9-205-074
REV: FEBRUARY 21, 2006

GEORGE CHACKO MARTI G. SUBRAHMANYAM VINCENT DESSAIN ANDERS SJÖMAN

Advising on Currency Risk at ICICI Bank
In March 2003, Shilpa Kumar, joint general manager of the Markets Advisory Group at ICICI Bank, India’s second-largest bank, had to come up with a recommendation. One of ICICI Bank’s customers, the Power Finance Corporation Ltd. (PFC), had asked ICICI Bank’s advice on its currency exposure. PFC worked with the Indian power sector and especially with India’s various state electricity boards (SEBs) to finance their operations. PFC’s loans to the boards were primarily in Indian rupees (INR), but the loans that PFC had to take itself were often denominated in other currencies. PFC therefore found itself regularly with large foreign exchange exposures. At her last meeting in New Delhi with PFC’s deputy general manager, Rajeev Mehrotra, Kumar had learned that PFC’s current exposure was running close to INR 1,300 crore1 (about US$300 million), mostly in U.S. dollars and Japanese yen (JPY). Out of this exposure, Mehrotra was especially interested in hedging a Japanese yen loan equivalent to $100 million with a five-year tenor. Back at ICICI Bank’s headquarters in Bombay, Kumar now had to come up with recommendations for how PFC should handle this JPY exposure. Mehrotra had made it clear that he was uninterested in hearing about a full hedge for the entire exposure but that he hoped ICICI Bank could present alternative strategies that potentially were more profitable to PFC. Whatever the recommendation, Kumar’s team would have to take a view of the development of interest rates and also exchange rates for the dollar and yen. This would help them decide what to hedge, interest rate risk or exchange risk, and how much. Kumar’s recommendation would have to take all these aspects into consideration.

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