We have built a great team for our treasury operations. In the last two years, when the world saw extreme volatility in currencies, we managed it well by making sure that the impact on our net income was minimal. In fact, in the whole industry, I think, we managed the currency volatility more efficiently.
We had greater focus on reducing the Indian rupee to US dollar volatility in the past and had been less active on the crosses. However, we have of late started very actively hedging our cross currency risks. Being a company registered in India, we had certain restrictions on what instruments we can use for hedging our currency exposure and the quantum we can cover. We are working with the regulators to remove some of these impediments to business.
Infosys developed the . Do you use this system yourself?
Finacle is a total bank automation product and not a product that can be used by a corporate. In India, most of the banks use this product. In fact, most of the banks with whom we have treasury relationships run on this product. Internally, we had implemented an ERP [enterprise resource planning] system for our financial accounting and also built lots of satellite systems around it to meet our requirements. We had integrated our ERP systems with the banks system for seamless treasury operations.
What future plans do you have for Infosys's treasury?
I think we need to continuously evolve. The business is becoming more and more global which brings with it more complexities. Whether we like it or not, currency markets will remain highly volatile in the near future. The regulations are becoming more and more rigid and compliance has become more rigorous. So, we have to keep evolving and keep adopting the best practices to make sure we are ahead of the game
TCS
BASIC INTRO
TCS Limited uses foreign currency option contracts as well on forward contracts to manage its exposure to foreign exchange. The Company recognizes the outstanding contracts at the fair values. The option contracts are designated and documented as hedges at the inception of the contract. The effectiveness of option contracts to reduce the risk associated with the exposure being hedged is assessed and measured at inception and on an ongoing basis. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of designated hedges are reported in earnings immediately.
Changes in fair value of derivative instruments designated and qualifying as hedges are either reported in earnings or other comprehensive income in shareholders’ equity. Fair value adjusted on these instruments is recognized as a component of the other comprehensive income in the shareholder’s equity and are reclassified into earnings when related hedge item impact earnings. Changes in fair value of derivative financial instruments that is not designated as a hedge are recorded immediately in earnings.
When the financial instrument is terminated or settled prior to the expected maturity or realization of the underlying item, hedge accounting is discontinued prospectively. Gains or losses from changes in fair value of discontinued derivative instruments are recognized in earnings when the hedged transaction occurs. Fair value adjustments, recognized for cash flow hedges after settlement or termination, continues to be reported in accumulated and other comprehensive income until the related hedged items impact earnings. For anticipated transactions that are no longer probable, recognized fair value adjustments within accumulated and other comprehensive income are reported immediately in current earnings.
DATA
Financial Year 2005-2006
TCS Limited, in accordance with its risk management policies and procedures, enters into foreign currency forward contracts to manage its exposure in foreign exchange rates. The counter party is generally a bank. Foreign exchange forward contracts and currency options held by TCS Limited as of March 31, 2005 and 2006 were Rs.24,702.5 million and Rs.25,781.4 million, respectively. These contracts are for a period between one and twelve months.
During the year ended March 31, 2006, TCS Limited has re-evaluated its risk management program and hedging strategies in respect of forecasted transactions. Effective April 2005, upon completion of the formal documentation and testing for effectiveness, TCS Limited has designated certain foreign currency options in respect of forecasted transactions, which meet the hedging criteria, as cash flow hedges. Exchange loss of Rs.110.4 million, an exchange gain of Rs.988.3 million and an exchange loss of Rs.408.5 million on foreign currency forward exchange contracts have been recognized in earnings in fiscals 2004, 2005 and 2006, respectively.
Net loss on derivative instruments of Rs.44.2 million recognized in accumulated other comprehensive income as of March 31, 2006, is expected to be reclassified into earnings by March 31, 2007.
Financial Year 2006-2007
TCS Limited has following outstanding derivative instruments as on March 31, 2007
Net gain on derivative instruments of Rs.394.7 million recognized in accumulated other comprehensive income as of March 31, 2007, is expected to be reclassified into earnings by March 31, 2008.
Additionally, the Company has entered into foreign exchange forward contracts and currency option contracts aggregating Rs.20,626.1 million to hedge the future cash flows. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting and accordingly these are accounted as trading instruments.
Exchange gain of Rs.988.3 million, exchange loss of Rs.408.5 million and exchange gain of Rs.451.3 million on foreign currency forward exchange contracts have been recognized in earnings in fiscals 2005, 2006 and 2007, respectively.
