TREASURY CLASSROOM VOLUME 118
Atul Gupta
Corporate Treasury PWC AC| Six Sigma, Currency Derivatives| Ex- Deloitte|Ex- KPMG
CONVERSION OF FLOATING INR LIABILITY TO DOLLAR FLOATING
As this article will cover that how companies are exposed to interest rate risk and currency risk when they are taking a loan in terms of ECB or raising through Non- resident bonds
Suppose for example there is an Indian IT company ABC LTD is issuing a commercial paper worth 1 lakh crore INR and tenure is of one year also on that commercial paper they are paying an interest rate linked to MIBOR+basis points. Now they are paying MIBOR+250 basis points and also as MIBOR is a floating element in that Now what they will do they will go to a bank and will convert the float INR liability to fixed INR liability. As in that case, the bank will give them the MIBOR and in that case, MIBOR is neutralized. And ABC LTD will pay the OIS (Overnight Index Swap) which is fixed to Bank. And also Suppose OIS is trading around 8%. Then the total liability stands around 10.5%(8%+2.5%). Now ABC LTD wanted to reduce this 10.5% liability also. As ABC LTD also wants dollars for their expansion. Now what they will do They will convert their INR Fixed to dollar float. Now in that case suppose they will go to any overseas bank that has a branch in India and will do an INR Fixed to Float Swap. In that case, they will receive MIFOR(Mumbai Interbank Forward offered rate) and will pay LIBOR+basis points. Then in that case liability would be around 2.5+ 3%= 5.5%. Now in that case liability is reduced to around from 10.5% to 5.5%. And also suppose at the spot rate of 70 JP Morgan India converted the INR amount 1 lakh cr to the dollar amount. Now that dollar amount ABC LTD will use in their expansion. And also after one year ABC LTD will give the dollars back worth 1 lakh cr and get their INR back. And will give INR back to commercial paper holders.
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It is used when the company wants to reduce their liability by converting their liability into dollar float from INR float to INR fixed than INR fixed to Dollar float.
There are other swaps also available like basis swaps which are also known as Float to Float swaps. In which suppose some company is paying Libor+ basis point on an ECB loan of around $1 billion loan. Then in that case company goes for a coupon only swap. In which they will ask the bank to Neutralize their Libor and the company continues to pay L+basis points to the bank. And the bank will give the Libor now Libor is neutralized and now in return company will pay the USD Interest rate swap to the bank.
Disclaimer- Only for Informative Purpose only
Senior Executive Vice President and Head Treasury Sales at SBM (India)
3 年There will be various factors to be considered before deciding whether to move from Fixed to Float or floating to Fixed like, liquidity expectation, inflation, central bank monetary policy expectations, the cost of hedge For example, in a situation where markets are expected to be flooded with liquidity despite inflation being at high levels but central banks are expected to take some slow monetary actions it will be better to stay in floating rate. However, if in above case central banks are expected to take aggrassive actions to curtail inflation than it's better to move to fixed despite market are flooded with liquidity to maintain growth.The tenor of the the swap to be decided accordingly. These swap will have P&L impacts and should be used as an instrument to hedge the interest rate movements or to take advantage of the expected interest rate conditions.
at
3 年But in the given scenario benifit will routed to pnl or OCI.