FX & RM (Final)

.
SUMMER PROJECT
ON
“FOREIGN EXCHANGE &

RISK MANAGEMENT”
SUBMITTED BY:
HITESH N SEHGAL
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LALA LAJPATRAI INSTITUTE OF MANAGEMENT
INDEX
1. ACKNOWLEDGEMENT……………………………………………………03
2. EXECUTIVE SUMMARY…………………………………………………...04
3. OBJECTIVES………………………………………………………………...05
4. INDUSTRY PROFILE…………………………………………………….…06
5. ONGC PROFILE………………………………………………………….....07
6. ONGC HISTORY…………………………………………………………......10
7. INTRODUCTION TO FOREX...……………………………………………14
8. HISTORY OF FOREX……………………………………………………….15
9. MAJOR CURRENCIES……………………………………………………...19
10. PROCEDURE FOR PURCHASE OF FX BY ONGC…………….............21
11. APPROVAL SHEET OF FX OF ONGC……………………………...…...27
12. REMITTANCES REPORT……………………………...………………….28
13. FX RISK MANAGEMENT…………………………………………………31
14. HEDGING……………………………………………………………………33
15. DEVELOPMENT OF DERIVATIVES MKT IN INDIA…………………36
16. FORWARD…………………………………………………………………..38
17. CURRENCY FUTURES…………………………………………………….47
18. CURRENCY OPTION………………………………………………………49
19. CONCLUSION………………………………………………………………57
20. BIBLIOGRAPHY……………………………………………………………58
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ACKNOWLEDGEMENT
It was a great opportunity for me to work for the summer project under
the professional mentors of ONGC ltd.
The Project given to me was on FOREX & I learned a lot from it. It was
a great experience for me as I gained some knowledge about FOREX
which will be really helpful for me.
I was doing this project under the guidance & mentorship of Mr.
A.C.ANDOTRA [DGM (F & A)]. I’m really thankful to him for giving
this opportunity to me for doing this project. Under his mentorship I’m
able to learn a lot about FOREX & RISK MANAGEMENT. Working
for FOREX gives me a good exposure to different currencies of the
world & also how they revolve around the world.
I’m also thankful to PROF.RAJ WADHWA at LALA LAJPATRAI

INSTITUTE OF MANAGEMENT for guiding me throughout my
training.
All the data was provided to me with the help of which I learned about
different concepts of FOREX, calculation of FORWARD & SPOT
RATES, etc.
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EXECUTIVE SUMMARY
Foreign exchange market facilitates transactions between countries, businessmen,
or even corporations around the world. Foreign exchange market is brought about
by trading among countries with different currencies. It operates 24 hours a day
catering businesses around the world. Technology , also , plays a big role in the
success of this market .This market is important because it enables individuals or
businesses to transfer purchasing power, it provides credit for goods in transit , and
it minimizes foreign exchange risk.
FX MARKET: THEN & NOW
What happens when a country runs a balance of payment deficit for a number of
years? One solution for this problem can be by trading. By importing goods or
services from another country, it must acquire the currency that is being used by
the exporting country. It shows the importance of foreign exchange market.
It has been said that investors are pretty concerned with foreign exchange because
they more interested on how they can ‘beat’ the market, how they can get the best
return for their investments. By studying structures and how the exchange market
works, they can then decide on how and where to put their investments.
The foreign exchange market operates 24 hours a day. Like the old ways of
trading, foreign exchange market requires also that both parties agree on their
wants or what we call ``double coincidence of wants. It facilitates transaction
between a person who wants to buy a particular currency and a person who is
willing to sell the desired currency.
Transactions are facilitated by financial market participants around the world. And
as a facilitator of transactions, fast communication is very important .It is also been
said that the foreign exchange market has the function of bringing together
currency traders at certain agreeable exchange rate, typically via brokers. It caters
financial centers from different countries.
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OBJECTIVES
MAIN 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.
SUB-OBJECTIVES
• 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.
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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 & 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.
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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.
ONGC – PROFILE
ONGC Is ASIA’S 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 Platt’s 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 fourth-highest Economic Value-Added (EVA) of Rs. 596 Crore, as
assessed in the 5th Business Today-Stern Stewart study (April 2003), ahead of
private sector leaders like Reliance and Infosys. ONGC is the only Public Sector
Enterprise to achieve a positive MVA as well as EVA.
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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.
It Owns and operates more than 11000 kilometer of pipelines in India, including
nearly 3200 kilometer of sub-sea pipelines. No other company in India operates
even 50 per cent of this route length.
Crossed the landmark of earning Net Profit exceeding Rs.10, 000 Crore, the first to
do so among all Indian Corporate, and a remarkable Net Profit to Revenue ratio of
29.8 per cent. The growth in ONGC's profits is not solely due to deregulation in
crude prices in India, as deregulation has affected all the oil companies, upstream
as well as downstream, but it is only ONGC which has exhibited such a
performance (of doubling turnover and profits).
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 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-km-long Mangalore-Hassan-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.
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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.
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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
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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 other’s 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 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 Platt’s 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).
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• ONGC is the only Company from India in the Fortune Magazine’s list of the
World’s 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 shareholder’s
equity. ONGC maintains top rank in terms of profits among seven
companies from India in the list.
INDIA’S MOST VALUABLE PUBLIC SECTOR ENTERPRISE
• 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.
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• Bagged the coveted winner’s 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
ONGC’s overseas arm ONGC VIDESH LTD (OVL) continued to maintain

robust growth during 2007-08. It acquired 11 E&P Projects in 6 countries during
the year.
ONGC VIDESH LTD (OVL) signed a joint venture agreement with Petroleous
de Venezuela SA (PDVSA) on 8th April, 2008 at Caracus to take 40% stake in the
San Cristobal oilfield located in Orinoco Heavy Oil belt of Venezuela; PDVSA
will hold the remaining 60% stake.
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.
OVL’s share of production of oil and oil-equivalent gas (O+OEG), together with
its wholly owned subsidiaries ONGC Nile Ganga B.V. and ONGC Amazon
Alaknanda Limited, increase from 7.95 MMTOE to 8.80 MMTONE, up 10.7%.
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Consolidated gross revenue of OVL increased from Rs.118610 million to
Rs.169540 million, up 42.93% and consolidated net profit from Rs.16633 million
to Rs.23971 million, up 44.12%.
ONGC’s 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
WHAT IS FOREX?
The foreign exchange market is the "place" where currencies are traded. Currencies
are important to most people around the world, whether they realize it or not,
because currencies need to be exchanged in order to conduct foreign trade and
business. If you are living in the U.S. and want to buy cheese from France, either
you or the company that you buy the cheese from has to pay the French for the
cheese in Euros (EUR). This means that the U.S. importer would have to exchange
the equivalent value of U.S. dollars (USD) into Euros. The same goes for traveling.
A French tourist in Egypt can't pay in Euros to see the pyramids because it's not the
locally accepted currency. As such, the tourist has to exchange the Euros for the
local currency, in this case the Egyptian pound, at the current exchange rate.
The need to exchange currencies is the primary reason why the forex market is the
largest, most liquid financial market in the world. It dwarfs other markets in size,
even the stock market, with an average traded value of around U.S. $2,000 billion
per day. (The total volume changes all the time, but as of April 2004, the Bank for
International Settlements (BIS) reported that the forex market traded U.S. $1,900
billion per day.)
One unique aspect of this international market is that there is no central

