Description
The PPT describing about analysis of Derivatives and risk management at Tata Consulting services (TCS).
Group 1
?
?
?
Tata Consultancy Services (TCS) is India’s largest software services exporter. Total INR 21,535 crores revenue in 2008-09, out of which foreign consultancy revenues account for INR 20,600 crores Have INR 7867 crores worth of foreign expenditure
Industry Diversity
Geographical Diversity
Risks Associated
Overall Risk
Macro Economic Risk
Counterparty Risk
Business Risk
Financial Risk
Legal & Regulatory Risk
Risks Explained
Risks Geographical Verticals Mitigation Operations spread across 42 countries Well Diversified BFSI (44%), Telecom (17%), Manufacturing (10%), Retailing (9%) & Others (20%) Global Compliance Process ‘Experience Certainty’ (BE-BP) agreement & Tata “Code of Conduct” - Use of re-usable components across different projects - Cloud computing which reduces the duplication of hardware - Bidding for complex work while sub-contracting the more mundane jobs.
Business Risk
Resources Reputation Business Model
Risks Business Risk Physical Risk
Mitigation Insurance
Regulatory Risk
Growth plan
Chief Compliance Officer to ensure 100% compliance
- Increased service offering - Offshoring to overcome protectionist approach - Hiring of local nationals in key markets
Macro economic Risk
Environment
Currency Risk:
?
Exposures:
? Transaction ? Translation ? Operation
Currency fluctuations has impacted profitability by reducing margins. ? Cross currency exposure
?
? Euro, British Pound and Australian Dollar appreciated against the US
Dollar which boosted Dollar revenues
? But appreciating Rupee neutralized this (Rs46.81 v/s Rs50.05 in Q4 2009)
?
Registered a foreign exchange loss of Rs 113 Cr on $112 million of Forex hedges that matured at Rs. 48.74 for the quarter 30 Sept 2009
10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% 3/31/2009 6/30/2009 9/30/2009
Mar – 09 USD GBP 5.62% 0.94%
June -09 Sep - 09 -6.76% 7.55% 0.17% 1.29% 1.15% 5.22%
Volatility 9.39% 11.16% 10.26%
EURO 1.91%
-4.00%
-6.00% -8.00%
USD
GBP
EURO
• Volatility in rates in last one year has been very high.
• Correlation among currencies against dollar has also been very poor, resulting in poor cross currency hedging strategy.
Mitigation: ? Use of financial derivative instruments to
hedge forex rates:
? Currency options
? Foreign currency forward contracts
? Contracts range from a period between 1 day - 8 years
? Early 2008, Hedge of $2 billion. No hedges after
that due to a depreciating rupee.
? Wrote call options at Rs 41 per dollar in April 2008
? Obliged TCS to sell dollars to banks at Rs 41 whenever
rupee depreciated below this threshold
? Old hedging contracts are still likely to cover the
company’s receivables.
? Q3 2009: TCS has hedges worth $75 million
? Q4 2010: Hedged sum is $40 million.
?
A new Hedge of $135 million at INR 47,
? account the difference in the old pre and post-hedge rates.
Strike Price – 41 Asset Price – 41 Premium – 4.2157
Asset (Long)
20 15 10 5 0 -5
-10
-15 -20 30 35 40 Asset (Long) 45
10
5
0 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49
Asset Long
Call (Short)
Covered Call
-5
-10
-15
Strike Price – 41 Asset Price – 41 Premium – 0.52
Asset (Long)
10
5
0 30 -5 35 40 45 Asset (Long)
-10
-15
15 10
5
0 30 -5 35 40 45 Asset Long
Put (Long)
-10
-15
15
10 5 Asset Long 0 30 -5 -10 -15 35 40 45 Put (Long) Synthetic Call
Strike Price – 41 Asset Price – 40.14 Premium – 2 X .5200
Asset (Long)
10
5
0
30 -5 35 40 45 50 Asset (Long)
-10
-15
25 20 15 10 5 0 -5 -10 -15 -20 30 35 40 45 50
Asset (Long)
Put (Long)
-25
25 20 15 10 5 Asset (Long) Put (Long) Final Payoff 30 -5 -10 -15 35 40 45 50
0
Strike Price – 41 Asset Price – 41 Call = Put
Asset (Long)
20
15
10 5 0 -5 -10 -15 -20 30 35 40 Asset (Long) 45
10.00
8.00
6.00 4.00 2.00
Long Asset
0.00 -2.00 -4.00 -6.00 -8.00 34 39 44 49
10.00
8.00
6.00 4.00 2.00 0.00 34 39 44 49 Long Asset Put (Long)
-2.00
-4.00 -6.00 -8.00
15.00
10.00
5.00
Long Asset
0.00 34 -5.00 39 44 49 Put (Long) Call (Short)
-10.00
-15.00
7 5 3 1 -1 34 -3 -5 -7 -9 39 44 49 Effective Long Asset
Put (Long)
Call (Short)
?
Oil Indexed Bond
? Oil price is generally negatively correlated with
?
?
?
?
dollar value Dollar value depreciates, Oil price appreciates And therefore Oil indexed bond pays more interest. Interest income would negate negative effect of rupee appreciation Possible seller of the bond: Oil Companies
Thank You
doc_219241044.pptx
The PPT describing about analysis of Derivatives and risk management at Tata Consulting services (TCS).