Financial Year 2007-2008
Net loss on derivative instruments of Rs.218.3 million recognized in accumulated other comprehensive income as of March 31, 2008, is expected to be reclassified into earnings by March 31, 2009.
TCS Limited has outstanding foreign exchange forward contracts and currency option co ntracts aggregating Rs.20,626.1 million and Rs.21,679.5 million as on March 31, 2007 and 2008 respectively, whose fair value showed a gain o f Rs.67.6 million and loss of Rs.44.6 million in fiscals 2007 and 2008 respectively, to hedge the future cash flows. Although these contracts are effective as hedges fro m an economic perspective, they do not qualify for hedge accounting and accordingly these are accounted as trading instruments.
Exchange loss of Rs.408.5 million, exchange gains of Rs.451.3 million and of Rs.2,839.6 million on foreign currency forward exchange contracts and currency option contracts have been recognized in earnings in fiscals 2006, 2007 and 2008 respectively.
Financial Year 2008-2009
Net loss on derivative instruments of $92.8 million recognised in accumulated other comprehensive income as of March 31, 2009, is expected to be reclassified into earnings by March 31, 2010.
In addition to the above cash flow hedges, TCS Limited has outstanding foreign exchange forward contracts and currency option contracts aggregating $540.5 million and $832.2 million as on March 31, 2008 and 2009 respectively, whose fair value showed a loss of $1.1 million and a gain of $1.5 million in fiscals 2008 and 2009 respectively. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting and accordingly these are accounted as trading instruments. Exchange gains of $9.9 million, $70.3 million and an exchange loss of $93.0 on foreign currency forward exchange contracts and currency option contracts have been recognised in earnings in fiscals 2007, 2008 and 2009 respectively
Financial Year 2009-2010
Net loss on derivative instruments of $4.4 million recognised in accumulated other comprehensive income as of March 31, 2010, is expected to be reclassified into earnings by March 31, 2011.
In addition to the above cash flow hedges, TCS Limited has outstanding foreign exchange forward contracts and currency option contracts aggregating $832.2 million and $779.9 million as on March 31, 2009 and 2010 respectively. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting Exchange gains of $70.3 million, an exchange loss of $93.0 and an exchange gain of $24.9 million on foreign currency forward exchange contracts and currency option contracts have been recognised in earnings in fiscals 2008, 2009 and 2010 respectively.
OVERVIEW
HCL is a leading global Technology and IT Enterprise with annual revenues of US$ 5.7 billion. The HCL Enterprise comprises two companies listed in India, HCL Technologies and HCL Infosystems.
The 3 decade old enterprise, founded in 1976, is one of India's original IT garage start ups. Its range of offerings span R&D and Technology Services, Enterprise and Applications Consulting, Remote Infrastructure Management, BPO services, IT Hardware, Systems Integration and Distribution of Technology and Telecom products in India. The HCL team comprises 79,000 professionals of diverse nationalities, operating across 31 countries including 500 points of presence in India. HCL has global partnerships with several leading Fortune 1000 firms, including several IT and Technology majors.
HCL STRATEGIES
Exchange Rate Risks and HCL Strategy
Global financial position continues to remain volatile during current fiscal with swings in both the directions on Indian Rupee impacting the IT industry. This trend is expected to continue in
near to medium term with added complexity of cross –currency movements.
As a risk containment strategy, HCL has taken forward covers to hedge its receivables and forecast revenues against the foreign currency fluctuations. This strategy ensures certainty in revenue collection and also provides safeguards against any unfavorable movement to stakeholder. The treasury department of the Company continues to track the foreign exchange movements and takes advice from financial experts to decide its hedging strategy from time to time.
Further, there is an increased focus on Europe, Asia Pacific and Rest of World for generating business which not only insulates from dependency on a single chosen economy but also ensures that the revenue streams are denominated in multiple currencies thereby de-risking the currency risk.
Physical Security and HCL Strategy
Increased risk to human life and assets due to frequent incidents of terror assault remains major risk for companies operating in third world. The impact would be more on service companies as against manufacturing companies due to manpower intensive business model applicable to IT/ ITeS
companies.
HCL has stringent security levels on all its facilities and ODCs. Comprehensive security is provided by leveraging on People, Processes and Technologies. Formation of ERT (Emergency Response Team), Evacuation plan and strengthening of Disaster Recovery and Business Continuity Plan (DR-BCP)
are other related steps in this direction to minimize the loss of human life and to provide continuity of operations with minimal disruptions.
