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    HEDGING IN AUTOMOBILE

    SECTOR

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    1

    2

    3

    INTRODUCTION - HEDGING

    4

    COPPER

    STEEL

    FOREX

    5TECHNOLOGY

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    1INTRODUCTION - HEDGING

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    INTRODUCTION

    Hedging

    Hedging is a form of risk management strategy used in limiting oroffsetting probability of loss from fluctuations in the prices ofcommodities, currencies or securities

    A gain or loss in the cash position due to changes in price levels will becountered by changes in the value of a futures position.

    Hedging is done based on Past Experiences and Future Market Projections

    Automobile Sector

    Hedging metals and currency is one of the major strategies, which globalautomobiles companies are practicing to mitigate the risk.

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    MAJOR STRATEGIES

    Macroeconomic analysis based on global market events andtrends to identify opportunities for investment

    Discretionary (trading is carried out by investmentmanagers) and Systematic (trading is based on mathematicalmodels and executed by software)

    Global Macro

    Utilize market movements, trends, or inconsistencies when

    picking stocks across a variety of markets Sub-strategies: emerging markets", sector funds","fundamental growth", "fundamental value"

    Directional

    Investment opportunities in corporate transactional eventssuch as consolidations, acquisitions, recapitalizations,bankruptcies, and liquidations

    Three categories - distressed securities, risk arbitrage, special

    situations

    Event-driven

    Take advantage of relative discrepancies in price betweensecurities

    Sub-strategies include: fixed income arbitrage, equity marketneutral, convertible arbitrage

    Relative value

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    2COPPER

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    COPPER

    Fundamental Analysis

    Demand Supply factors varies From

    Business environment in developedeconomies to huge growth in emergingeconomies

    Labor unrest to political climate

    Difficult to estimate

    Unable to predict the short term positions

    Hence, identified certain factors but didnt

    try to analyze the magnitude of impact.

    Technical Analysis

    Started with pure Mathematics with manypermutation and combination

    Concept: Hundreds of variable have theirimpact on metal pricing and exchange rates.

    Identified 4 parameters which are result ofvarious forces of these variables

    a-Monthly % change in copper grade-A,cathode monthly price

    b-Monthly % change in USD/Euroexchange rate (International trade)

    c-Monthly % change in crude prices(Future prospects)

    d-Monthly % change in NYSE (Impact ofthe various global factors)

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    COPPER ANALYSIS

    Analysis Methodology Published monthly data from Mar 1988 to Dec 2012

    Various P &C to come-up with a strong correlation

    8% of the data set removed as outliers

    Analysis explanation

    Very weak correlation ranging from -0.26 to 0.19, movedto parameter groups with strong correlation

    Utility : Copper prices of future month and otherparameters of the same month.

    Parameter Parameter Groups Correlation Coefficient

    a+ Sqrt {d*d +b*(c-a)} 0.67

    a+ c*(d+a)/b 0.56

    a+ (c-d)/(b-a) 0.49

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    COPPER ANALYSIS - CONSTRAINTS

    Difficulty in estimating direction and magnitude of each parameter

    Arbitrariness removed the outliers without any pattern and this limitsthe analyses application as mentioned below:

    Rigorous analyses will be required each time rather than justrepeating certain set of specified actions

    Explanation behind the erratic behavior of outliers

    Weightage of the each parameter group is yet to be find out

    Combined formula is yet to be developed on the basis of the strong relationbetween a certain factors

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    3STEEL

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    STEEL HEDGING STRUCTURES

    Enables client to lock in a fixed price at which to buy

    (client pays fixed)

    No upfront premium

    Client is protected from prices above the swap price

    There is no benefit if prices fall below swap price

    SWAP

    Enables client to protect costs above the cap price

    Client pays an upfront premium to purchase the

    cap

    When prices rise above the cap price, payments

    are made to the client equal to the difference

    Client retains 100% of the benefits of prices falling

    below the cap level

    CAP

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    4FOREX

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    FOREX

    Type of Foreign Currencies involved:Last 3 Year Capital Investment Trend in MSIL

    2008-09 2009-10 2010-11

    MRs % MRs % MRs %JPY 9,407 56% 3,826 26% 8,824 40%

    USD 701 4% 1,099 7% 896 4%

    GBP 432 3% 95 1% 12 0%

    EUR 412 2% 318 2% 419 2%

    CHF 1 0% 15 0% 1 0%

    INR 5,796 35% 9,418 64% 11,854 54%16,749 100% 14,771 100% 22,006 100%

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    FE Variation in Recent Times

