WIPRO’S BILLION DOLLAR HEDGE

QUES. 1:IN THE CIRCUMSTANCES OF THE CASE, WOULD YOU SAY THAT WIPRO’S CHANGE OF RISK MANAGEMENT POLICY AMOUNTED TO SPECULATING ON THE CURRENCY? EXPLAIN.

Wipro’s policy to switch from their old policy of hedging only foreign assets & liabilities i.e., their receivables & payables to US$ revenues to a policy of hedging a significant portion of anticipated US$ revenues led to speculating on the currency as the fluctuations in the case of assets & liabilities indirectly forms a part of fluctuation in revenues. Since, this revenue will include a substantial amount of the receivables that might materialize in the next 6 months. In effect, there was speculation beforehand as well and so the speculation continued.

QUES. 2:WAS THE SIZE OF THE HEDGE INADEQUATE, ADEQUATE OR EXCESSIVE?

The policy states Wipro’s intention of hedging against anticipated US$ revenues. In this case, the growth experienced in the year 2002-03 was 46.8% and in the year 2003-04 was 44.2%, so it is safe to expect the rate of growth for the year 2004-05 to be around 45.5%. Using this growth rate if we forecast the revenue it comes out to be US$ 1,458 million for 2005 fiscal. In this case the hedging cover is only US$ 980 million i.e., 67.2% as cover. Add to this, both the hedging techniques were driven towards expected appreciation in the value of INR. As Wipro covered more than 2/3rd of its expected revenue we would deem it as an adequate hedge.

 QUES.3: DOES THE HEDGING POLICY NEED A RETHINK IN SEPTEMBER 2004?

Wipro definitely needs to rethink their hedging policy as their expected appreciation in the value of INR never happened. And due to this unforeseen turn of events Wipro needs to adopt a different strategy post September to firstly, recover the 6% (US$ 60million) on the account of depreciation in the value of INR & secondly, to gain profits from hedging on future anticipated incomes post September.

 QUES. 4: IS IT A GOOD IDEA TO SELL PUT OPTIONS TO HEDGE THE CURRENCY RISK?

Wipro was expecting an appreciation in the value of INR, so the idea of selling a put option seems to be the right one as it would ensure that it earns some money by way of premiums. In retrospect though, owing to depreciation of INR buying a put option seems the more viable idea.

QUES. 5: DO YOU THINK THAT THE HEDGE ACCOUNTING FOR THESE TRANSACTIONS IS APPROPRIATE? DO YOU THINK HEDGE ACCOUNTING REDUCES THE FLEXIBILITY OF THE COMPANY IN DEALING WITH EXCHANGE RATE VOLATILITY?

Hedge accounting requires gains/losses to be marked to market on the date of reporting of financial statements. Wipro’s approach to account for gain/losses at the forward rate locked in March,2004 is appropriate considering it was marked to market as on 31st March, 2004 & the subsequent reporting/accounting date falls only on the date of transaction.

 Hedge accounting reduces the flexibility to the extent gain/losses are not recorded on a more frequent basis viz. daily/monthly. Thus, there is a higher chance of volatility on account of exchange rate fluctuations.