also uses options on a small scale to hedge foreign currency risk.
Reliance prepares its financial statements in Indian Rupee, but most of the payables and
receivables of hydrocarbon business are in US Dollars, minimising the cash flow risk on
account of fluctuations in foreign exchange rates. Reliance avails long-term foreign
currency liabilities (primarily in USD, EURO and JPY) to fund its capital investments.
Reliance also avails short-term foreign currency liabilities to fund its working capital.
 HPCL: With high adverse net exposure & large % of exchange losses on net profit, it has
employed all currency derivative instruments like Forward, Future, option & swap to
mitigate foreign exchange risk. It is exposed only one majorly traded currency that is USD.
Low margin of net exposure and thin exchange loss on net profit has resulted in choosing
only forward contract, kept remaining exposure un hedged to manage foreign exchange
risk. USD, GBP, EURO, JPY, AUD, CNY, SGD and CHF were the currencies used for
international operation.

The Corporation enters into derivative contracts for hedging purpose, to mitigate the
commodity price risk, on highly probable forecast transactions as detailed above.

The Corporation has established a hedge ratio of 1:1 for the hedging relationship as the
underlying risk of the commodity forward contracts are identical to the hedged risk
component. Hedge item and the hedging instruments have economic relationship as the
terms of the commodity forward contracts match with the terms of hedge items.

 BPCL: In order to effectively mitigate price risk of crude oil, petroleum products & freights,
Bharat Petroleum adopts a comprehensive Risk Management Policies & Processes.
Refinery margins are being hedged in order to protect operating costs of BPCL’s refineries
from adverse price movement of crude oils and petroleum products in the international
markets. Freight costs on import of crude oil are being hedged in order to protect BPCL
from adverse price movement of international shipping freight rates.

Refinery margins are hedged by entering into derivatives contracts viz. Swaps, with BPCL’s
registered counterparties through Over-the-Counter transactions, at fixed prices for future
months.