marketplace for foreign exchange. Rather, currency trading is conducted
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electronically over-the-counter (OTC), which means that all transactions occur via
computer networks between traders around the world, rather than on one
centralized exchange. The market is open 24 hours a day, five and a half days a
week, and currencies are traded worldwide in the major financial centers of
LONDON, NEW YORK, TOKYO, ZURICH, FRANKFURT, and
HONGKONG. This means that when the trading day in the U.S. ends, the forex
market begins in Tokyo and Hong Kong. As such, the forex market can be
extremely active any time of the day, with price quotes changing constantly.
HISTORY OF THE FOREX
The creation of the gold standard monetary system in 1875 marks one of the most
important events in the history of the forex market. Before the gold standard was
implemented, countries would commonly use gold and silver as means of
international payment. The main issue with using gold and silver for payment is
that their value is affected by external supply and demand. For example, the
discovery of a new gold mine would drive gold prices down.
The underlying idea behind the gold standard was that governments guaranteed the
conversion of currency into a specific amount of gold, and vice versa. In other
words, a currency would be backed by gold. Obviously, government needed a
fairly substantial gold reserve in order to meet the demand for currency exchanges.
During the late nineteenth century, all of the major economic countries had defined
an amount of currency to an ounce of gold. Over time, the difference in price of an
ounce of gold between two currencies became the exchange rate for those two
currencies. This represented the first standardized means of currency exchange in
history.
The gold standard eventually broke down during the beginning of World War I.
Due to the political tension with Germany, the major European powers felt a need
to complete large military projects. The financial burden of these projects was so
substantial that there was not enough gold at the time to exchange for all the excess
currency that the governments were printing off.
Although the gold standard would make a small comeback during the inter-war
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years, most countries had dropped it again by the onset of World War II. However,
gold never ceased being the ultimate form of monetary value.
One of the main features of Bretton Woods is that the U.S. dollar replaced gold as
the main standard of convertibility for the world’s currencies; and furthermore, the
U.S. dollar became the only currency that would be backed by gold. (This turned
out to be the primary reason that Bretton Woods eventually failed.)
Over the next 25 or so years, the U.S. had to run a series of balance of payment
deficits in order to be the world’s reserved currency. By the early 1970s, U.S. gold
reserves were so depleted that the U.S. treasury did not have enough gold to cover
all the U.S. dollars that foreign central banks had in reserve.
Finally, on August 15, 1971, U.S. President Richard Nixon closed the gold
window, and the U.S. announced to the world that it would no longer exchange
gold for the U.S. dollars that were held in foreign reserves. This event marked the
end of BrettonWoods.
Even though Bretton Woods didn’t last, it left an important legacy that still has a
significant effect on today’s international economic climate. This legacy exists in
the form of the three international agencies created in the 1940s: the IMF, the
International Bank for Reconstruction and Development (now part of the World
Bank) and GATT, the precursor to the World Trade Organization.
MARKET PARTICIPANTS
Unlike the equity market - where investors often only trade with institutional
investors (such as mutual funds) or other individual investors - there are additional
participants that trade on the forex market for entirely different reasons than those
on the equity market. Therefore, it is important to identify and understand the
functions and motivations of the main players of the forex market.
GOVT & CENTRAL BANKS
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Arguably, some of the most influential participants involved with currency
exchange are the central banks and federal governments. In most countries, the
central bank is an extension of the government and conducts its policy in tandem
with the government. However, some governments feel that a more independent
central bank would be more effective in balancing the goals of curbing inflation
and keeping interest rates low, which tends to increase economic growth.
Regardless of the degree of independence that a central bank possesses,
government representatives typically have regular consultations with central bank
representatives to discuss monetary policy. Thus, central banks and governments
are usually on the same page when it comes to monetary policy.
Central banks are often involved in manipulating reserve volumes in order to meet
certain economic goals. For example, ever since pegging its currency (the Yuan) to
the U.S. dollar, China has been buying up millions of dollars worth of U.S.
treasury bills in order to keep the Yuan at its target exchange rate. Central banks
use the foreign exchange market to adjust their reserve volumes. With extremely
deep pockets, they yield significant influence on the currency markets.
BANKS & OTHER FINANCIAL INSTITUITIONS
In addition to central banks and governments, some of the largest participants

involved with forex transactions are banks. Most individuals who need foreign
currency for small-scale transactions deal with neighborhood banks. However,
individual transactions pale in comparison to the volumes that are traded in the
interbank market.
The interbank market is the market through which large banks transact with each
other and determine the currency price that individual traders see on their trading
platforms. These banks transact with each other on electronic brokering systems
that are based upon credit. Only banks that have credit relationships with each
other can engage in transactions. The larger the bank, the more credit relationships
it has and the better the pricing it can access for its customers. The smaller the
bank, the less credit relationships it has and the lower the priority it has on the
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pricing scale.
Banks, in general, act as dealers in the sense that they are willing to buy/sell a
currency at the bid/ask price. One way that banks make money on the forex market
is by exchanging currency at a premium to the price they paid to obtain it. Since
the forex market is a decentralized market, it is common to see different banks with
slightly different exchange rates for the same currency.
HEDGERS
One choice that a business can make to reduce the uncertainty of foreign-exchange
risk is to go into the spot market and make an immediate transaction for the foreign
currency that they need.
Unfortunately, businesses may not have enough cash on hand to make spot
transactions or may not want to hold massive amounts of foreign currency for long
periods of time. Therefore, businesses quite frequently employ hedging strategies
in order to lock in a specific exchange rate for the future or to remove all sources
of exchange-rate risk for that transaction.
For example, if a European company wants to import steel from the U.S., it would
have to pay in U.S. dollars. If the price of the euro falls against the dollar before
payment is made, the European company will realize a financial loss. As such, it
could enter into a contract that locked in the current exchange rate to eliminate the
risk of dealing in U.S. dollars. These contracts could be either forwards or futures
contracts.
SPECULATORS
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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.
Some of the largest and most controversial speculators on the forex market are
hedge funds, which are essentially unregulated funds that employ unconventional
investment strategies in order to reap large returns.
MAJOR CURRENCIES
U.S. DOLLAR
The United States dollar is the world's main currency – a 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.
EURO
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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
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. The pound could join the euro in the
early 2000s, provided that the U.K. referendum is positive.
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
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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 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.
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.
The procedure regarding purchase of forex, which was reviewed by, the board and
its silent 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.
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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 centers by

adopting a transparent short-listing procedure and roster system would be followed
for inviting quotes from the panel of banks, which 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 affected 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 that 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
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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.
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
centers 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.
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The Reuters screen provides online status about ongoing traders in the forex
market as well as the indicative rates at which the Banks / Authorized 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 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 (up
to USD 5 Million) and follow modified approaches for bigger remittances.
THE SUGGESTED APPROACH 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
1
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.
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) :
1
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.
1
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

MR/F&A/FxMC/Appr/09-
10 20-Jul-09
The following payment vouchers have been received for payment which are proposed
to be booked on 20-Jul-09 The details of the vouchers with the name of the
parties, TT/DD, currency, amount and due dates are given hereunder :
Due
Beneficiaries Mode Gr Ccy Amount Vch dt dt Rec dt
LOT 1
1 BGEPIL TT JV USD 1,538,880.00 7/20/2009 Due 7/20/2009
Transocean
2 Offshore TT DS USD 1,847,558.14 7/8/2009 Due 7/17/2009
3,386,438.14
LOT 2
Transocean
5,000,000.00
LOT 3
Transocean
Pride
5 Foramer TT DS USD 4,506.22 6/25/2009 Due 7/17/2009
Hal Offshore
6 Ltd. TT MA USD 4,010.67 3/31/2009 Due 7/20/2009
Maharashtra
7 Seamless TT BA USD 15,563.78 7/8/2009 Due 7/17/2009
2,990,407.76
Maharashtra
8 Seamless TT BA EUR 1,935.70 7/15/2009 Due 7/17/2009
9 Converteam TT UP EUR 41,253.14 7/15/2009 Due 7/20/2009
43,188.84
Eqvl.
USD
for
Sl.
No. 1.42
8-9 = USD 61,328.15 (1 EUR = 00 USD)
3,051,735.91
TOTAL USD 11,438,174.05
1
All payments
are to be made
for value TOM
i.e. 21-Jul-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 3 lots.
REMITTANCES REPORT
The remittances report describes the total inflows and outflows for that particular
month. It also includes the list o empanelled banks, bank wise summary which
highlights no of bids sought and successful. It also includes the currency wise
distribution for that particular month.
List of remittances made during the month : October 2009

Remarks (to
Exchange rate specifiy
offered by spot/tom/
No. of Amount in Amount in forward)
Sl. Date of Name of the
Value date quotes Curr foreign INR (Rs.
No Booking qualifying bank
obtained Qualify Currency In crores)
ing SBI
bank
State Bank of 47.8 CASH-adj

