Presentation on risk in international finance

Praveen Kumar Dangi B.Com(H), CAIIB, AICWA, MBA (B&F) Senior Manager / Faculty - IMAGE Meaning – Financing of international trade and effecting transactions Cross border cross currency transactions Export requires payment in the currency of the exporter’s country but importer can pay only in the currency of the importer’s country What is Foreign exchange? mechanism by which the currency of one country is converted into the currency of another country FEMA defines Fx =Fc includes deposits, credits and balance payable in any foreign currency DD, TC, LC, B/E expressed or drawn in Indian currency but payable in any foreign currency DD, TC, LC, B/E expressed or drawn by banks, institutions or persons outside India payable in Indian currency  Protecting from the future uncertainty  Why textile industry is in trouble?  Why bollywood is using the hedging techniques?  Why TCS profits have come down?  Credit Risk Refuse to accept goods  Cancellation of order  Delay payment  Raise unjustified objections later  Default in payment  Insolvency of buyer  Delay in execution of order  Despatch inferior goods  Inability to ship goods  Fails to execute – Lehman brothers  Advantage of time zone - Herstatt Cargo Risk        Weather and climate Natural calamities Delay in transportation Accidents Mishandling Theft, pilferage   Country Risk  Legal / regulatory – license cancel, restrictions    Political- war, change of regime Economic- Chinese goods Social- KFC Commercial Risk  $ marketing the product in foreign land Currency Risk $ uncertainty in currency rates – exposure limits  Opinion on buyer – ECGC, D&B  ECGC policy for commercial and country risk  Individual buyer-wise policy  LC  Export production finance Gtee  Insurance cover for transit loss  Forward contract / option etc HEDGING TOOLS - DERIVATIVES  Defined –  A financial instrument giving rise to right and obligation in monetary terms  Executable on a future date  Value is dependent on the value of an underlying asset  OTC – forwards, options, swaps  Exchange – future, options  Quotations :  Direct – when FC is fixed  Indirect – when local currency is fixed  Transaction based:  Buying Rate – when bank takes FC in exchange of rupees   TT rate – bank gets credit without delay Bills rate – when transaction involves sometime  Selling  Rate – When bank gives FC in exchange of rupees Time based:  Cash – Payment and receipt of currencies same day value today  TOM – Deal today at today’s rate settlement tomorrow  Spot – Deal today at today’s rate settlement within 48 hours  Forward – Deal today transaction on pre-determined future date Types of rates: Interbank – Quoted in interbank markets Bid – where a bank quotes a rate to buy a currency Offer – where a bank quotes a rate to sell a currency Card – Bank loads its margin on exchange rates and offered through its branches Types of account:  NOSTRO – Our account with you  VOSTRO – Your account with us  LORO – Their account with you  Mirror – account of foreign bank in books of bank in India Value date: On which purchased currency gets credited to NOSTRO account abroad Mitigation: Insurance – US govt – Overseas Private Investment Corporation (OPIC), World Bank - Multilateral Investment Guarantee Agency (MIGA), Private – American International Corporation (AIG), Johnson, Higgins Risk Appetite – invest or ignore based upon analysis – One part of the country affected – Kashmir, North SriLanka – choose to operate in less disturbed parts of that country Negotiate a better deal with govt – restrictions, remittance limits, control regime Direct action – Ransom, kidnapping – hire security guards for protection Section 41- Central Govt may from time to time give to RBI such general or specific directions which RBI shall comply with Section 46- Central Govt is empowered to make rules to carry out the provisions of the Act Section 47- RBI is empowered to make regulations to carry out the provisions of the Act and the rules made there under  Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business  Payments due as interest on loans and as net income from investments  Remittances for living expenses of parents, spouse and children residing abroad, Expenses in connection with foreign travel, education and medical care of parents, spouse and children  Remittance out of lottery winnings  Remittance of income from racing/riding etc or any other hobby  Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc  Payment of commission on exports made towards equity investment in Joint Ventures/ Wholly Owned Subsidiaries abroad of Indian companies  Remittance of dividend by any company to which the requirement of dividend balancing is applicable  Payment of commission on exports under Rupee State Credit Route, except commission upto 10% of invoice value of exports of tea and tobacco  Payment related to "Call Back Services" of telephones  Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme Gift DonationPrivate visits Business travel Maintenance expenses of a patient Attendant to a patient Property commission Employment Emigration Maintenance of close relatives abroad Studies abroad Pre-incorporation expenses - exceeding Consultancy service - US$ 5,000 US$ 5,000 US$ 10,000 US$ 25,000 US$ 25,000 US$ 25,000 US$ 25,000 US$ 100,000 US$ 100,000 US$ 100,000 US$ 100,000 US$ 100,000 US$ 1,000,000 Medical treatment - estimate from the doctor in India or hospital/doctor abroad Cultural Tours Ministry of Human Resources Development, (Department of Education and Culture) Advertisement in foreign print media , for the Ministry purposes other than promotion of tourism, foreign (Department of of Finance, Economic investments and international bidding (exceeding Affairs) US$ 10,000) by a