Compliance with regulatory requirements and HCL Strategy
As HCL is operating in no. of developing countries along with new destinations added in Africa, Latin America, China etc., therefore there is an increased risk of non-compliance to local regulatory requirements. This risk in terms of ensuring total compliance with regulatory framework increases with increase in global reach and operations. HCL has put in place a comprehensive Regulatory Compliance framework in place to manage the regulatory compliance related issues. Detailed checklists are available with respective process owners to ensure compliance with legal requirements. Besides Specialized legal function helps in creating awareness around the regulatory framework and focuses on various local compliance related aspects being faced by business entities
in respective countries.
Geography wise breakdown of revenue
The following table classifies total revenue by geographic areas:
Revenues from US geography have grown by 23% resulting in increase in its shares in total revenue from 54.4% to 56.5%. Europe has grown by 14.9%.
Foreign exchange earnings and outgo
Company is an export-oriented unit and the majority of the Information Technology (IT) services and Business
Process Outsourcing (BPO) services by the Company are for clients outside India. Activities relating to exports, initiatives taken to increase the exports, development of new exports markets for products and services and export plans—
During the year, a substantial portion of the revenue of the Company was derived from the exports. During the year, your company has set up subsidiaries in Denmark and Norway to enhance its business. The various global offices of the Company are staffed with sales and marketing specialists, who promote and sell services to large international clients.
The foreign exchange earned and spent by the Company during the year under review is as follows:
Derivative Financial Instruments and Hedge Accounting
Foreign currency forward and option contracts
The Group is exposed to foreign currency fluctuations on foreign currency assets / liabilities, forecasted cash flows denominated in foreign currency. The use of derivatives to hedge foreign currency forecasted cash fl ows is governed by the Group’s strategy, which provide principles on the use of such forward contracts and currency options consistent with the Group’s Risk Management Policy. The counter party in these derivative instruments is a bank and the Group considers the risks of non-performance by the counterparty as non-material. A majority of the forward foreign exchange/option contracts mature between one to 12 months and the forecasted transactions are expected to occur during the same period. The Group does not use forward covers and currency options for speculative purposes.
The following table presents the aggregate contracted principal amounts of the Group’s derivative contracts outstanding:
WIPRO
DATA
Financial Year 2000-01
Foreign Exchange Earnings and Outgoings
The foreign exchange earnings of the Company during the year were Rs. 23,495 million while the outgoings were Rs. 11,963 million (including materials imported).
Foreign currency transactions
Foreign currency transactions are recorded at the spot rate prevailing at the beginning of the concerned month. Year end balances of foreign currency assets and liabilities are restated at the closing rate/forward contract rate, as applicable. Resultant differences in respect of liabilities relating to acquisition of fixed assets are capitalized. Other differences on restatement or payment are adjustment to revenue account.
Forward premiums in respect of forward exchange contracts are recognized over the life of the contract, except that premiums relating to foreign currency loans for the acquisition of fixed assets are capitalized.
Conversion into Indian Rupees:
For the purpose of the accounts during the period all Income and expense items are converted at the average rate of exchange applicable for the period. All assets and liabilities are translated at the closing rate as on the Balance Sheet date.
The exchange difference arising out of the year-end conversion was being debited or credited to Translation Reserve.
The Equity Share Capital was carried forward at the rate of exchange prevailing on the transaction date. The resulting exchange difference on account of translation at the year-end are transferred to Translation Reserve account and the said account was being treated as “Reserve and Surplus”.
-
Foreign currency translation gains 2001 (86,399)
Financial Instruments and Concentration of Risk
Derivative financial instruments: The Company enters into forward foreign exchange contracts and interest rate swap agreements, where the counterparty was generally a bank. The Company considers the rwasks of non-performance by the counterparty as nonmaterial.
The following table presents the aggregate contracted principal amounts of the Company’s derivative financial instruments outstanding:
Forward contracts ........................................................ $ 39,531,243 (sell)
Interest rate swaps ......................................................... $ 3,250,000
The foreign forward exchange contracts mature between one to nine months.
Financial Year 2001-02
Foreign Exchange Earnings and Outgoings
The foreign exchange earnings of the Company during the year the company Rs. 23,495 million while the outgoings the company Rs. 11,963 million
(Including materials imported).
Foreign currency transactions
Foreign currency transactions are recorded at the spot rate prevailing at the beginning of the concerned month. Year end balances of foreign currency assets and liabilities are restated at the closing rate/forward contract rate, as applicable. Resultant differences in respect of liabilities relating to acquisition of fixed assets are capitalized. Other differences on restatement or payment are adjustment to revenue account.
