Strong Swiss franc hits exporters' bottomline

This is yet another story of carry trade in a foreign currency that would severely impact the balance sheet of the Indian companies and banks.

The currency is the Swiss franc, in which most of the Indian companies had swapped their dollar receivables, not through direct exposure, but by striking exotic derivatives deals to ward off fluctuations in the dollar-rupee exchange rate.

However, with the Swiss franc appreciating against the dollar since a month now, the Indian companies are at the receiving end. The exotic derivative deals struck by them have started giving low returns.

The Swiss franc had been ruling quite stable for the entire year. This had led many Indian companies and banks to hedge their dollar exposures by working out structured products in the Swiss franc even if the currency was very strong.

Moreover, these products had embedded options since companies did not want to pay the rupee premium, which is very high for the Swiss franc, to banks, said a dealer.

Dealers explained that lower interest was the primary reason for global players to swap dollars into the yen for trading in emerging markets (yen carry trade). On the other hand, the stability in the Swiss franc vis-à-vis the dollar was the fundamental factor for the Indian companies or banks with dollar exposures to hedge in the Swiss franc.

The Swiss franc has been ruling in the range of $1.23-1.25 since October 2006, when most of the deals were struck by Indian banks on behalf of their corporate clients. Under the structured products, the dollar exposure was hedged by working out exotic derivative products in the Swiss franc.

These products help in realising the dollar receivable at fixed levels of the Swiss franc, irrespective of the dollar-rupee volatility in the market. However, these products have knock-in levels, where the deals enter into the negative zone (loss) if the currency movement runs adverse to the predicted levels.

Most of the products entered into losses with the sudden appreciation in the Swiss franc.

Dealers explained that no one had expected the Swiss franc to be so volatile within a year. The Swiss franc appreciated from $1.23 to $1.19 on September 7, when the US employment data turned weak, prompting the US Federal Reserve to cut the rate by 50 basis points. Since then the Swiss franc has been consistently appreciating.

Bankers further added that they have been advising their Indian clients to revise the knock-in to a further high of $1.05 immediately in order to avoid further losses.