Group 1
?
?
?
Tata Consultancy Services (TCS) is India’s largest software services exporter. Total INR 21,535 crores revenue in 2008-09, out of which foreign consultancy revenues account for INR 20,600 crores Have INR 7867 crores worth of foreign expenditure
Industry Diversity
Geographical Diversity
Risks Associated
Overall Risk
Macro Economic Risk
Counterparty Risk
Business Risk
Financial Risk
Legal & Regulatory Risk
Risks Explained
Risks Geographical Verticals Mitigation Operations spread across 42 countries Well Diversified BFSI (44%), Telecom (17%), Manufacturing (10%), Retailing (9%) & Others (20%) Global Compliance Process ‘Experience Certainty’ (BE-BP) agreement & Tata “Code of Conduct” - Use of re-usable components across different projects - Cloud computing which reduces the duplication of hardware - Bidding for complex work while sub-contracting the more mundane jobs.
Business Risk
Resources Reputation Business Model
Risks Business Risk Physical Risk
Mitigation Insurance
Regulatory Risk
Growth plan
Chief Compliance Officer to ensure 100% compliance
- Increased service offering - Offshoring to overcome protectionist approach - Hiring of local nationals in key markets
Macro economic Risk
Environment
Currency Risk:
?
Exposures:
? Transaction ? Translation ? Operation
Currency fluctuations has impacted profitability by reducing margins. ? Cross currency exposure
?
? Euro, British Pound and Australian Dollar appreciated against the US
Dollar which boosted Dollar revenues
? But appreciating Rupee neutralized this (Rs46.81 v/s Rs50.05 in Q4 2009)
?
Registered a foreign exchange loss of Rs 113 Cr on $112 million of Forex hedges that matured at Rs. 48.74 for the quarter 30 Sept 2009
10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% 3/31/2009 6/30/2009 9/30/2009
Mar – 09 USD GBP 5.62% 0.94%
June -09 Sep - 09 -6.76% 7.55% 0.17% 1.29% 1.15% 5.22%
Volatility 9.39% 11.16% 10.26%
EURO 1.91%
-4.00%
-6.00% -8.00%
USD
GBP
EURO
• Volatility in rates in last one year has been very high.
• Correlation among currencies against dollar has also been very poor, resulting in poor cross currency hedging strategy.
Mitigation: ? Use of financial derivative instruments to
hedge forex rates:
? Currency options
? Foreign currency forward contracts
? Contracts range from a period between 1 day - 8 years
? Early 2008, Hedge of $2 billion. No hedges after
that due to a depreciating rupee.
? Wrote call options at Rs 41 per dollar in April 2008
? Obliged TCS to sell dollars to banks at Rs 41 whenever
rupee depreciated below this threshold
? Old hedging contracts are still likely to cover the
company’s receivables.
? Q3 2009: TCS has hedges worth $75 million
? Q4 2010: Hedged sum is $40 million.
?
A new Hedge of $135 million at INR 47,
? account the difference in the old pre and post-hedge rates.
Strike Price – 41 Asset Price – 41 Premium – 4.2157
Asset (Long)
20 15 10 5 0 -5
-10
-15 -20 30 35 40 Asset (Long) 45
10
5
0 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49
Asset Long
Call (Short)
Covered Call
-5
-10
-15
Strike Price – 41 Asset Price – 41 Premium – 0.52
Asset (Long)
10
5
0 30 -5 35 40 45 Asset (Long)
-10
-15
15 10
5
0 30 -5 35 40 45 Asset Long
Put (Long)
-10
-15
15
10 5 Asset Long 0 30 -5 -10 -15 35 40 45 Put (Long) Synthetic Call
Strike Price – 41 Asset Price – 40.14 Premium – 2 X .5200
Asset (Long)
10
5
0
30 -5 35 40 45 50 Asset (Long)
-10
-15
25 20 15 10 5 0 -5 -10 -15 -20 30 35 40 45 50
Asset (Long)
Put (Long)
-25
25 20 15 10 5 Asset (Long) Put (Long) Final Payoff 30 -5 -10 -15 35 40 45 50
0
Strike Price – 41 Asset Price – 41 Call = Put
Asset (Long)
20
15
10 5 0 -5 -10 -15 -20 30 35 40 Asset (Long) 45
10.00
8.00
6.00 4.00 2.00
Long Asset
0.00 -2.00 -4.00 -6.00 -8.00 34 39 44 49
10.00
8.00
6.00 4.00 2.00 0.00 34 39 44 49 Long Asset Put (Long)
-2.00
-4.00 -6.00 -8.00
15.00
10.00
5.00
Long Asset
0.00 34 -5.00 39 44 49 Put (Long) Call (Short)
-10.00
-15.00
7 5 3 1 -1 34 -3 -5 -7 -9 39 44 49 Effective Long Asset
Put (Long)
Call (Short)
?
Oil Indexed Bond
? Oil price is generally negatively correlated with
?
?
?
?
dollar value Dollar value depreciates, Oil price appreciates And therefore Oil indexed bond pays more interest. Interest income would negate negative effect of rupee appreciation Possible seller of the bond: Oil Companies
Thank You
doc_219241044.pptx