State Government and its Public Sector Undertakings Remittance of freight of vessel charted by a Ministry of Surface Transport, PSU (Chartering Wing) Payment of import by a Govt Department or a Ministry of Surface Transport, PSU on c.i.f basis (i.e other than f.o.b and f.a.s (Chartering Wing) basis) Multi-modal transport operators making Registration Certificate from the remittance to their agents abroad Director General of Shipping Hiring of transponders by Ministry (a)TV Channels &Broadcasting (b) Internet Service Providers Ministry of Communication and of Information Information Technology Remittance of container detention charges Ministry of Surface Transport exceeding the rate prescribed by Director General (Director General of Shipping) of Shipping Remittances under technical collaboration agreements where payment of royalty exceeds 5% Ministry on local sales and 8% on exports and lump-sum Commerce payment exceeds US$ million of Industry and Remittance of prize money/sponsorship of Ministry of Human Resources sports activity abroad by a person other than Development (Department of International/National/State Level sports bodies,if Youth Affairs and Sports) the amount exceeds US$ 100,000 10 Deleted 11 Remittance for membership of P & I Club Ministry of Finance, (Insurance Division) “Capital account transactions" means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India and includes transactions referred in sub section (3) of section 6:  Transfer or issue of any foreign security by  a person resident in India  A person resident outside India  any branch, office or agency in India of a person resident outside India  Any borrowing or lending in foreign exchange in whatever form or      by whatever name called Any borrowing or lending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India Deposits between persons resident in India and persons resident outside India Export, import or holding of currency or currency notes Transfer of immovable property outside India, other than a lease not exceeding five years, by a person - resident in India / resident outside India/ Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred  by a person resident in India and owed to a person resident outside India  person resident outside India CAPITAL ACCOUNT TRANSACTIONS OF PERSONS RESIDENT IN INDIA  a Investment by a person resident in India in foreign securities  b Foreign currency loans raised in India and abroad by a person resident in India  c Transfer of immovable property outside India by a person resident in India  d Guarantees issued by a person resident in India in favour of a person resident outside India  e Export, import and holding of currency/currency notes  f Loans and overdrafts ( borrowings) by a person resident in India from a person resident outside India  g Maintenance of foreign currency accounts in India and outside India by a person resident in India  h Taking out of insurance policy by a person resident in India from an insurance company outside India  i Loans and overdrafts by a person resident in India to a person resident outside India  j Remittance outside India of capital assets of a person resident in India  k Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India CAPITAL ACCOUNT TRANSACTIONS OF PERSONS RESIDENT OUTSIDE INDIA  a Investment in India by a person resident outside India, that is to say,  (i) Issue of security by a body corporate or an entity in India and investment therein by a person resident outside India; and  (ii) Investment by way of contribution by a person resident outside India to the capital of a firm or a proprietorship concern or an association of persons in India  b Acquisition and transfer of immovable property in India by a person resident outside India  c Guarantee by a person resident outside India in favour of, or on behalf of, a person resident in India  d Import and export of currency/currency notes into / from India by a person resident outside India  e Deposits between a person resident in India and person resident outside India  f Foreign currency accounts in India of a person resident outside India  g Remittance outside India of capital assets in India of a person resident outside India  To ensure that no person accepts foreign contribution for antinational activities, funds are used properly  Any article whose value does not exceed Rs10,000/- shall not be treated as foreign contribution  Interest earned on Foreign contribution to be treated as foreign contribution  It now excludes receipts on account of earnings in lieu of rendering professional services, fees for attending seminar, tuition fees subscription for journal etc  Shall not spend more than 30% on administrative expenses  Renewal of registration every two years, validity for five years GROUP E Departure EXW Ex-Works GROUP F Main Carriage unpaid FCA Free Carrier FAS Free Alongside Ship FOB Free on Board CFR Cost and Freight CIF Cost, Insurance and Freight CPT Carriage Paid To CIP Carriage & Insurance Paid to DAF Delivered At Frontier DES Delivered Ex-Ship DEQ Delivered Ex-Quay DDU Delivered Duty Unpaid DDP Delivered Duty Paid GROUP C Main Carriage Paid GROUP D Arrival ... production finance Gtee  Insurance cover for transit loss  Forward contract / option etc HEDGING TOOLS - DERIVATIVES  Defined –  A financial instrument giving rise to right and obligation in monetary... purchased or sold in the Spot market and carrying the funds in the money markets Eg If you buy USD forward, bank borrows INR in Indian money market converts at spot rate and invests in US money market... borrows the contracted amount in US money market converts at spot rate and kept invested in Indian money market for you REFLECTION OF INTEREST DIFFERENTIAL IN FOREX FORWARD PREMIA INTEREST RATE