3. A STUDY ON FOREIGN EXCHANGE RISK MANAGEMENT TECHNIQUES OF THE CUSTOMERS Under the guidance of Dr. B. CHARUMATHI, Reader & Faculty Advisor Corporate Relations and Placements
Indian Overseas Bank (IOB) was founded on 10 th February 1937 and has distinction of three branches at Chennai, Karaikudi and Rangoon(Myanmar) It was started with a vision to specialise in foreign exchange and overseas banking business in India. In 1969, when it was nationalised, the bank has 208 branches with aggregate deposits of Rs. 67.70 Crores and advances of Rs. 44.90 Crores.
In the year 1993, the bank was under partial automation. They used the ALPM (Automatic Ledger Posting Machines) in some departments of the bank. In the year 1995, the bank has started to operate with full automation In the year 2005, they have implemented networking From September 2009, this branch was allowed direct SWIFT ( Society for Worldwide Interbank Financial Telecommunication) connectivity
Forwards – in detail
Forward sale contract: Forward sale contract is a method for hedging the exchange risk that involves an agreement between a banker and an importer to sell particular currency at a specified rate and a future time. Forward purchase contract: Forward purchase contract is a method for hedging the exchange risk that involves an agreement between a banker and an importer to sell particular currency at a specified rate and a future time. Fixed and Option Forward contract: The Forward contract under which the delivery of foreign exchange should take place on a specified future date is known as ‘Fixed Forward Contract’
Forward contracts ended in Premium: In case of a Forward purchase contract, if the forward rate is more than the spot rate and in case of a Forward sale contract, if the spot rate is more than the forward rate then the contract results in a Premium. Forward contracts ended at Discount: In case of a Forward purchase contract, if the spot rate is more than the forward rate and in case of a Forward sale contract, if the forward rate is more than the spot rate the contract ends at a Discount.
The interest rate given in the NRE deposits accounts has undergone a drastic decrease and that have resulted the customers to be price conscious and they have started shifting from NRE deposits to NRE savings account. When we look into the table of NRE (savings account), though the number of accounts have increased in the last year of the study period, the total balance has shows an increasing figure. This is because in that particular year there were more withdrawals.
Bank could withstand their import payments through their own export proceeds… To analyze whether the imports are supported by the exports. This ratio brings out the relationship between the value of exports and the value of imports. By calculating this ratio, we can determine whether the bank’s inflow of currency can withstand the outflow of the same
The first step undertaken was to consolidate the total value of exports and the total value of imports for every year. Since the bank deals with several currencies it is difficult to find this ratio for all the currencies. Hence, all the currencies are converted into the value of US Dollars using cross rates taking Indian Rupees as the base currency. After finding the value of exports and the value of imports, we can use this formula and find the relationship between them.
It is a rate of exchange between a pair of currencies. For example, USD 1 = Rs. 44.40 and Euro 1 = Rs. 53.43, the cross rate will be calculated as follows: * NOTE: The above mentioned cross rates are calculated based on the average exchange rate provided by the bank.
While we consider the Forward contracts, it is suggested to the customers of Indian Overseas bank to enter into more Forward contracts for their transactions to hedge their risk. Even if they have any chance of the contract ending at a huge difference they can go for cancellation of the contract. The bank need not worry about the cancellation of Forward contracts because they obtain cancellation charges. But they should be careful that the customers do not use these Forward contracts for speculation purposes. Even if a customer is an EEFC account holder they can enter into Forward contracts because sometimes there is a chance that they may never get a good rate in future. The customers can also see which currency gives them a better rate with the help of calculating Cross rates and enter Forward contracts in that currency. When we compare the NRE deposits and NRE savings account, the bank can advice their customers to move to NRE savings so that they get a better returns. Thus, they can have a good relationship with their customers. While dealing with the EXIM ratio, it is advised to the bank to enter into inter-bank Forward contracts so that their FOREX reserves are at a stable position.