1 01/10/2009 01/10/2009 1 India USD 020 ###### ######## 73.62 against rec
0.5
2 05/10/2009 06/10/2009 3 ING Vysya Bank JPY 287 ######## 0.99 TOM
47.5
3 05/10/2009 06/10/2009 3 ING Vysya Bank USD 375 ######## 15.50 TOM
47.5
State Bank of 69.2
5 06/10/2009 07/10/2009 1 India EUR 365 ###### ######## 0.75 TOM
69.
6 06/10/2009 07/10/2009 3 UTI Bank EUR 2708 ######## 3.21 TOM
47.
7 06/10/2009 07/10/2009 3 UTI Bank USD 0430 ######## 2.63 TOM
47.
8 06/10/2009 07/10/2009 3 UTI Bank USD 0490 ######## 21.32 TOM
47.
9 06/10/2009 07/10/2009 3 Corporation Bank USD 0350 ######## 22.72 TOM
68.4
10 08/10/2009 09/10/2009 3 Corporation Bank EUR 322 ######## 8.40 TOM
46.3
46.3
State Bank of 46.3
13 08/10/2009 09/10/2009 1 India USD 200 ###### ######## 2.10 TOM
1
State Bank of 68. TOM against
14 12/10/2009 14/10/2009 1 India EUR 5117 ###### 1,532.94 0.01 receipts
State Bank of 46.6 TOM against
15 12/10/2009 14/10/2009 1 India USD 415 ###### ######## 78.95 receipts
46.6
State Bank of 46.1
17 14/10/2009 15/10/2009 1 India USD 490 ###### ######## 56.83 TOM
Standard 46.1
18 14/10/2009 15/10/2009 1 Chartered Bank USD 475 ######## 58.20 TOM
46.1
46.0
74.8
21 15/10/2009 16/10/2009 3 Corporation Bank GBP 200 ######## 0.12 TOM
46.0
46.0
46.3
46.2
State Bank of 46.1
26 20/10/2009 21/10/2009 1 India USD 295 ######## 3.04 TOM
0.5
27 20/10/2009 21-20-2009 3 Corporation Bank JPY 108 ######## 0.41 TOM
TOM
46.3
28 21/10/2009 22/10/2009 3 Corporation Bank USD 625 ######## 8.13
46.7
29 22/10/2009 23/10/2009 1 UTI Bank USD 575 ######## 52.90 TOM
46.7
30 22/10/2009 23/10/2009 1 IDBI Bank USD 400 ######## 51.53 TOM
70.0
31 22/10/2009 23/10/2009 1 Indusind Bank EUR 203 ######## 13.99 TOM
77.3
32 22/10/2009 23/10/2009 1 Indusind Bank GBP 121 ######## 0.18 TOM
46.7
33 22/10/2009 23/10/2009 1 Indusind Bank USD 425 ######## 46.74 TOM
46.5
34 23/10/2009 26/10/2009 1 ICICI Bank USD 600 ######## 36.30 TOM
46.5
46.5
36 23/10/2009 26/10/2009 1 Bank of India USD 650 ######## 32.93 TOM
70.0
37 23/10/2009 26/10/2009 1 Bank of India EUR 756 ######## 3.23 TOM
76.5
38 23/10/2009 26/10/2009 1 Bank of India GBP 016 ######## 0.37 TOM
State Bank of 46.5
39 23/10/2009 26/10/2009 1 India USD 620 ###### ######## 4.70 TOM
40 26/10/2009 26/10/2009 1 India USD 525 ###### ######## 58.30 against rec
41 26/10/2009 26/10/2009 1 India GBP 620 ###### ######## 4.97 against rec
46.9
69.9
43 27/10/2009 27/10/2009 3 Corporation Bank EUR 175 ######## 8.43 TOM
77.0
44 27/10/2009 27/10/2009 3 Corporation Bank GBP 641 ######## 0.16 TOM
47.2
1
47.3
46 29/10/2009 30/10/2009 1 HDFC Bank USD 625 ######## 60.07 TOM
State Bank of 47.3
47 29/10/2009 30/10/2009 1 India USD 925 ###### ######## 54.93 TOM
Standard 47.3
48 29/10/2009 30/10/2009 1 Chartered Bank USD 875 ######## 56.64 TOM
Total
Remittanc
es ######## Crores
List of inward remittances made during the month : October 2009
Exchange rate offered Remar

by ks (to
Amount Amount
Name of specifi
Date of No. of in in
Sl. Value the Received y
Realisatio quotes Curr foreign INR(Rs.
No date qualifying Qualifying From spot/t
n obtained SBI Currenc In
bank bank om/
y crores)
forwar
d)
State Bank
1 01/10/2009 30/09/2009 1 of India USD 47.7537 47.7537 ######## ###### TOTSA OIL CASH
State Bank
2 01/10/2009 30/09/2009 1 of India USD 47.7537 47.7537 ######## ###### S K ENERGY CASH
State Bank
3 12/10/2009 14/10/2009 1 of India USD 46.6350 46.6350 ######## ###### S K ENERGY CASH
State Bank
4 26/10/2009 26/10/2009 1 of India USD 46.5525 46.5525 ######## ###### TOTSA OIL CASH
State Bank
5 26/10/2009 26/10/2009 1 of India USD 46.5525 46.5525 ######## ###### ITOCHO Co CASH
Total
Receipts ######
Total
Receipts 501.42 crores
The above table highlights the inward remittances of October 2009.
1
The above graph highlights the trend of cash inflows, outflows and for the year
2009-10
FOREIGN EXCHANGE RISK MANAGEMENT
FX RISK MANAGEMENT: PROCESS & NECESSITY
Firms dealing in multiple currencies face a risk (an unanticipated gain/loss) on

account of sudden/unanticipated changes in exchange rates, quantified in terms of
exposures. Exposure is defined as a contracted, projected or contingent cash flow
whose magnitude is not certain at the moment and depends on the value of the
foreign exchange rates. The process of identifying risks faced by the firm and
implementing the process of protection from these risks by financial or operational
hedging is defined as foreign exchange risk management. This paper limits its
scope to hedging only the foreign exchange risks faced by firms.
FX EXPOSURE
Risk management techniques vary with the type of exposure (accounting or

economic) and term of exposure. Accounting exposure, also called translation
exposure, results from the need to restate foreign subsidiaries’ financial statements
1
into the parent’s reporting currency and is the sensitivity of net income to the
variation in the exchange rate between a foreign subsidiary and its parent.
Economic exposure is the extent to which a firm's market value, in any particular
currency, is sensitive to unexpected changes in foreign currency. Currency
fluctuations affect the value of the firm’s operating cash flows, income statement,
and competitive position, hence market share and stock price. Currency
fluctuations also affect a firm's balance sheet by changing the value of the firm's
assets and liabilities, accounts payable, accounts receivables, inventory, loans in
foreign currency, investments (CDs) in foreign banks; this type of economic
exposure is called balance sheet exposure.
The most common definition of the measure of exchange-rate exposure is the

sensitivity of the value of the firm, proxies by the firm’s stock return, to an
unanticipated change in an exchange rate. This is calculated by using the partial
derivative function where the dependant variable is the firm’s value and the
independent variable is the exchange rate
NECESSITY OF MANAGING FOREIGN EXCHANGE RISK
A key assumption in the concept of foreign exchange risk is that exchange rate
changes are not predictable and that this is determined by how efficient the markets
for foreign exchange are. Research in the area of efficiency of foreign exchange
markets has thus far been able to establish only a weak form of the efficient market
hypothesis conclusively which implies that successive changes in exchange rates
cannot be predicted by analyzing the historical sequence of exchange rates.
However, when the efficient markets theory is applied to the foreign exchange
market under floating exchange rates there is some evidence to suggest that the
present prices properly reflect all available information. This implies that exchange
rates react to new information in an immediate and unbiased fashion, so that no
one party can make a profit by this information and in any case, information on
direction of the rates arrives randomly so exchange rates also fluctuate randomly. It
implies that foreign exchange risk management cannot be done away with by
employing resources to predict exchange rate changes.
HEDGING AS A TOOL TO MANAGE FX RISK
1
There is yet another set of companies who believe shareholder value cannot be
increased by hedging the firm’s foreign exchange risks as shareholders can
themselves individually hedge themselves against the same using instruments like
forward contracts available in the market or diversify such risks out by
manipulating their portfolio.
There are some explanations backed by theory about the irrelevance of managing
the risk of change in exchange rates. For example, the International Fisher effect
states that exchange rates changes are balanced out by interest rate changes, the
Purchasing Power Parity theory suggests that exchange rate changes will be offset
by changes in relative price indices/inflation since the Law of One Price should
hold. Both these Theories suggest that exchange rate changes are evened out in
some form or the other. Also, the Unbiased Forward Rate theory suggests that
locking in the forward exchange rate offers the same expected return and is an
unbiased indicator of the future spot rate. But these theories are perfectly played
out in perfect markets under homogeneous tax regimes.
HEDGING
Based on the limits a firm set for it to manage exposure, the firms then decides an
appropriate hedging strategy. There are various financial instruments available for
the firm to choose from: futures, forwards, options and swaps.
HEDGING STRATEGIES/INSTRUMENTS
A derivative is a financial contract whose value is derived from the value of some
other financial asset, such as a stock price, a commodity price, an exchange rate, an
interest rate, or even an index of prices. The main role of derivatives is that they
reallocate risk among financial market participants, help to make financial markets
more complete.
FORWARDS
A forward is a made-to-measure agreement between two parties to buy/sell a

