MRPL hedging policy to soften forex shock

NEW DELHI: Fluctuations in the foreign currency market has forced Mangalore Refinery & Petrochemicals (MRPL) to devise a risk-management policy to hedge its annual forex receipt of over $6 billion (over Rs 24,000 crore).

There has been risk of adverse movement in the foreign currency vis-à-vis rupee, hence the
oil company is considering to implement a forex policy soon based on a draft prepared by Ernst & Young (E&Y).

According to the draft policy, constitution of a foreign exchange risk management committee (FRMC) is proposed. FRMC will approve hedging activities including approving currencies and instruments. Proposed instruments are; spot, cash spot and tom; forwards, plain vanilla currency options, zero-cost option structures and currency and interest rate swaps. Additional instruments could be added with the approval of FRMC. It is also proposed that any activity that is speculative in nature would not be allowed.

“Hedges will initially permitted only against the underlying exposures. The hedge position shall at no time be in access of the outstanding forex exposures,” the draft said. Members of the proposed committee would be director (finance), one member from outside the finance department (of at least vice-president level), deputy general manager (finance & accounts), senior manager (international trade), back-office incharge and a representative from the internal audit department (with observer status). It is also proposed to set up a finance department (forex) to look after front office and back office operations.

The company had already undertaken a mock exercise in 2006-07 for the crude oil imports, product exports, and buyers credit, a company source said. The net result of hedging was a loss of Rs 96.87 crore. Summarising the conclusion of the mock exercise, a company source said that the total exposure in the period (April 2006 to March 2007) was of $6,856 million.

Exports of $2,537 million took place in the period while imports was of $3,967 million. Buyers’ credit was to the tune of $352 million. Forward premium paid in risk management was Rs 42.14 crore, while forward premium received in the process was Rs 9.75 crore.

Summarising the benefits of institutionalising a forex policy, a source said it would help in addressing all forex risk centrally. It will also help in creating an ability to take “informed decision to protect margins that can be hurt by adverse movement in foreign currency.”