Forward premiums in respect of forward exchange contracts are recognized over the life of the contract, except that premiums relating to foreign currency loans for the acquisition of fixed assets are capitalized.
Conversion into Indian Rupees:
For the purpose of the accounts during the period all Income and expense items are converted at the average rate of exchange applicable for the period. All assets and liabilities are translated at the closing rate as on the Balance Sheet date. The exchange difference arising out of the year-end conversion was being debited or credited to Translation Reserve. The Equity Share Capital was carried forward at the rate of exchange prevailing on the transaction date. The resulting exchange difference on account of translation at the year-end are transferred to Translation Reserve account and the said account was being treated as “Reserve and Surplus”.
-
Foreign currency translation gains/(loss)(115,088)
Financial Instruments and Concentration of Risk
Concentration of risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, investment securities, accounts receivable and inter-corporate deposits. The Company’s cash resources are invested with financial institutions and commercial corporations with high investment grade credit ratings. Limits have been established by the Company as to the maximum amount of cash that may be invested with any such single entity. To reduce its credit risk, the Company performs ongoing credit evaluations of customers. No single customer accounted for 10% or more of the revenues or accounts receivable as of March 31, 2001 and 2002.
Derivative financial instruments: The Company enters into forward foreign exchange contracts and interest rate swap agreements, where the counterparty was generally a bank. The Company considers the risks of non-performance by the counterparty as nonmaterial.
The following table presents the aggregate contracted principal amounts of the Company’s derivative financial instruments outstanding :
Forward contracts ........................................................ $ 62,845,414 (sell)
Interest rate swaps ......................................................... $ Nil
The foreign forward exchange contracts mature between one to nine months.
Foreign exchange gains, net, increased to Rs. 219 million for the year ended March 31, 2002
from Rs. 120 million for the year ended March 31, 2001. This was primarily due to the depreciation of the rupee against the dollar and an increase in their export revenues. During fiscal 2002, the rupee declined by over 4% against the dollar. Revenues from exports of their products and services increased 20% to Rs. 21,912 million from Rs. 18,323 million in the year ended March 31, 2001.
Financial Year 2002-03
Foreign Exchange Earnings and Outgoings
The foreign exchange earnings of the Company during the year were Rs. 28,866 million while the outgoings re Rs. 12,911 million
(including materials imported).
Foreign currency translation gains/(loss) (273,135)
Foreign exchange gains, net, increased to Rs. 307 million for the year ended March 31, 2003
from Rs. 219 million for the year ended March 31, 2002. This was primarily due to the foreign currency forward contracts entered into by them to mitigate their exchange rate risk and an increase in the amounts of receivables and cash balances denominated in dollars. A portion of their receivables and cash balances are also denominated in pound sterling. The rupee depreciated against the pound sterling by over 6.8% during the year ended March 31, 2003, which was partially offset by a 2.7% appreciation of the rupee against the dollar in the year ended March 31, 2003.
Financial Instruments and Concentration of Risk
Derivative financial instruments: The Company enters into forward foreign exchange contracts, where the counterparty was generally a bank. The Company considers the risks of non-performance by the counterparty as non-material. The following table presents the aggregate contracted principal amounts of the Company’s derivative financial instruments outstanding :
March 31, 2003
Forward contracts .................................................. $ 113.5 million (sell)
£ 2.5 million (sell)
The foreign forward exchange contracts mature between one to twelve months.
Financial year 2003-04
Foreign Exchange Earnings and Outgoings
The foreign exchange earnings of the Company during the year the companyre Rs. 38,357 million while the outgoings were Rs. 13,784 million
(including materials imported).
Foreign currency transactions
Foreign currency transactions are recorded at the spot rate at the beginning of the concerned month. Period-end balances of foreign currency assets and liabilities are restated at the closing rate/forward contract rate, as applicable. Resultant differences in respect of liabilities relating to acquisition of fixed assets are capitalized. Other differences on restatement or payment are adjusted to revenue account.
The forward premium/discount on forward contracts was recognized over the life of the contract. Forward premium was worked out based on the spot rate and contract rate on the date of transaction. Gain if any in respect of forward/options contract on account of movement in spot rate of the currency, was recognized only at the expiry of the contract.
In respect of non-integral operations assets and liabilities are translated at the exchange rate prevailing at the date of the balance sheet.
