 This is hedging and in fact, it's a very big topic if you want to discuss it in financial term But here we are talking about only counting side of it. Now what hedging is basically? Let's see the price of patrol is fluctuating a Transporter estimated that for next three months his patrol demand is 200,000 liters 2,00,000 liter Patrol should be a first for currency current rate is 90 rupee a liter He entered into an agreement with the patrol dealer to purchase 200,000 liters by 31st March 2021 In the next three months During which his demand is 2,00,000 liters and you are deciding with a dealer that you are going to give us In the next three months at 31st March The price is there and they agreed a price of rupee 100 per liter The current rate is 90 rupee per liter but the price you have after three months You never know if it is 100, 105, 110, 100, 100, but you agreed and the contract to 100 rupee per liter Now protect against increase in price is hedging We are going to do that we are hedging and protecting ourselves that if there is an increase or decrease in the price So the dealer will pay off according to the 100 rupee per liter So that is what basically hedging is Now technically hedging is a process of risk management So here you have to manage the risk and particularly the risk of financial matters There are a lot of risks but we have to talk about the risk of financial risk Through the use of financial instruments We have discussed what are the financial instruments There are three major instruments like Forward, Future and Option There are other instruments but we have discussed three in detail Thus reducing the variability in the fair value changes in the future cash flow What we are going to do is that the cash flow in the future The variability in the cash flow that we have to give If there is a change in it then how do we manage that change? How do we mitigate it? How do we compensate it? That is what basically the question is So this is the process of hedging Hedging is simply one of the management strategies to reduce risk and volatility In the management of assets and libraries Again financial assets and financial libraries That is all about the assets and libraries Now what do we look at in the type of risk? Strategic risk is that there is a change in technology In fact, new technologies take a long time to come into our industries If a machinery runs for 10 years from the lead of an industry Then we take it for more than 10-15 years What should be different is that we should first renovate it In that we have the word BRM BRM means Business, Engineering, Maintenance, something So you should change it along with it And the second risk is commercial risk Reduction in demand and Adverse price movement Because even in the price, you do not have control Because supply and demand is what fixes the price So this is also a risk that how to reduce this Again as I said, we will not financially discuss Because we have to manage the risk of financial assets and libraries But this is a risk Because demand can be increased or reduced Due to many reasons, we will not go into that detail But Adverse pricing is also known as change prices So you also have a problem with the receivable Operational risk, increase in employment, employee turnover This is the biggest risk of today's time That if your key employee, on whom you are dependent He leaves you, then your whole system sits down Similarly, the problem of fuel prices The problem of unutilized capacity This is also a big problem in today's time Our peer capacity Now its cost is being read If you are saying that we have to pay for electricity Even if you don't use it, you still have to do it So this is a problem, we have to see this risk But again, we are not talking about the risk of financial assets and libraries Then there is fluctuation in forex rates I am talking about this financial risk Customers default in payments This is also a big problem That we give things on credit Then the customers cannot pay off How to manage this risk We will discuss a lot of details in this Because we have talked about financial risk There are many risks as I said But we don't have to go into all of them We are only talking about financial risk Fluctuation in forex rates Changes in rates of foreign currency If we are dealing in export or import Then the payments we have to receive Obviously we have to do it in foreign currency And we will change it in foreign currency So obviously when the rate changes on a daily basis Then the fluctuation has to be more We have to see this risk Interest rate risk This is another issue If we go to loan from the bank Then the loans are given at a variable rate Earlier it was 10% and now it is 10% Now it is not like that Now the state bank is offering a base rate And that base rate is called Kaibor Karachi Inter Banking Rate So the Karachi Banking Rate Announces the state bank every 3 months After that the commercial banks Add some basic points And the 100 basic points are equal to 1% So if you have a Kaibor plus 200 basic points This means that if the rate of Karachi is 10% The rate of the state bank Then add 2% more, 12% Now the risk is If the Kaibor of your Karachi Changes Then obviously your rate will also change So how to manage this? This is also a big issue Normally we get a cab with the banks Provided that they agree to that If we give maximum of 12% You can say that we can give maximum of 13% If 12% of your Kaibor is done Then you have to give 14% But if you get a cab At the top we will not pay more than 13% So if the bank agrees Then even if you have any rate of Kaibor You have to give maximum of 13% So what does the bank do on its own? Then we will get a cab at the bottom We will not give less than this It can be 11% agreed So this is a way How to manage the rate change Now what is the hedge item What is the hedge instrument This is also a very important definition What is the hedge item What is the hedge document The hedge instrument is the same Three forward, contract Future, contract, options There are more But we have discussed these three So we keep them in front And it should be designated That this is your option Contract or future Or forward You should clearly mention The hedge instrument Designated derivative Whose fair value or cash flow Are expected to offset changes In the fair value of cash flow Of designated hedge item The hedge item that you want to deal with The things you are going to buy or sell You have to do it first grade Receivable So what is the hedge item Assets, liability, firm commitment For cost future Transactions or net investment In foreign operations So many things Any financial assets Or liabilities Any firm Against them You take an instrument The hedge instrument And cover it up What happens If you are Loss in an item Investment Instruments In the instrument Compensate it And this is the reason That we call it hedge If you are making a loss You are compensating it So this is the concept Of hedging How we operate it Now this Fair value hedge What is this Fair value hedge are those In which fair value of item Is changed If the prices change in the market Then obviously The money you have to pay Will be less So you have to hedge it How to save it An entry is due An amount in foreign currency At a future specified date You have sold something And in the future There will be an amount in foreign currency As therefore taken out For an exchange contract To buy the stipulated amount At future date So what do you do For a future date If you take a loan Or you have to pay it back For the future You will first decide a rate With banks You will decide a rate Until the contract matures There will be Changes in fair value of liability In instrument There can be changes But again Compensation should be in both Basically It is not possible to protect 100% It is not possible No It can be 10% margin Some people said 80% to 120% But 10% is normal It is not possible Okay Then These do not have a result in cash flows Until the date specified In the future of maturity of the contract In this cash flow Will only come when the date of maturity comes Before this There will be no change That is why there is no entry When you have cash flow in the future You will consider the value For that Under eye of errors Hedge accounting rules Can only be applied to fair value hedge If the hedge relationship Meet the following criteria It is necessary to meet the criteria That there should be documentation On the initial stage It should be clear in the document That this is your hedge instrument And this is your hedge item Second is its effectiveness Effectiveness means That In the item It is reliable It can be 5-10% But effectiveness Generally We assume that there is effectiveness The hedge has been assessed On the ongoing basis And is determined to have been effective This is not that You are fixed But on the ongoing basis See what is effective If it is effective then you will continue If it is not then it is possible to adjust Thank you very much