    1.83

    1.87

    1.95

    1.99

    2.02

    2.02

    1.99

    1.90

    1.88

    1.92

    1.892.00

    1.96

    1.96

    2.13

    2.13

    1.92

    1.89

    1.89

    1.79

    1.89

    1.82

    1.85

    1.60

    1.70

    1.80

    1.90

    2.00

    2.10

    2.20

    JPY to INR

    MY 100

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    Cost Calculation

    MY 100 = MRs 100 / 2.13 = MRs 47 (Apr-2010)

    MY 100 = MRs 100 / 1.70 = MRs 59 (Sep-2010)------------------------

    - MRs 12

    ------------------------Pay 25 % More

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    GOING FORWARD

    Capital Budget Proposal Formats

    All data in millions

    USD GBP Euro JPYTotal

    FEUSD GBP Euro JPY

    Total

    FEUSD GBP Euro JPY

    Total

    FEUSD GBP Euro JPY

    Total FE

    (MRs.)

    1 Engineering - - - 1 1 95

    2 Assembly - - - 1 0 1,188 697

    3 Press Shop 4 4,368 2,602 365 203 5 939 730 0 204 Weld 1,797 998 747 415 415 231 512 284

    5 Supply chain 9 151 505 299 166 13 581 3 119

    6 Machines 198 110 55 31 45 25 95 53

    7 Paint 1 0 1,493 889 0 0 349 223 0 330 185 1,060 589

    Grand Total 15 - 0 8,007 5,104 0 - 0 1,815 1,037 18 - 0 1,729 1,752 4 - 1 2,855 1,858

    Q3

    S. No. Dept

    Q4Q1 Q2

    BASIS: All data in corresponding currencies

    All data in Millions

    Currency/Quarter Q1 Q2 Q3 Q4

    USD 15 0 18 4

    GBP - - - -

    Euro 0 0 0 1

    JPY 8,007 1,815 1,729 2,855

    Total (MRs.) 5,104 1,037 1,752 1,858

    - - - -

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    FOREX Support required from Users

    Accurate Estimationof Foreign Currencies required for next FY.

    Accurate break up of Currency wise & Quarter wise Cash Flowfor next FY.

    Accurate Data Entry of FE break up in On-line System

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    5TECHNOLOGY

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    TECHNOLOGY AND PROCESS

    The flow of information between the front office and the back

    office is critical to any hedge fund.

    Disparate systems for trading and accounting are a real source

    of such risk and platforms which reference a single book of

    records for trading, positions and P&L can keep this risk to a

    minimum.

    The high levels of market volatility highlight the need for real-

    time reporting.

    Systems must be able to support streaming data to display the

    impact of trade executions on a funds risk.

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    TECHNOLOGY PLATFORM BUSINESS

    OBJECTIVES

    Trader position look-up for appropriate allocation of trades to multipleprime broker accounts.

    Consolidated reporting tools to present data from across the multipleprime brokers.

    Prime broker connectivity, a secure and encrypted process in which totransmit trade and position data in the format prescribed by eachprime broker.

    Exception-based reconciliation of the funds own records of trading

    activity with those kept by its multiple prime brokers and third partyadministrator.

    Ability to accrue for the various styles of product financing employed bythe prime brokers.

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    TECHNOLOGY CONSIDERATIONS

    Security is fundamental when considering a funds technology

    setup and network infrastructure. A multi-tiered security approach is essential to protecting the

    critical information

    1. Infrastructure andSecurity

    Internet service

    Phone and voicemail

    Market data services.

    2. Telecommunications

    Back up all essential documents and data offsite in an electronicformat at least daily, if not in near-real time.

    Able to access critical information and applications in a remotemanner even during outage

    3. Data Protection

    Host hardware and software in an offsite facility, which providesnecessary bandwidth and increased protection

    Advantages: disaster recovery, business continuity planning,

    security and flexibility

    4. Collocation

    Email and IM data should be saved in WORM format for theamount of time prescribed by law.

    Records need to be indexed in searchable files to aid in providingonly the information that is requested.

    5. Archiving

    Hedge funds whose very existence depends on managing risk in volatile markets

    need to know, in the event of disruption that it is business as usual

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    OPTIMIZATION COST SAVINGS

    Cost SavingStrategy

    Virtualization

    SmartPurchasing

    Market

    data

    BrokerExecution

    Costs

    Disaster

    Recovery

    Telecommunication

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    With the growing uncertainty in the global business

    environment, Hedging as become as an importantrisk mitigation strategy as part of the operations.

    THANK YOU

    CONCLUSION