Reference no: EM13704703

CASE - 1:

You are the CFO of a large Indian pharmaceutical company. Over the last five years your company has grown, primarily through overseas acquisitions. You started acquiring companies in Europe and North America in 2000.

Your balance sheet on March 2005 has assets equivalent of US$200 million, including those of your subsidiaries.

In the last board meeting, a presentation made by your European subsidiary painted a worrisome picture. This bulk drug manufacturing facility sources its raw materials from a small South African country, which is facing political unrest. This means that the reliability of this source of raw material, in the days to come, is poor. Your subsidiary is keen to source this material from a small Taiwanese firm. This Taiwanese firm is willing to supply the raw material but wants payment in US dollars for the January to June 2006 period; in euros for the July to December 2006 period through its Cayman Island bank account.

If this supply contract clicks, it could mean at least two things: one, getting a reliable supplier, and two, opening a link in the Far East market.

You are preparing to present a case for this supply contract to the top management. You search the web to get some data on USD/INR and Europe/INR behaviour.

Question:

What are the issues that you will take into account and what is the likely response from the board members?

CASE - 2:

"Government of India closely watching rise in FOREX reserves".

"BOP situation for India worsens over last few months due to bird flu scare."

"RBI considering possible hike in CRR, thereby signaling possible tight monetary policy."

"Political parties demanding compensation in dollar terms, for farmers for chickens culled."

These were some of the headlines screaming for your attention before the annual board meeting. You the CEO of a mega-property developing corporation-call up the chief economist to take her views into consideration. Your company has heavily invested in many mega projects and you are planning to ride the retail boom. The organization has ambitious plans to make foray into airport and seaport privatisation process.

This will mean hand-holding with international agencies and taking loans and, possibly, equity partnership. These inflows will have the usual condition of repayment of interest and minimum guaranteed dividends in dollar terms.

Your phone rings and chief economist explains, "On one hand, India has a promising future in retail market, as it is evident from the shopping malls boom in all metros and mini-metros. Therefore, our investments are well protected. GDP is projected to grow at about 8% over next five years. This will mean a much larger foreign trade component, giving fillip to requirement of airport and seaport infrastructure. In such a scenario, we should be able to establish ourself in this sector as well. However, on the other hand, there is a definite possibility that in case this GDP growth is not achieved, unemployment will rear its head once again, causing supply side shortages and unabated demand in some sectors-thereby meaning inflation will soar, and, in turn, interest rates will go up; and finally this will put downward pressure on rupee against all major currencies. This will erode our credibility and profitability in the market. the signs of impact could be visible in six months from now and among the first indicators of this shift looming over the horizon will be change in India's BOP account." You listen to her silently on your intercom.

You give a sigh of relief as soon as her prognosis is over. You call up your treasurer for a small chat. After all, he is the person who deals in foreign exchange market on minute-to-minute basis.

He has a different story to tell, "Well, even if worst case scenario emerges, we stand to gain. See, hardening of interest rates with devaluation of currency will not have any material impact on us. In fact, with this India will become a preferred destination for further foreign investment. Our exports will become more competitive in the international market and it will give a boost for indigenous production of many things. This means more imports of plant and machinery, and of course, raw materials." He signs off by saying, "I see no reason for worry even if BOP situation worsens, we are well covered in currency and interest rate futures market." He adds further with smile, "We can actually make money on the basis of this forecast, subject to the permission from our board to take position in options market."

Questions:

You sit back in your chair and try to figure out what your presentation is going to be in front of the board.

CASE - 3:

While you are making presentation to the top management a middle aged person enters the boardroom. All the board members exchange smiles with this person.

At the end of your presentation, the new entrant speaks up, "Well, that was a very interesting presentation. It appears that you know about forex markets in India." This person continues, "While, I was on flight today, I came across an interesting bit of information. There was a story in the newspaper mentioning that one can make a ‘killing' in forex market, if one is smart enough. I feel that you should tell us about this ‘killing' business as well." And goes on to add with a smile and tinge of sarcasm, "I guess this will make our treasury a ‘profit center'". All the board members nod in unison. The chairman takes out the day's paper and hands it over to you to examine the possibility of making a ‘killing' in the market.

