Page 60 - DCOM510_FINANCIAL_DERIVATIVES

Unit 4: Introduction to Future Contracts

Notes
Did u know? Interest rate futures contract allows the buyer of the contract to lock in a
future investment rate; not a borrowing rate as many believe. Interest rate futures are
based off an underlying security which is a debt obligation and moves in value as interest
rates change.
When interest rates move higher, the buyer of the futures contract will pay the seller in an
amount equal to that of the benefit received by investing at a higher rate versus that of the rate
specified in the futures contract. Conversely, when interest rates move lower, the seller of the
futures contract will compensate the buyer for the lower interest rate at the time of expiration.
Self Assessment

Fill in the blanks:
12. A ...................................... futures contract is a contract to buy or sell the face value of the
underlying stock index.
13. The first exchange-traded foreign currency futures contracts were launched on the
......................................

14. The futures index at expiration is set equal to the ...................................... on that day.
15. ...................................... trading in India was the predecessor of futures and forwards trading.

Case Study Currency Hedging at HCL Tech

“In this quarter (Apr-Jun 2009), we have cancelled some hedges that were to mature by
December 2009. These were the same hedges that were taken in late 2007 and early 2008
before the global meltdown took place. But the forex losses are already reflected in the
P&L account to the extent these are marked-to-market and the rest are reflected in the
balance sheet. They will flow through the P&L over the next seven quarters, irrespective
of the cancellation of these hedges.”
Anil Chanana, EVP, Finance, HCL Technologies Limited, May 2009.
On May 16, 2009, one of the leading global IT players in India, HCL Technologies Limited
(HCL Tech), announced the cancellation of currency hedging contracts worth US$ 600
million or around ` 29.70 billion. The announcement came in the wake of an unexpected
rise in the value of the US dollar against the Indian rupee which touched the level of ` 52.5
in March 2009. According to industry analysts, the company had taken these contracts
during 2007-08 when the rupee was at approximately ` 41 against the dollar. Analysts
estimated that the cancellation of the hedges would lead to a loss of ` 4,000 million to
` 5,000 million for the company in the next few quarters, which would subsequently affect
the dividend payout.
HCL Tech, which was known to hedge heavily, had a forward hedge cover of US$ 1.30
billion at the end of the third quarter of FY 09. However, this went down to US$ 813
million at the end of the fourth quarter of FY 09. Canceling of forward cover was not new
to the company - in FY 08, it unwound a US$ 540 million cover, incurring a cash loss of US$
9 million in the process.

Contd...

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