specified amount of a currency at a specified rate on a particular date in the future.
The depreciation of the receivable currency is hedged against by selling a currency
1
forward. If the risk is that of a currency appreciation (if the firm has to buy that
currency in future say for import), it can hedge by buying the currency forward.
The main advantage of a forward is that it can be tailored to the specific needs of
the firm and an exact hedge can be obtained. On the downside, these contracts are
not marketable, they can’t be sold to another party when they are no longer
required and are binding.
FUTURES
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.
OPTIONS
A currency Option is a contract giving the right, not the obligation, to buy or sell a
specific quantity of one foreign currency in exchange for another at a fixed price;
called the Exercise Price or Strike Price. The fixed nature of the exercise price
reduces the uncertainty of exchange rate changes and limits the losses of open
currency positions. Options are particularly suited as a hedging tool for contingent
cash flows, as is the case in bidding processes.
SWAPS
A swap is a foreign currency contract whereby the buyer and seller exchange
equal initial principal amounts of two different currencies at the spot rate. The
buyer and seller exchange fixed or floating rate interest payments in their
respective swapped currencies over the term of the contract. At maturity, the
principal amount is effectively re-swapped at a predetermined exchange rate so
that the parties end up with their original currencies.
COST OF HEDGING
1
Hedging can be done through the derivatives market or through money markets
(foreign debt). In either case the cost of hedging should be the difference between
value received from a hedged position and the value received if the firm did not
hedge. In the presence of efficient markets, the cost of hedging in the forward
market is the difference between the future spot rate and current forward rate plus
any transactions cost associated with the forward contract.
Similarly, the expected costs of hedging in the money market are the transactions
cost plus the difference between the interest rate differential and the expected value
of the difference between the current and future spot rates. In efficient markets,
both types of hedging should produce similar results at the same costs, because
interest rates and forward and spot exchange rates are determined simultaneously.
The costs of hedging, assuming efficiency in foreign exchange markets result in
pure transaction costs.
FACTORS AFFECTING THE DECISION TO HEDGE FX RISK
Determinants of hedging separate the decision of a firm to hedge from that of how
much to hedge. There is conclusive evidence to suggest that firms with larger size,
R&D expenditure and exposure to exchange rates through foreign sales and foreign
trade are more likely to use derivatives.
FIRM SIZE
Firm size acts as a proxy for the cost of hedging or economies of scale. Risk
management involves fixed costs of setting up of computer systems and
training/hiring of personnel in foreign exchange management. Moreover, large
firms might be considered as more creditworthy counterparties for forward or swap
transactions, thus further reducing their cost of hedging.
LEVARAGE
According to the risk management literature, firms with high leverage have greater
incentive to engage in hedging because doing so reduces the probability, and thus
1
the expected cost of financial distress. Highly levered firms avoid foreign debt as a
means to hedge and use derivatives.
LIQUIDITY & PROFITABITY
Firms with highly liquid assets or high profitability have less incentive to engage
in hedging because they are exposed to a lower probability of financial distress.
Liquidity is measured by the quick ratio, i.e. quick assets divided by current
liabilities). Profitability is measured as EBIT divided by book assets.
IF A FIRM DECIDES TO HEDGE, THE DECISION OF HOW MUCH TO

HEDGE IS AFFECTED SOLELY BY ITS EXPOSURE TO FOREIGN
CURRENCY MOVEMENTS.
DEVELOPMENT OF DERIVATIVES
MARKET IN INDIA
The economic liberalization of the early nineties facilitated the introduction of
derivatives based on interest rates and foreign exchange. Exchange rates were
deregulated and market determined in 1993. By 1994, the rupee was made fully
convertible on current account. The ban on futures trading of many commodities
was lifted starting in the early 2000s. As of October 2007, even corporate have
been allowed to write options in the atmosphere of high volatility.
Derivatives on stock indexes and individual stocks have grown rapidly since
inception. In particular, single stock futures have become hugely popular.
Institutional investors prefer to trade in the Over-The-Counter (OTC) markets to
interest rate futures, where instruments such as interest rate swaps and forward rate
agreements are thriving. Foreign exchange derivatives are less active than interest
rate derivatives in India, even though they have been around for longer. OTC
instruments in currency forwards and swaps are the most popular. Importers,
exporters and banks use the rupee forward market to hedge their foreign currency
exposure. Turnover and liquidity in this market has been increasing, although
1
trading is mainly in shorter maturity contracts of one year or less. The typical
forward contract is for one month, three months, or six months, with three months
being the most common. The Indian rupee, which is being traded on the Dubai
Gold and Commodities Exchange (DGCX), crossed a turnover of $23.24 million in
June 2007.
REGULATORY GUIDELINES FOR THE USE OF FX DERIVATIVES
With respect to foreign exchange derivatives involving rupee, residents have

access to foreign exchange forward contracts, foreign currency-rupee swap
instruments and currency options – both cross currency as well as foreign
currency-rupee. In the case of derivatives involving only foreign currency, a range
of products such as Interest Rate Swaps, Forward Contracts and Options are
allowed. While these products can be used for a variety of purposes, the
fundamental requirement is the existence of an underlying exposure to foreign
exchange risk i.e. derivatives can be used for hedging purposes only.
The RBI has also formulated guidelines to simplify procedural/documentation

requirements for Small and Medium Enterprises (SME) sector. In order to ensure
that SMEs understand the risks of these products, only banks with which they have
credit relationship are allowed to offer such facilities. These facilities should also
have some relationship with the turnover of the entity. Similarly, individuals have
been permitted to hedge up to USD 100,000 on self declaration basis.
Authorized Dealer (AD) banks may also enter into forward contracts with residents
in respect of transactions denominated in foreign currency but settled in Indian
Rupees including hedging the currency indexed exposure of importers in respect of
customs duty payable on imports and price risks on commodities with a few
exceptions.
Domestic producers/users are allowed to hedge their price risk on aluminum,

copper, lead, nickel and zinc as well as aviation turbine fuel in international
commodity exchanges based on their underlying economic exposures.
1
Authorized dealers are permitted to use innovative products like cross-currency
options; interest rate swaps (IRS) and currency swaps, caps/collars and forward
rate agreements (FRAs) in the international foreign exchange market. Foreign
Institutional Investors (FII), person’s resident outside India having Foreign Direct
Investment (FDI) in India and Nonresident Indians (NRI) is allowed access to the
forwards market to the extent of their exposure in the cash market.
FORWARD
A FORWARD CONTRACT in the forex market that locks in the price at which
an entity can buy or sell a currency on a future date. Also known as “outright
forward currency transaction", "forward outright" or "FX forward”.
An FX forward is an agreement to purchase or sell a set amount of a foreign

currency at a specified price for settlement at a predetermined future date, or
within a predetermined window of time.
A FORWARD CONTRACT is simply a forward is a non-standardized contract

between two parties to buy or sell an asset at a specified future time at a price
agreed today. This is in contrast to a spot contract, which is an agreement to buy or
sell an asset today. It costs nothing to enter a forward contract. The party agreeing
to buy the underlying asset in the future assumes a long position, and the party
agreeing to sell the asset in the future assumes a short position. The price agreed
1
upon is called the delivery price, which is equal to the forward price at the time the
contract is entered into.
The price of the underlying instrument, in whatever form, is paid before control of
the instrument changes. This is one of the many forms of buy/sell orders where the
time of trade is not the time where the securities themselves are exchanged.
A closely related contract is a futures contract; they differ in certain respects.