The items in the profit & loss account are translated at the average exchange rate during the period. The differences arising out of the translation are included in translation reserve.
Foreign currency translation gains (132,771)
March 31, 2004
Forward contracts .................................................. $867 million (sell)
£3 million (sell)
Mark to market gain on forward contracts $85 [in millions]
Financial year 2004-05
Foreign Exchange Earnings and Outgoings
The foreign exchange earnings of the Company during the year were Rs. 53,736 million while the outgoings were Rs. 36,549 million
(including materials imported).
As of March 31, 2005, forward contracts to the extent of $ 280 Mn have been assigned to the foreign currency assets as on the balance sheet date. These assets are valued at the forward contract rate, adjusted for premium / discount in respect of the
expired period.
The Company had designated certain forward contracts to hedge highly probable forecasted transactions. The gain or loss on these forward contracts was recognised in the profit and loss account in the period in which the forecasted transaction was expected to occur. In certain cases, the Company had entered into forward contracts having a maturity earlier than the period in which the hedged transaction was forecasted to occur. The gain / loss on roll over / cancellation / expiry of such contracts was recognised in the profit and loss account in the period in which the forecasted transaction was expected to occur, till such time the same was accumulated and shown under Loans and Advances / Current liabilities.
The Company had also entered into option / forward contracts which are not designated as hedge of highly probable forecasted transactions. Gain or loss on such contracts was recognised in the profit and loss account of the respective periods. The outstanding contracts as at the balance sheet date are marked to market, the impact of which was taken to profit and loss account. Consequently, the Company had recognised marked to market loss of Rs. 1.03 Mn in the current period.
As at the balance sheet date, the Company had forward contracts to sell $ 503 Mn in respect of forecasted transactions. The effect of marked to market and of intermediary roll over / expiry of the said forward contracts was a gain of Rs. 275.31 Mn. The final impact of such contracts will be recognised in the profit and loss account of the respective periods in which the forecasted transactions are expected to occur.
Had the Company continued to follow the earlier year’s accounting policy, the profit for the year would have been higher by Rs. 83.22 Mn.
As of March 31, 2005, the company had forward contracts to sell amounting to $856 million and £11 million.
In addition, the company have $8 million of purchased put options outstanding as on March 31, 2005. For the year ended March 31, 2005, the company recognized a loss of Rs. 154 million due to change in fair value of net written options.
Sensitivity analysis of exchange rate risk: As at March 31, 2005, a Rs.1 increase /decrease in the spot rate for exchange of Indian Rupee with U.S. dollar resulted in approximately Rs. 900 million decrease/increase in the fair value of the company’s forward contracts and net written options.
Interest rate risk.: Their interest rate risk primarily arises from their investment securities. Their investments are primarily in short term investments, which do not expose them to significant interest rate risk.
Fair value: The fair value of their market rate risk sensitive instruments, other than forward contracts and option contracts, closely approximates their carrying value.
Financial year 2005-06
The Company’s earnings in Foreign Exchange stood at Rs. 70,833 millions
and have registered a growth of 32% compared to the previous year
Foreign Exchange Earnings and Outgoings
The foreign exchange earnings of the Company during the year the company Rs. 71,788 million while the outgoings were Rs. 25,281 million
(including materials imported).
Foreign currency transactions
The Company was exposed to currency fluctuations on foreign currency transactions. With a view to minimize the volatility arising from fluctuations in the currency rates, the Company follows established risk management policies, including the theme of foreign exchange forward contracts and other derivative instruments.
As a part of the Risk Management Policies, the forward contracts are designated as hedge of highly probable forecasted transactions. The Accounting Standard (AS 11) on “The Effects of Changes on Foreign Exchange Rates”, amended with effect from April 1, 2004 provides guidance on accounting for forward contracts. In respect of forward contracts entered into to hedge foreign exchange risk of highly probable forecasted transactions, the ICAI had clarified that AS 11 was not applicable to exchange differences arising from such forward contracts. The premium or discount of such contracts was amortised over the life of the contract in accordance with AS 11 (revised).
Foreign currency transactions are recorded at the average rate for the month. Period-end balances of monetary foreign currency assets and liabilities are restated at the closing rate. The exchange difference arising from restatement or settlement was recognized in the profit and loss account.
In respect of forward contracts assigned to the foreign currency assets as on the balance sheet date, the proportionate premium/discount for the period upto the date of balance sheet was recognized in the profit and loss account. The exchange difference measured by the change in exchange rate between inception of forward contract and the date of balance sheet was applied on the foreign currency amount of the forward contract and recognized in the profit and loss account.
