Question :Managing Exchange Rate Risk 

Mahindra International (India) imported spares of an engine from a US manufacturer for $ 5,000 per annum at a price of $ 2.5 per piece. The average exchange rate during 2001-02 was Rs. 47.70/$. The Indian company imported the spares also from a British manufacturer. In fact, it had diversified its import in view of reducing the risk associated with the supply. The import from the USA was competitive in view of the fact the same spares imported from the UK was slightly costlier. The American spares cost Rs. 119.25 per piece, while the British spares cost Rs. 120.00 per piece. In 2002-03, US dollar appreciated to Rs. 48.40 with the result that the cost of American spares turned higher than the British spares. In the sequel of the appreciation of US dollar, the Indian importer cut its demand from 2,000 pieces to 500 pieces. The loss to the US exporter was colossal. But at the same time, the Indian Importer suffered a lot. It had to pay a higher price for the US spares in terms of rupee. And also, it had to divert its import from the USA to the UK insofar as the pound sterling did not appreciate during this period. All this happened in the wake of the exchange rate changes.

Questions:

1. Mention the loss borne by the US exporter in the sequel of appreciation of dollar.

2. What strategy the Indian importer needs to follow to hedge the exchange rate risk?

Case let 2

ABN Amro Bank and Correspondent Banking in India

ABN AMRO bank has emerged as a major correspondent bank owing to a large network. In India, it operates in six major cities, viz. Baroda, Chennai, Kolkata, Mumbai, New Delhi and Pune. Being a correspondence bank, its product offerings are found primarily in the area of trade and clearing. It is doing well in these owing to strong tie-up with local Indian banks reaching 350 centres across the country. As a result, payments are effected speedily and effectively.

Cash Management

The customized products in the area of cash management include cheques payable at par at all its branches across the country, apart from traditional collection services, such as collection of outstation/upcountry cheques drawn on other banks. ABN AMRO is a member of all major clearing centers in the major financial centers. It has an electronic delivery system and structures multilateral netting of cash.

Trade Services

Under trade services, the Bank offers a comprehensive range of products, such as:

1. LC reimbursement

2. Indian rupee trade payments

3. Handling documentary bills for collection

4. Bills negotiation

5. Letter of credit advising

6. Letter of credit confirmation

7. Guarantees

Examination Paper of Finance Management

IIBM Institute of Business Management

Treasury Services

Treasury services at ABN AMRO Bank (India) are available round-the-clock. Rupee funding at its treasury desk is provided at competitive rates along with advice on market trends and rates. It provides also advisory services on the request of financial institutions and corporate in the area of regulatory, economic and financial matters including depository services.

Questions:

1. Describe the network of ABN AMRO Bank in India.

2. What role does it play for global cash management?