Forward contracts are very similar to futures contracts, except they are not
exchange traded, or defined on standardized assets. Forwards also typically have
no interim partial settlements or "true-ups" in margin requirements like futures -
such that the parties do not exchange additional property securing the party at gain
and the entire unrealized gain or loss builds up while the contract is open.
FOREX FORWARD
Sometimes, a business needs to do foreign exchange at some time in the

future. For instance, it might sell goods in Europe, but will not receive
payment for at least 1 year. How can it price its products without knowing
what the foreign exchange rate, or spot price, will be between the United
States dollar (USD) and the Euro (EUR) 1 year from now? It can do so by
entering into a forward contract that allows it to lock in a specific rate in 1
year.
A FORWARD CONTRACT is an agreement, usually with a bank, to

exchange a specific amount of currencies sometime in the future for a
specific rate – FORWARD EXCHANGE RATE.
How is this forward exchange rate calculated? It cannot depend on the

exchange rate 1 year from now because that is not known. What is known is
1
the spot price, or the exchange rate, today, but a forward price cannot simply
equal the spot price, because money can be safely invested to earn interest,
and, thus, the future value of money is greater than its present value.
CALCULATING THE FORWARD EXCHANGE RATE
The future value of a currency is the present value of the currency + the
interest that it earns over time in the country of issue. This can be
represented as:
FUTURE VALUE OF CURRENCY (FV)
FV=P (1+r)n
FV FUTURE VALUE OF CURRENCY
P PRINCIPAL
R INTEREST RATE PER YEAR
N NUMBER OF YEARS
For example, if the interest rate in the United States is 5%, then the future
value of a dollar in 1 year would be $1.05.
If the forward exchange rate equalizes the future values of the base and
quote currency, then this can represented in this equation:
1
Forward Exchange Rate x Future Value of Base Currency = Spot Price
x Future Value of Quote Currency
FORWARD EXCHANGE RATE
Forward
Exchange = Spot Price x Future Value of
Rate Quote Currency = S(1+rq)n
──────────── ────
Future Value of (1+rb)n
Base Currency
S SPOT PRICE
rq INTEREST RATE OF QUOTE CURRENCY
rb INTEREST RATE OF BASE CURRENCY

n
NUMBER OF COMPOUNDING PERIODS
EXAMPLE — Calculating the Forward Exchange Rate
For instance, if the spot price for USD/EUR = 0.7395, then this means that 1
USD = .7395 EUR. The interest rate in Europe is currently 3.75%, and the
current interest rate in the United States is 5.25%. In 1 year, 1 dollar earning
United States interest will be worth $1.0525 and 0.7395 Euro earning the
European interest rate of 3.75% will be worth 0.7672 Euro. Thus, the
forward spot rate 1 year from now is equal to 0.7672/1.0525, or, using the
1
above equation (note, however, that rounding errors between the 2 different
methods of calculating the forward rate results in slight differences):
Forward
S(1+rq)n 0.7395(1+0.0375)1 0.7395 *1.0375
Exchange = ────── = ─────────── = ────────── = 0.7290
(1+rb)n (1+0.0525)1 1.0525
Rate
Thus, the forward exchange rate is 1 USD = 0.7290 (rounded) Euro, or