Exchange differences, including gains/losses on intermediary roll over/cancellation, of forward contracts designated as hedge of highly probable forecasted transactions are recognised in the profit and loss account in the period in which the forecasted transaction occurs.
Realised/unrealised gains and losses on forward contracts and options not designated as hedges of forecasted transactions are accounted in the profit and loss account for the period.
As of March 31, 2006, forward contracts and options (including zero cost collars) to the extent of $ 226 Million have been assigned to the foreign currency assets as on the balance sheet date. The proportionate premium/discount on the forward contracts for the period upto the date of balance sheet was recognized in the profit and loss account. The exchange difference measured by the change in exchange rate between inception of forward contract and the date of balance sheet was applied on the foreign currency amount of the forward contract and recognized in the profit and loss account.
Additionally, the Company had designated forward contracts and options to hedge highly probable forecasted transactions. The Company also designates zero cost collars to hedge the exposure to variability in expected future foreign currency cash inflows due to exchange rate movements beyond a defined range. The range comprises an upper and lower company strike price. At maturity, if the exchange rate remains within the range the Company realizes the cash inflows at spot rate, otherwise the Company realizes the inflows at the upper or lower company strike price.
The exchange differences on the forward contracts and gain/loss on options are recognized in the profit and loss account in the period in which the forecasted transaction was expected to occur. The premium/discount at inception of forward contracts was amortised over the life of the contract.
In certain cases, the Company had entered into forward contracts having a maturity earlier than the period in which the hedged transaction was forecasted to occur. The gain/loss on roll over/cancellation/expiry of such contracts was recognized in the profit and loss account in the period in which the forecasted transaction was expected to occur, till such time the same was accumulated and shown under Loans and Advances/Current liabilities.
In respect of option/forward contracts which are not designated as hedge of highly probable forecasted transactions, realized/unrealized gain or loss are recognized in the profit and loss account of the respective periods.
Exchange rate risk: Their exchange rate risk primarily arises from their foreign exchange revenue, receivables, forecasted cash flows, payables and foreign currency debt. A significant portion of their revenue was in U.S. dollars while a significant portion of their costs are in Indian rupees. The exchange rate between the rupee and dollar had fluctuated significantly in recent years and may continue to fluctuate in the future. Appreciation of the rupee against the dollar can adversely affect their results of operations.
The company evaluate their exchange rate exposure arising from these transactions and enter into foreign currency forward contracts to mitigate such exposure. The company follow established risk management policies, including the theme of derivatives like forward foreign exchange contracts to hedge forecasted cash flows denominated in foreign currency. As of March 31, 2005, the company had forward contracts to sell amounting to $856 million and £11 million. As of March 31, 2006, the company had forward contracts to sell amounting to $592 million and £4 million. In connection with cash flow hedges, the Company had recorded Rs. 114, and Rs. 202 of net gains/(losses) as a component of accumulated and other comprehensive income within stockholders’ equity as at March 31, 2005 and March 31, 2006.
As of March 31, 2006
Forward contracts
Sell $ 592.23
£ 4.00
Buy -
Net purchased options (sell) $ 254.00
£ 8.00
Net written options (sell) $ 6.00
£ 5.00
Sensitivity analysis of exchange rate risk: As at March 31, 2006, a Re.1 increase /decrease in the spot rate for exchange of Indian Rupee with U.S. dollar would result
in approximately Rs. 600 million decrease/increase in the fair value of the company’s forward contracts.
Interest rate risk: Their interest rate risk primarily arises from their investment securities. Their investments are primarily in short term investments, which do not expose them to significant interest rate risk.
Fair value: The fair value of their market rate risk sensitive instruments, other than forward contracts and option contracts, closely approximates their carrying value.
Financial year 2006-07
Foreign Exchange Earnings and Outgoings
During the year their Company earned foreign exchange of Rs. 109,546 million and the outgoings in foreign exchange was Rs. 43,829 million, including outgoings on materials
imported.
Foreign currency transactions:
The Company was exposed to currency fluctuations on foreign currency transactions. Foreign currency transactions are accounted in the books of account at the average rate for the month.
Transaction:
The difference between the rate at which foreign currency transactions are accounted and the rate at which there are realised was recognised in the Profit and Loss Account.
Translation:
Monetary foreign currency assets and liabilities at period-end are translated at the closing rate. The difference arising from the translation was recognised in the Profit and Loss Account.