Sweat breaks on your eyebrows. You do not remember having seen newspaper quotes during your course work, since you devoted the majority of your time during MBA days to cultural activities and student exchange programmes. This is going to be your first real challenge in the industry. You ask for some time to examine the numbers. The chairman and CFO give you patronizing looks and ask you to come back after a working lunch and tell the board about your findings. As you come back to your desk, you feel sudden loss of appetite.

After a while, the same person walks up to your desk and says, "I can understand your predicament. I know you are fresh from you MBA, and just one week young with our company. I hope these numbers help you to present your case", while handing over a piece of paper to you. You do not like the patronizing tone. You thank this person for encouragement(!). You find following details staring at you.

USD/CHF : 1.5963/1.5973. This is a quote from a bank in Zurich. At the same time, a bank in New York is offering the following spot quote :

CHF/USD : 0.6265/0.6270

Further, a New York bank is currently offering these spot quotes:

USD/JPY : 112.25/112.55 and USD/AUD : 1.6659/1.6672

At the same time, a bank in Sydney is quoting:

AUD/JPY : 68.80/68.97

Additionally, the following pair of spot and forward quotes are also available :

GBP/USD spot : 1.6531/1.6577

Hope this helps!

What will you do next? How will you present your analysis?

CASE - 4:

It is month of December, Christmas holidays are fast approaching, everyone is getting into a festive mood, but you-the Chief Investment Officer of a large corporate-are in a restive mood. You have had a somewhat dull year. It is close to bonus time. You have promised your teenaged daughter a new Porsche as the Christmas present. You are looking for making a killing on the forex front. Working on tips given by your economist friend about interest rate theorem, you are trying to build a contract that will help your company in counteracting the movement in exchange rate and interest rates will get you enough bonus to make that Christmas present.

As you open your e-mail, there is a message saying: the spot USD/CHF rate is 1.5960, and 6-month forward is 1.5625, the 3-month deposit rates 4.50% p.a. for USD and 1.75% p.a. for CHF. Will you able to make that killing?

It looks like your lucky day. The very message has the following news: USD/CHF spot: 1.5960/10; 3 months: 6 months: 550/500. The 3-month and 6-month outright forward rates are: 3 months: 1.5950; 6 months: 1.5700/20. Can you do something here?

The last message from your banker gives some good information about the rates prevailing in the market. GBS/USD Spot: 1.7580/90; 1-month; 2-months: 30/20; 3-months: 45/35; 6-months: 25/20; 9-months: 35/30; 12-months: 30/2o. US interest rates are somewhat above UK rates but less so at the far end.

Your experience in these markets makes you feel confident that in nine months, UK rates are going to fall, and the sterling will go into a forward premium. Your gut feel is: 6-month swap points to become 150/250 in nine months time.

Question:

You have a Porsche in mind and 100 million dollar to play with. Will you make it this time?

CASE - 5:

You are back in Mumbai after a grueling day in New Delhi. You were called by the mandarins in the North Block to explain the cause of crash in the price of the stock of your company-a leading Indian software MNC. The investors were aghast at the stock price crash. The main charge was simple: your company used futures trading for speculation, instead of normal hedging.

Before you can get out of your shining Merc (which might get auctioned soon) media-persons are already all over the place thrusting microphones in your face-waiting for a sound bite. You barely mumble ‘no comments' to the gathering but promise to get back with a detailed description of events, to be transmitted live on the television, in a couple of hours.

As you sit down at your office table, and call for a RT (room-temperature) glass of narial paanee (coconut water)-since your friends tell that it is good when you have hyper-acidity; you need a strong stomach lining to digest al the vitriol being offered to you.

When you look at the documents spread in front of you, the following details emerge:

(a) Since the exposure of your company is in USD, you chose to buy 6-month USD futures at a price that was above spot price for a long time, and you sold GBP futures for 9-months since pricing was very attractive, and you were expecting to receive payments for services rendered in about 8-months time.

(b) As the maturity of USD futures approached, US of A attacked Iraq, leading to a jump in oil prices.

(c) Sensing trouble you immediately bought 3-month interest rate futures which were trading below spot.

(d) Within a week of your futures purchase, markets started stabilizing and returned to normal behaviour.

(e) But your board was uncomfortable with your position, and margin calls. They ask you to settle your position and face the jury, charging you for speculation in the markets with the company money.

Question:

What additional information will you need? How will you defend your case?