simply, the FORWARD RATE.
FORWARD CALCULATIONS
Value Frwd Clubbed Spot Frwd Profit bcoz of
Date Rate factor Amt FX Amt in INR Amount Rate Rate 1 hedging
4,148,544.1 22,042,436.4
01/06/2009 47.2700 0.2900 3 196101681 5 47.2944 50.492 -70933594.11
3,226,306.4
01/06/2009 47.2700 0.2900 5 152507505.9 0
5,000,000.0
01/06/2009 47.3100 0.2900 0 236550000 0
1,805,695.0
01/06/2009 47.3100 0.2900 0 85427430.45 0
341,780.8
01/06/2009 47.3100 0.2900 6 16169652.49 0
79,089.4
01/06/2009 47.3100 0.2900 9 3741723.772 0
1,601.0
01/06/2009 47.3100 0.2900 6 75746.1486 0
4,807,023.7
01/06/2009 47.2800 3 227276082 0
2,632,395.7
01/06/2009 47.2800 3 124459670.1 0
4,888,548.0 6,405,098.8
03/06/2009 47.1260 0.2900 0 230377713 8 47.1260 49.7005 -16518717.77
166,538.5
03/06/2009 47.1260 0.2900 1 7848293.822 0
126,448.1
03/06/2009 47.1260 0.2900 7 5958996.459 0
70,944.5
03/06/2009 47.1260 0.2900 7 3343333.806 0
215,265.5
03/06/2009 47.1260 0.2900 4 10144603.84 0
28,736.1
03/06/2009 47.1260 0.2900 5 1354219.805 0
83,276.0
03/06/2009 47.1260 0.2900 4 3924466.661 0
8,623.1
03/06/2009 47.1260 0.2900 1 406372.6819 0
564,832.9
03/06/2009 47.1260 0.2900 1 26618315.72 0
1
66,139.4
03/06/2009 47.1260 0.2900 1 3116885.836 0
185,746.4
03/06/2009 47.1260 0.2900 7 8753488.145 0
2,207,618.4 9,995,148.5
04/06/2009 46.9710 0.2775 0 103694043.9 3 46.9731 49.7005 -27148582.08
1,916,526.1
04/06/2009 46.9675 0.2775 3 90014441.01 0
1,756,722.8
04/06/2009 46.9675 0.2775 4 82508879.99 0
17,401.5
04/06/2009 46.9775 0.2775 0 817478.9663 0
3,203,419.9
04/06/2009 46.9775 0.2775 3 150488659.8 0
893,459.7
04/06/2009 46.9775 0.2775 3 41972504.47 0
3,008,817.0 3,008,817.0
05/06/2009 47.1000 0.2675 0 141715280.7 0 47.1 49.7005 -7658943.674
3,956,353.5 12,093,284.7
08/06/2009 47.1550 0.2592 3 186561850.7 5 47.1521 49.3975 -27130076.78
104,227.7
08/06/2009 47.1550 0.2592 8 4914860.966 0
3,937,727.0
08/06/2009 47.1550 0.2592 2 185683517.6 0
110,425.3
08/06/2009 47.1550 0.2592 9 5207109.265 0
187,286.9
08/06/2009 47.1510 0.2592 7 8830767.922 0
139,981.8
08/06/2009 47.1510 0.2592 1 6600282.323 0
151,876.7
08/06/2009 47.1510 0.2592 4 7161140.168 0
344,734.6
08/06/2009 47.1510 0.2592 6 16254583.95 0
622,853.5
08/06/2009 47.1510 0.2592 4 29368167.26 0
207,924.7
08/06/2009 47.1510 0.2592 2 9803858.473 0
215,333.5
08/06/2009 47.1510 0.2592 4 10153191.74 0
1,070,169.8
08/06/2009 47.1510 0.2592 7 50459579.54 0
1,026,375.4
08/06/2009 47.1510 0.2592 8 48394630.26 0
18,013.7
08/06/2009 47.1510 0.2592 0 849363.9687 0
1,879,424.0 4,150,715.6
10/06/2009 47.4560 0.2625 8 89189949.14 0 47.4560 49.3511 -7867065.792
239,907.6
10/06/2009 47.4560 0.2625 8 11385058.86 0
724,274.4
10/06/2009 47.4560 0.2625 3 34371167.35 0
75,763.8
10/06/2009 47.4560 0.2625 2 3595447.842 0
3,336.7
10/06/2009 47.4560 0.2625 4 158348.3334 0
8,282.5
10/06/2009 47.4560 0.2625 1 393054.7946 0
1,024,653.0
10/06/2009 47.4560 0.2625 4 48625934.67 0
172,113.7
10/06/2009 47.4560 0.2625 8 8167831.544 0
22,959.5
10/06/2009 47.4560 0.2625 2 1089566.981 0
19,012.6 17,840,156.1
11/06/2009 47.4105 0.2850 1 901397.3464 0 47.4105 49.3511 -34663106.93
217,631.5
11/06/2009 47.4105 0.2850 8 10318022.02 0
1
24,717.2
11/06/2009 47.4105 0.2850 8 1171858.603 0
38,794.6
11/06/2009 47.4105 0.2850 3 1839272.806 0
2,540,000.0
11/06/2009 47.4105 0.2850 0 120422670 0
5,000,000.0
11/06/2009 47.4105 0.2850 0 237052500 0
5,000,000.0
11/06/2009 47.4105 0.2850 0 237052500 0
5,000,000.0
11/06/2009 47.4105 0.2850 0 237052500 0
5,000,000.0 6,814,601.0
12/06/2009 47.4020 0.2850 0 237010000 6 47.4080 49.4025 -13229649.82
1,814,601.0
12/06/2009 47.4140 0.2850 6 86037494.66 0
11,180.3 2,046,518.1
15/06/2009 47.5910 0.2750 1 532082.1332 4 47.5910 49.8634 -4018421.565
41,862.3
15/06/2009 47.5910 0.2750 8 1992272.527 0
124,122.5
15/06/2009 47.5910 0.2750 0 5907113.898 0
242,361.3
15/06/2009 47.5910 0.2750 0 11534216.63 0
1,626,991.6
15/06/2009 47.5910 0.2750 5 77430159.62 0
3,985,379.2 11,031,061.0
16/06/2009 47.9795 0.2625 7 191216504.7 1 47.9483 49.8634 -21157608.13
5,000,000.0
16/06/2009 47.9670 0.2625 0 239835000 0
1,659,953.3
16/06/2009 47.9400 0.2625 6 79578164.08 0
5,724.3
16/06/2009 47.9400 0.2625 1 274423.4214 0
46,330.6
16/06/2009 47.9400 0.2625 0 2221088.964 0
39,460.1
16/06/2009 47.9400 0.2625 3 1891718.632 0
17,945.3
16/06/2009 47.9400 0.2625 8 860301.5172 0
276,267.9
16/06/2009 47.9400 0.2625 6 13244286 0
138,080.6 3,302,901.6
17/06/2009 47.7660 0.2700 0 6595557.94 8 47.7660 49.8634 -6199967.791
79,974.4
17/06/2009 47.7660 0.2700 2 3820058.146 0
24,470.7
17/06/2009 47.7660 0.2700 9 1168871.755 0
701,767.4
17/06/2009 47.7660 0.2700 3 33520623.06 0
463,977.7
17/06/2009 47.7660 0.2700 3 22162360.25 0
1,894,630.7
17/06/2009 47.7660 0.2700 1 90498930.49 0
21,256.0 19,819,918.4
18/06/2009 48.1500 0.2634 8 1023480.252 0 48.1476 47.9253 4368071.313
5,000,000.0
18/06/2009 48.1500 0.2634 0 240750000 0
3,541,489.2
18/06/2009 48.1500 0.2634 9 170522709.3 0
13,802.9
18/06/2009 48.1475 0.2634 8 664578.9796 0
68,862.8
18/06/2009 48.1475 0.2634 4 3315573.589 0
5,900.0
18/06/2009 48.1475 0.2634 0 284070.25 0
824,994.8
18/06/2009 48.1475 0.2634 6 39721440.02 0
1
4,665,975.5
18/06/2009 48.1475 0.2634 3 224655056.8 0
5,000,000.0
18/06/2009 48.1455 0.2634 0 240727500 0
198,663.1
18/06/2009 48.1455 0.2634 9 9564738.614 0
478,973.6
18/06/2009 48.1455 0.2634 3 23060424.9 0
84,840.8 3,807,228.1
22/06/2009 48.0875 0.2650 5 4079784.374 1 48.0875 47.4065 2640848.152
8,890.5
22/06/2009 48.0875 0.2650 9 427526.2466 0
26,747.1
22/06/2009 48.0875 0.2650 7 1286204.537 0
1,755,276.7
22/06/2009 48.0875 0.2650 3 84406869.75 0
67,554.0
22/06/2009 48.0875 0.2650 1 3248503.456 0
613,828.8
22/06/2009 48.0875 0.2650 5 29517494.82 0
1,142,905.4
22/06/2009 48.0875 0.2650 8 54959467.27 0
107,184.4
22/06/2009 48.0875 0.2650 3 5154231.278 0
5,000,000.0 26,990,302.5
23/06/2009 48.5365 0.2506 0 242682500 6 48.5775 47.4065 32079780.15
2,332,477.6
23/06/2009 48.5365 0.2506 6 113210301.9 0
4,742,134.3
23/06/2009 48.5365 0.2506 1 230166601.9 0
5,000,000.0
23/06/2009 48.6150 0.2506 0 243075000 0
5,000,000.0
23/06/2009 48.6150 0.2506 0 243075000 0
643,388.2
23/06/2009 48.6150 0.2506 2 31278318.32 0
114,650.3
23/06/2009 48.6150 0.2506 5 5573726.765 0
448,606.8
23/06/2009 48.6150 0.2506 2 21809020.55 0
1,787,205.2
23/06/2009 48.5450 0.2506 0 86759876.43 0
1,921,840.0
23/06/2009 48.5450 0.2506 0 93295722.8 0
10,464,178.5 31,706,285.4
24/06/2009 48.7160 0.2458 2 509772920.8 9 48.6927 47.4065 40558300.58
10,000,000.0
24/06/2009 48.7160 0.2458 0 487160000 0
5,000,000.0
24/06/2009 48.6540 0.2458 0 243270000 0
5,000,000.0
24/06/2009 48.6740 0.2458 0 243370000 0
1,158,150.2
24/06/2009 48.6980 0.2458 6 56399601.36 0
83,956.7
24/06/2009 48.6980 0.2458 1 4088523.864 0
2,289,135.3 20,498,598.5
25/06/2009 48.4750 0.2500 0 110965833.7 6 48.4743 47.2014 26129211.81
4,261,608.3
25/06/2009 48.4750 0.2500 1 206581462.8 0
5,000,000.0
25/06/2009 48.4750 0.2500 0 242375000 0
967,884.0
25/06/2009 48.4750 0.2500 0 46918176.9 0
5,000,000.0
25/06/2009 48.4750 0.2500 0 242375000 0
2,753,080.8
25/06/2009 48.4750 0.2500 1 133455592.3 0
1
226,890.1
25/06/2009 48.4700 0.2500 4 10997365.09 0
1,290,747.5 5,682,931.1
26/06/2009 48.6335 0.2419 9 62773572.92 5 48.6485 47.2014 8062498.196
282,164.1
26/06/2009 48.6335 0.2419 1 13722628.24 0
305,563.2
26/06/2009 48.6335 0.2419 5 14860610.32 0
1,604,431.9
26/06/2009 48.6635 0.2419 1 78077272.25 0
1,752,598.7
26/06/2009 48.6635 0.2419 3 85287588.3 0
447,425.5
26/06/2009 48.6635 0.2419 6 21773293.74 0
1,970,053.1 9,706,304.0
29/06/2009 48.2180 0.2375 7 94992023.75 4 48.2180 47.5968 5548053.877
101,176.4
29/06/2009 48.2180 0.2375 9 4878527.995 0
189,935.9
29/06/2009 48.2180 0.2375 4 9158331.155 0
227,491.4
29/06/2009 48.2180 0.2375 0 10969180.33 0
280,666.6
29/06/2009 48.2180 0.2375 9 13533186.46 0
300,221.2
29/06/2009 48.2180 0.2375 3 14476067.27 0
4,755,891.1
29/06/2009 48.2180 0.2375 8 229319560.9 0
1,880,867.9
29/06/2009 48.2180 0.2375 4 90691690.33 0
The above table 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.
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CURRENCY FUTURES
FUTURES : BASICS
A futures contract is a type of derivative instrument, or financial contract, in

which two parties agree to transact a set of financial instruments or physical
commodities for future delivery at a particular price. If you buy a futures contract,
you are basically agreeing to buy something that a seller has not yet produced for a
set price. But participating in the futures market does not necessarily mean that you
will be responsible for receiving or delivering large inventories of physical
commodities - remember, buyers and sellers in the futures market primarily enter
1
into futures contracts to hedge risk or speculate rather than to exchange physical
goods (which is the primary activity of the cash/spot market). That is why futures
are used as financial instruments by not only producers and consumers but also
speculators.
The consensus in the investment world is that the futures market is a major
financial hub, providing an outlet for intense competition among buyers and sellers
and, more importantly, providing a center to manage price risks. The futures
market is extremely liquid, risky and complex by nature, but it can be understood if
we break down how it functions. While futures are not for the risk averse, they are
useful for a wide range of people.
FUTURES : HISTORY
Before the North American futures market originated some 150 years ago,
farmers would grow their crops and then bring them to market in the hope of
selling their inventory. But without any indication of demand, supply often
exceeded what was needed and unpurchased crops were left to rot in the streets!
Conversely, when a given commodity - wheat, for instance - was out of season, the
goods made from it became very expensive because the crop was no longer
available.
In the mid-nineteenth century, central grain markets were established and a central
marketplace was created for farmers to bring their commodities and sell them
either for immediate delivery (spot trading) or for forward delivery. The latter
contracts - forward contracts - were the forerunners to today's futures contracts. In
fact, this concept saved many a farmer the loss of crops and profits and helped
stabilize supply and prices in the off-season.
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
1
are seen throughout the world, so a Kansas farmer can match a bid from a buyer in
Europe.
ECONOMIC IMPORTANCE
Because the futures market is both highly active and central to the global
marketplace, it's a good source for vital market information and sentiment
indicators.
PRICE DISCOVERY
Due to its highly competitive nature, the futures market has become an important
economic tool to determine prices based on today's and tomorrows estimated
amount of supply and demand. Futures market prices depend on a continuous flow
of information from around the world and thus require a high amount of
transparency. Factors such as weather, war, debt default, refugee displacement,
land reclamation and deforestation can all have a major effect on supply and
demand and, as a result, the present and future price of a commodity. This kind of
information and the way people absorb it constantly changes the price of a
commodity. This process is known as price discovery.
CURRENCY OPTION
A CURRENCY OPTION is a contract that gives the owner the right, but not the
obligation, to buy or sell a currency at a specified price at or during a given time.
FX or Currency Option is a financial derivative instrument under which the owner