Hedge:
As part of the Risk Management Policies, the forward contracts are designated as hedges of highly probable forecasted transactions. The Accounting Standard (AS 11) on “The Effects of Changes on Foreign Exchange Rates”, amended with effect from April 1, 2004 provides guidance on accounting for forward contracts. In respect of forward
contracts entered into to hedge foreign exchange risk of highly probable forecasted transaction, the ICAI had clarified that AS 11 was currently not applicable to exchange differences arising from such forward contracts. The premium or discount
of such contracts was amortised over the life of the contract in accordance with AS 11 (revised).
Exchange differences of forward contracts/option contracts designated as hedge of highly probable forecasted transactions are recognised in the Profit and Loss Account only in the period in which the forecasted transaction occurs.
Forward contracts and options not designated as hedges of forecasted transactions are marked to their current market value as at the balance sheet date and accounted in the Profit and Loss Account for the period.
As of March 31, 2007, forward contracts and options(including zero cost collars) to the extent of $ 93 Million have been assigned to the foreign currency assets as on the balance sheet date. The proportionate premium/discount on the forward contracts for the period upto the balance sheet date was recognised in the Profit and Loss Account. The exchange difference measured by the change in exchange rate between inception of forward contract and the date of balance sheet was applied on the foreign currency amount of the forward contract and recognised in the Profit and Loss Account.
Additionally, the Company had designated forward contracts and options to hedge highly probable forecasted transactions.
The Company also designates zero cost collars to hedge the exposure to variability in expected future foreign currency cash inflows due to exchange rate movements beyond a defined range. The range comprises an upper and lower strike price. At maturity, if the exchange rate remains within the range the Company realises the cash inflows at spot rate,
otherwise the Company realises the inflows at the upper or lower strike price. The exchange differences on the forward
contracts and gain/loss on such options are recognised in the Profit and Loss Account in the period in which the forecasted transaction was expected to occur. As of March 31, 2007, the Company had forward/option contracts to sell $ 87 Million, relating to highly probable forecasted transactions. The effect of mark to market of the designated contracts was a
gain of Rs. 105 Million. The premium/discount at inception of forward contracts was amortised over the life of the contract.
Additionally, as at March 31, 2007 forward contracts to purchase $135 Million have been designated to hedge highly probable outflows. The effect of mark to market of the designated contract was a loss of Rs. 25 Million.
Derivative financial instruments: The Company was exposed to foreign currency fluctuations on foreign currency assets and forecasted cash flows denominated in foreign currency. The Company follows established management policies, including the theme of derivatives to hedge foreign currency assets and foreign currency forecasted cash flows. The counter party was a bank and the Company considers the risks of non-performance by the counterparty as non-material. The forward foreign exchange/option contracts mature between one to twelve months and the forecasted transactions are expected to occur during the same period.
The following table presents the aggregate contracted principal amounts of the Company’s derivative contracts outstanding :
As of March 31, 2007
Forward contracts
Sell $ 345.00
£ 16.00
Buy $ 184.56
Net purchased options (sell) $ 36.00
£ 13.00
Net written options (sell) -
-
Financial year2007-08
Foreign Exchange Earnings and Outgoings
During the year their Company earned foreign exchange of Rs. 128,852 million and themed in foreign exchange of Rs. 52,028 million, including expenditure on materials
imported, dividend.
As of March 31, 2007, the Company had forward/option contracts to sell $ 87 Million and as of March 31, 2008, the Company had forward/option contracts to sell $ 2,497 Million, GBP 84 Million, Euro 24 Million and JPY 7,682 Million relating to highly probable forecasted transactions. In addition, the Company had forward contracts to sell $ 281 Million and EUR 65 Million as of March 31, 2008 relating to net investments in non-integral foreign operations. As of March 31, 2008 the Company had recognized mark-to-market losses of
Rs. 1,097 Million relating to forward contracts/options that are designated as effective cash flow hedges.
As of March 31, 2007, the Company had undesignated forward/option contracts to sell $ 165 Million, GBP 123 Million, Euro 23 Million and as of March 31, 2008, the Company had undesignated forward/option contracts to sell $ 414 Million, GBP 58 Million and EUR 39 Million. The mark-to-market gain/(losses) on such contracts have been recognized in the profit and loss account. (Note 4 in the Notes to Accounts of the annual parent financial
statements).
