IN one of the first instances that has come to light of a company being hit by exotic forex option transactions, Hexaware Technologies has made a provision of $20-25 million towards possible losses on these deals. The company also said it was suspending one of its employees in this connection for actively concealing these transactions and exercising unauthorised fiduciary powers.
According to currency market sources, several companies, taking bets that euro and yen will slip against dollar, have struck derivatives deals to cut cost and prop up revenue without assessing the hidden exchange risks. They said more such hits from option deals are feared in the coming days. Some of the companies will, however, find a way to absorb the losses and keep the development out of public domain.
Hexaware did not give the exact nature of the transaction. The software exporter has appointed a committee consisting of independent directors, Shailesh Haribhakti, Preeti Mehra and L S Sharma, to investigate the matter. According to sources, a small private bank, at least two large foreign banks with significant presence in India—were involved in the transactions. The company did not wish to name the banks.
Hexaware chairman Atul Nishar said the company found about the first transaction late on Thursday and subsequently investigated the matter, leading to more such transactions being discovered. “We don’t have any need to get into these structured option deals. The company policy does permit these kind of deals—we only need a simple forward cover,” Mr Nishar told ET. An external forex expert has also been roped in. The options contracts were in Swiss franc, yen and euro.
“An embargo has been placed on all option deals; future forex deals will necessarily have to transacted jointly by two signatories out of the designated four from among the top management,” Mr Haribhakti said in a statement. The company intends to continue with “normal” hedging strategies to protect against the rupee appreciation. It said business and order pipeline were unaffected and as on it September 30, 2007, the order book stood at over $ 300 million. The company has hedged around Rs 400 million at Rs 40.43.
Forex experts said the Hexaware announcement was only the beginning, and more such announcement by corporates could follow in the coming weeks. “There could be cases were the losses are higher than the company’s revenues,” said an expert, who said the biggest hit could be on Target Redemption Notes, one of the exotic options contracts corporates had entered into.
“The market has seen an unprecedented level of volatility. Some things, which were thought to be rare possibilities have become real, leading to such situations,” said Nandlal Bhatkar, CEO of Pyxis Systems, a firm that has derivative trading products.
ET had first reported on November 21 that corporates could end up run up losses on currencies other than the rupee-dollar because of the exotic options contracts many of them had entered into.