of the instrument gets the right but not the obligation to exchange one currency
against another at a particular point of time in future at a predetermined exchange
rate. This predetermined rate is called as STRIKE PRICE OR EXERCISE
PRICE.
1
The market for FX Options is the largest & most liquid option market in the world.
Most of the trading in FX Options happens in OTC (Over the Counter) markets &
less regulated. A portion of the FX Option trading also happens on regulated
exchanges like Philadelphia Stock Exchange, Chicago Mercantile Exchange
and International Securities Exchange.
HOW ARE CURRENCY OPTION TRADED?
While currency options give the buyer the right to buy or sell the underlying
currency, there is no obligation to do so. However, the seller of the currency
options is obligated to buy or sell the underlying currency in case the buyer decides
to exercise the option.
For exercising the right to trade the underlying asset, the seller of the option is paid
a price, known as premium. The price that is specified for either buying or selling
at the future date is known as the strike price.
When an investor believes that the US dollar will appreciate against the Euro, he
purchases a currency call option on USD/EUR. If the value of the US dollar
actually increases against the Euro, the buyer can exercise his right to earn a profit.
BENEFITS
The benefits of currency options are:
1] Currency options are extremely useful for hedging against the adverse
movements of exchange rates.
2] Currency options are the only option contracts that are traded 24 hours a day.
RISKS
The risks associated with currency options are:
1
1] Currency options change in value very frequently, since they are tied to the
volatile forex market.
2] The small outlay that is paid as the initial margin may prevent an investor from
estimating the actual losses that he may suffer due to adverse market conditions.
CALL OPTION
A CALL OPTION is a contract between two parties to transfer ownership of a

stock at a specified price within a specified time period. A call option is also
known simply as a ‘call.’ The price that the parties agree on is termed as the strike
price. The date on which the agreement expires is called the expiration date of the
call option. Though call options enable a buyer with the right to buy the underlying
share, there is no obligation to buy it.
The seller of the contract is also known as the writer. The payment that is paid to
the writer by the buyer of the call option is known as the premium.
TRADING A CALL OPTION
The specification of the trade may differ from exchange to exchange. They may
also depend upon the option style. For instance, a US call option can be exercised
at any point of time during life of a call option while a European call option can be
exercised only on the expiration date.
VALUE OF A CALL OPTION
When the price of the underlying instrument goes up and gets closer to the strike
price, that situation is most profitable for the buyer of the call options. When this
price exceeds the strike price, the option is said to be ‘in the money.’
STRATEGIES OF A CALL OPTION
A covered call option refers to a strategy in which the seller of the call option is the
owner of that underlying stock. So, the seller is provided a ‘cover’ by these shares
in case the buyer of the option decides to buy the underlying instrument.
A naked call option is a highly risky and speculative strategy in which a speculator
sells a call option on a stock without the actual ownership of that stock. The
1
expectation of the speculator is that the price of the call option will increase. If it
increases even by a dollar, the rate of return on the investment is very high. So, a
naked call option is ranked among the riskiest strategies because the seller does not
own the stock and is exposed to unlimited risk.
PUT OPTION
A PUT OPTION is a financial contract between a buyer and a seller (also called a
writer) through which the buyer receives the right to sell the underlying asset at a
specified price before the expiry of a contract. This pre-specified selling price of an
option is termed as the ‘strike price.’ For exercising the put option, the buyer needs
to pays a premium to the writer.
Although the buyer of the put option has the right to sell the underlying, he is
under no obligation to do so. However, the writer of the put option is under an
obligation to agree to the transaction.
The underlying asset for a put option could be anything ranging from a bond to a
commodity like crude oil. However, the most widely traded put options have
equities as the underlying assets
TRADING A PUT OPTION
The put option, also called a “put,” is sold in lots. For example, a put option based
on stock will be sold in lots of 100 shares. However, the premium of a put is
quoted on a per share basis. A put can be exercised in either the American or the
European way. The American way lets a put option to be exercised any time before
the expiry date. The European way is that a put option can be exercised only on the
day of expiry of the option.
VALUE OF A PUT OPTION
The buyer of the put option believes that an underlying asset’s price would fall
before the date of the expiry of the option. On the contrary, the seller of the put
option believes that such likelihood is extremely low. The main advantage of
1
buying a put option is that the buyer’s risk in the underlying asset is limited to the
premium. A put option also helps to limit the portfolio risk.
STRATEGIES OF A PUT OPTION
In order to find the proper put option for purchase, decide your objectives and the
time for which you want to remain in the market. Finalize the amount you want to
spare for the put option. A last factor to consider is the kind of approach
(conservative or aggressive) that you will follow in the market.
INTRINSIC & EXTRINSIC VALUE
The price of an FX option is calculated into two separate parts, The INTRINSIC &
EXTRINSIC (TIME) VALUE.
The INTRINSIC VALUE of an FX option is defined as the difference between

the strike price and the underlying FX spot contract rate (American Style Options)
or the FX forward rate (European Style Options). The intrinsic value represents the
actual value of the FX option if exercised. The intrinsic value must be zero (0) or
above – if an FX option has no intrinsic value, then the FX option is simply
referred to as having no (or zero) intrinsic value (the intrinsic value is never
represented as a negative number). An FX option with no intrinsic value is
considered “out-of-the-money,” an FX option having intrinsic value is considered
“in-the-money,” and an FX option with a strike price at, or very close to, the
underlying FX spot rate is considered “at-the-money.”
The EXTRINSIC VALUE of an FX option is commonly referred to as the “time”

value and is defined as the value of an FX option beyond the intrinsic value. A
number of factors contribute to the calculation of the extrinsic value including, but
not limited to, the volatility of the two spot currencies involved, the time left until
expiration, the riskless interest rate of both currencies, the spot price of both
currencies and the strike price of the FX option. It is important to note that the
extrinsic value of FX options erodes as its expiration nears. An FX option with 60
days left to expiration will be worth more than the same FX option that has only 30
days left to expiration. Because there is more time for the underlying FX spot price
to possibly move in a favorable direction, FX options sellers demand (and FX
options buyers are willing to pay) a larger premium for the extra amount of time.
1
VOLATILITY – Volatility is considered the most important factor when pricing
forex options and it measures movements in the price of the underlying. High
volatility increases the probability that the forex option could expire in-the-money
and increases the risk to the forex option seller who, in turn, can demand a larger
premium. An increase in volatility causes an increase in the price of both call and
put options.
DELTA – The delta of a forex option is defined as the change in price of a forex
option relative to a change in the underlying forex spot rate. A change in a forex
option’s delta can be influenced by a change in the underlying forex spot rate, a
change in volatility, a change in the riskless interest rate of the underlying spot
currencies or simply by the passage of time (nearing of the expiration date).The
delta must always be calculated in a range of zero to one (0-1.0). Generally, the
delta of a deep out-of-the-money forex option will be closer to zero, the delta of an
at-the-money forex option will be near .5 (the probability of exercise is near 50%)
and the delta of deep in-the-money forex options will be closer to 1.0. In simplest
terms, the closer a forex option’s strike price is relative to the underlying spot forex
rate, the higher the delta because it is more sensitive to a change in the underlying
rate.
If the spot rate has not yet reached the EXERCISE PRICE [S<X], the option
cannot be exercised and is said to be “OUT OF THE MONEY”
If the spot rate equals the exercise price [S=X], the option is said to be “AT THE
MONEY.”
If the spot rate has surpassed the exercise price [S>X], the option is said to be “IN
THE MONEY.”
FOREX OPTIONS
It is a contract between a buyer & seller where the buyer has special power of
buying or selling forex at a predetermined rate & on a specified time. In lieu of this
power the buyer pays seller a premium. It is a derivative contract, which means
that the price of the contract is derived from the underlying assets.
ADVANTAGES OF OPTION TRADING
• FLEXIBILITY: Option investing can be used in a wide variety of

