A Paper manufacturing company with import and export turnover of more than 100 crs, is looking at exports in a big way. The company’s finance team is unaware about an efficient forex risk management system. The company’s management have assigned the task to the risk management team at Myforexeye. They are banking with a PSU bank and have faced operational challenges in their branch banking arrangements.
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In a review meeting to discuss the ongoing risk management practices and strategies with the management, we came up with an idea to book forward for exports as soon as the order gets materialized. The management does the costing of export orders at the ongoing spot rate. By following the first day hedge strategy, the USDINR premium of 4 – 4.5% per annum can be capitalized. In the very first order of around $0.5 million, we followed the same strategy and booked the forward contract for February end maturity. The inward remittance that was expected in middle of January came at the first week of February and even after instructing the branch to utilize this forward, the conversion was done at the market rate. The balance inward got delayed and did not come in February, leading to the cancellation of the forward contract and resulting in a cash loss. Instead of forward cancellation only, we did a rollover of this transaction at the common spot, to neutralize the profit and loss effect. The rollover was done partly for the month of March and partly for April. Though the forward contract rollovers were done with the Treasury, their branch did not report the cancellation and rollover transactions at their end and hence the transactions were not executed due to reporting issues.
In the process, the company lost a big amount on forward cancellation and also an opportunity to recover the loss by way of forwards because of inefficiency of the bank’s branch. We extracted the audit trail of the entire transaction and got the audio recording of the deal as well as e-mail communications to the client. The treasury was asked to check the deal details with their back office. After numerous calls and e-mails, the treasury agreed to honour the same rates that we had booked on roll-overs. The treasury apologized for the lack of professionalism by their branch.
In the whole process we managed to get the company out of the loss they incurred on forward cancellation by way of getting the rollover forwards reinforced.