Thursday, October 19, 2017 New York : London: India: Tokyo:

 

BENCHMARK RATES

Fixation of benchmark rates for the revenue and Capex exposures is imperative for :the company to:

1) To ensure efficient exposure management.

2) To guide the hedging plan and level of entry for hedging.

3) To take the realistic exchange rates quarter-to quarter for the budget plan of the company.

4) To evaluate and determine the notional losses or gains on the unhedged exposures.

The following are the choices available for fixation of benchmark rates for the company’s forex exposures:

1) To have a uniform exchange rates as a benchmark rate for the forex receivables and payables of the company during the financial year.

2) Weighted daily average of RBI reference rate in the previous month applicable for succeeding one month.

3) Weighted average RBI reference rate in the preceding 3 months applicable for the succeeding quarter.

4) Forward exchange rate applicable on the date of creation of exposure. The forward exchange rate includes the spot rate plus forward dollar premium applicable from the exposure creation date to     the respective exposure maturities.

We feel that option 3 is the best choice as the benchmark rate arrived at captures the exchange rate movements during that period.The benchmark rate fixed by this method is very reliable and scientific as it captures all the variations in the exchange rate in relation to internal and external factors during the period. Also it captures a series of rate variations viz., linear basis or unidirectional trend, non-linear basis and zig-zag/2 way movements basis etc in the exposure cycle.The momentum in the exchange rate is also captured.

The benchmark rate for non-dollar Exposures can be the cross rate prevailing on the date of exposure creation. The USD/INR currency risk on these exposures will have to be brought under the hedging scanner for revenue and capex exposure management.

The benchmark rate for installment/interest payments under the foreign currency loans falling due within the one year period will be the exchange rate prevailing at close of previous year plus forward premium applicable for respective maturities. By following this process the company can minimize the transaction losses or maximize the transaction gains on these type of exposures. This follows the cost management strategy.

For loan exposure maturities beyond one year, the benchmark rate will be determined with reference to the interest cost on the long-term rupee debts of the company for comparable maturities.

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