strategies, from minimum-risk to high risk. It is flexible enough to let you
1
take the benefits from any market condition, whether the stocks are up or
down.
• LIMITED RISKS: Risk is limited to the option premium (not when writing
options for a security that is not already owned).
• GAINS LEVARAGE: An investor can gain leverage in a stock options

trading without committing to a trade.
• HEDGING: Options investing allows the investors to protect their positions

against any price fluctuations when it is not advantageous to modify the
underlying position.
DIS ADVANTAGES OF OPTION TRADING
• COSTLY: The cost of trading options including both commissions and the
bid is higher on a percentage basis than trading the underlying stock.
• COMPLEX PROCESS: Understanding option trading requires great

observation and maintenance.
• LIQUIDITY: With the wide range of prices available, some will suffer
from very low liquidity making trading difficult.
• TIME DECAY: Option trading is time-sensitive in nature and leads to the

result that most options trading expire worthless. This is only applied to the
traders that purchase options.
E.G. OF FOREX OPTION
Suppose in a EUR/USD FX Option the terms of contract may specify that the
owner of the instrument will have a right but not the obligation to sell EUR
1,000,000 on a particular date & buy 1,334,000 USD. The exchange rate implied in
this contract is 1.334. This rate is the predetermined or strike price for per unit of
EUR against USD. This rate can be arrived at by simply dividing the Notional
values of the currencies involved. A close look of the above contract would reveal
1
that this is both Call & Put option in the same contract. This is a Call Option for
USD & Put Option for EUR. The owner has Option to buy or call USD & sell or
put EUR on specified date. Trading Forex Options
Now suppose the actual exchange rate on specified date for EUR/USD is 1.255 the
owner can exercise the Option to sell EUR 1,000,000 at 1.338 under the option
contract & buy it back in Spot market at 1.255. This would result in a profit to the
owner. (1.334-1.255) x 1,000,000 = 79000 USD in profit.
Selling EUR 1,000,000 @1.334 would get 1,334,000 USD.
Now selling this 1,334,000 USD @1.255 would get 1,062,948 EUR
The net excess in EUR would be 62948. When we convert this to USD @1.255 it
would come to 79000 USD in Profit.
OPTIONS MARKET
The exchange where most of the buying and selling of options contracts take place
is called the OPTION MARKET. The most common way of trading options is
through standardized options contracts. These are listed in various futures and
options exchanges. The listing of the contracts and their respective prices is done
using ticker symbols.
These exchanges publish the options prices continuously and create live options
markets for options trading. Thus, the exchange offers the trading parties a
1
platform to discover prices and execute transactions. These exchanges assume the
role of intermediaries for buyers and sellers.
ROLE
These exchanges ensure that the contract terms are backed by the credit of the
exchange. They also safeguard the anonymity of the counterparties and enforce
market regulations to ensure that the trades remain fair and transparent. During fast
trading conditions, these exchanges ensure the maintenance of orderly markets.
BASIC TRADES OF AN OPTION MARKET
--LONG CALL: When a trader believes that the price of a stock would appreciate,
he/she can acquire the right to buy an option rather than just opting to purchase the
stock. If the price of the stock moves above the exercise price by more than the
premium, the trader earns a profit.
-- LONG PUT: In case the trader believes that the price of the share will decrease,
he/she can buy the right to sell.
--SHORT CALL: A trader expecting a share price to decline can sell a call. The
trader will then be obligated to sell the stock to the call buyer.
--SHORT PUT: A trader expecting a share price to appreciate can sell a put. This
will give the trader an obligation to buy the stock from the put buyer.
CONCLUSION
The foreign exchange market Is unique because of the following features:

considérable trading volumes, the very high level of liquidity, the large number
and variety of actors, geographical dispersion, long trading hours and the variety of
factor That affect exchange rates. A Key assumption in the concept of foreign
exchange risk Is That exchange rate changes are not predictable, and that this is
1
détermine by how efficient the market for foreign exchange are. In general,
companies use internal hedging techniques to reduce exposure before applying
external tools.
Important considerations in the sélection of an appropriate external hedging

technique would be the cost and flexibility of the hedge, the firm’s attitude to risk,
the currency to be hedged and the size and certainty of the exposure. Currency
swaps and futures are more useful for medium to long-term hedging, forward
contracts and currency options are generally used to manage a foreign currency
exposure until one year.
BIBLIOGRAPHY
1. ONGCINDIA.COM
2. BLOOMBERG.COM
3. FOREX.COM
1
4. FOREXTRADING.COM
5. ECONOMICTIMES.COM

FX & RM (Final)

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“FOREIGN EXCHANGE &

10. PROCEDURE FOR PURCHASE OF FX BY ONGC…………….............21

11. APPROVAL SHEET OF FX OF ONGC……………………………...…...27

12. REMITTANCES REPORT……………………………...………………….28

13. FX RISK MANAGEMENT…………………………………………………31

15. DEVELOPMENT OF DERIVATIVES MKT IN INDIA…………………36

17. CURRENCY FUTURES…………………………………………………….47

18. CURRENCY OPTION………………………………………………………49

I’m also thankful to PROF.RAJ WADHWA at LALA LAJPATRAI

it minimizes foreign exchange risk.

FX MARKET: THEN & NOW

The main objective of the project is to understand the FOREX MARKET IN

• To understand the INTERNATIONAL FOREX MARKETS.

• To study FOREX MARKET IN INDIA.

• To study and analyze the DERIVATIVE MARKET in INDIA with respect

It Is recognized as the Most Valuable Indian Corporate, by Market Capitalization,

• Dedicated to excellence by leveraging competitive advantages in R&D

• Imbibe high standards of business ethics and organizational values.

• Abiding commitment to safety, health and environment to enrich quality

• Foster a culture of trust, openness and mutual concern to make working a

• Strive for customer delight through quality products and services.

INTEGRATED IN ENERGY BUSINESS

• Provide value linkages in other sectors of energy business.

• Create growth opportunities and maximize shareholder value.

Further expansion of equity was done by 2% share offering to ONGC employees.

ONGC ranks 20th among the Global publicly-listed Energy companies as

INDIA’S MOST VALUABLE PUBLIC SECTOR ENTERPRISE

• Ranked as the most respected Public Enterprise in India in 2007 “Business

• Rated ‘Excellent’ in MOU Performance Rating for 2006-07 by the

• Bestowed with “Amity Award for Excellence” in Cost Management.

SOURCING EQUITY OIL ABROAD

ONGC’s overseas arm ONGC VIDESH LTD (OVL) continued to maintain

The company now has participation in 44 projects in 18 countries. Out of 44

INTRODUCTION TO FOREIGN EXCHANGE

One unique aspect of this international market is that there is no central

HISTORY OF THE FOREX

GOVT & CENTRAL BANKS

BANKS & OTHER FINANCIAL INSTITUITIONS

In addition to central banks and governments, some of the largest participants

PROCEDURE FOR PURCHASE OF FOREIGN

ONGC is required to purchase foreign exchange for remittance to the contractors

(a) Remittance equal or ABOVE USD 1 Million equivalent

A panel of such Authorized Dealers shall be drawn by respective work centers by

Authorization levels for dealing in Foreign Exchange shall be approved by

Director (finance) is also authorized by the Board to modify/amend the procedure

FUNCTIONING OF THE APPROVED PROCEDURE.

As regards other normal FE requirements, there is a distinct merit from

THE SUGGESTED APPROACH IS AS FOLLOWS:

REMITTANCES UPTO USD 5 MILLION (CATEGORY I ) :

For transactions up to USD 5 Million, competitive quotes may be invited

REMITTANCES OVER USD 5 MILLION UPTO USD 15 MILLION:

Thus in case of ONGC, the preferred approach is considered to be splitting

REMITTANCES OVER USD 15MILLION AND UPTO USD 50 MILLION.

Hence it is strategically considered a better option, to put through transactions over

For the purpose of transactions above USD 15 million, a panel of top 10

REMITTANCES OVER USD 50 MILLION:

APPROVAL SHEET OF FOREX TRANSACTIONS OF ONGC

List of remittances made during the month : October 2009

State Bank of 47.8 CASH-adj

List of inward remittances made during the month : October 2009

Exchange rate offered Remar