Foreign exchange gains/(losses), net ....................... $125(in millions)
Derivative financial instruments:(explained earlier)
The following table presents the aggregate contracted principal amounts of the Company’s derivative contracts outstanding :
As of March 31, 2008
Forward contracts
Sell $ 2,775
€ 105
£ 61
Buy $ 435
¥ 7,580
Net purchased options (to sell) $ 641
€ 24
£ 84
¥ 7,682
Financial year 2008-09
Foreign Exchange Earnings and Outgoings
During the year the company earned foreign exchange of Rs. 166,229 million and the outgoings in foreign exchange were Rs. 70,256 million, including outgoings on materials imported and dividend.
In addition, the Company had designated $ 267 Million and Euro 40 Million of forward contracts as hedges of equity investments in foreign subsidiaries. The Company had also designated a yen-denominated foreign currency borrowing amounting to JPY 27 Billion, along with a fl oating for floating Cross-Currency Interest Rate Swap (CCIRS), as a hedging instrument to hedge its net investment in a non-integral foreign operation. Further, the Company had also designated yen-denominated foreign currency borrowing amounting to JPY 8 Billion along with floating for fixed CCIRS as cash flow hedge of the yen- denominated borrowing and also as a hedge of net investment in a nonintegral foreign operation. As equity investments in foreign subsidiaries are stated at historical cost, in the standalone financial statements, the changes in fair value of forward contract, the yen- denominated foreign currency borrowing and the related CCIRS amounting to Rs. 7,454 Million for the year ended March 31, 2009 had been recorded in the profit and loss account.
Derivatives
As of March 31, 2009, the Company had derivative financial instruments to sell $ 1,060 Million, GBP 54 Million, and JPY 6,130 Million relating to highly probable forecasted transactions. As of March 31, 2008, the Company had derivative financial instruments to sell $2,497 Million, GBP 84 Million, EUR 24 Million and JPY 7,682 Million relating to highly probable forecasted transactions. As of March 31, 2009 the Company had
recognized mark-to-market losses of Rs. 16,859 Million (2008: Rs.1,097 Million) relating to derivative financial instruments that are designated as effective cash flow hedges in the shareholders’ fund. As of March 2009, the Company had undesignated derivative financial instruments to sell $ 612 Million, GBP 53 Million and EUR 39 Million. As of March 31, 2008, the Company had undesignated derivative financial instruments to sell $ 414 Million, GBP 58 Million and EUR 39 Million. As of March 31, 2009, the Company had
recognized mark-to-market gain/(losses) on such derivative financial instruments through the profi t and loss account.
The following table presents the aggregate contracted principal amounts of the Company’s derivative contracts outstanding:
As of March 31, 2009
Forward contracts
Sell $ 1,374
€ 79
£ 53
Buy $ 438
¥ 23,170
Net purchased options (to sell) $ 562
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£ 54
¥ 6,130
Cross-currency interest rate swap ¥ 35,016
Financial year 2009-2010
Foreign Exchange Earnings and Outgoings
During the year, Company had earned foreign exchange of Rs. 168,469 million and the outgoings in foreign exchange were Rs. 71,739 million, including outgoings on materials
imported and dividend
The Company had designated $ 262 Million (2009: $ 267 Million) and Euro 40 Million (2009: Euro 40 Million) of forward contracts as hedges of its net investments in non integral foreign operations. The Company had also designated a yen-denominated foreign currency borrowing amounting to JPY 18 Billion (2009: JPY 27 Billion), along with a floating for floating Cross-Currency Interest Rate Swap (CCIRS), as a hedging instrument to hedge its net investment in a non-integral foreign operation. Further, the Company had also designated yen-denominated foreign currency borrowing amounting to JPY 8 Billion (2009: JPY 8 billion) along with floating for fixed CCIRS as cash flow hedge of the yen- denominated borrowing and also as a hedge of net investment in a non-integral foreign operation. As equity investments in non integral foreign subsidiaries/operations are stated at historical cost,
in the standalone financial statements, the changes in fair value of forward contracts, the yen- denominated foreign currency borrowing and the related CCIRS amounting to gain/ (loss) of Rs 4,378 Million for the year ended March 31, 2010 had been recorded in the profit and loss account as part of other income (2009: Rs (7,454) Million).
Bibliography
- Managing Global Financial and Foreign Exchange Rate Risk by Ghassem A Homafair
- Managing Currency Risk using foreign exchange options by Alan Hicks
- Foreign Exchange Risk by S. Yadav
- Financial Risk manager Handbook – Google Book Search
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