Keshav: Good morning, good afternoon, good evening, ladies and gentlemen. Welcome to another episode of "A Done Deal". Today, we have with us Dipak Khot. A quick intro - Dipak is an accomplished client-focused banker with nearly 3 decades of experience in Treasury/ Market risk management. He has an exceptional understanding of global financial markets, banking, FX IR hedging and structuring, liquidity management and an ability to leverage the knowledge of current economic, financial, accounting, regulatory and industry climate to develop effective hedging strategies. Dipak started his career with a couple of multinational corporates and subsequently gained 25+ years of Banking experience in a number of locations across the globe working for Standard Chartered Bank, RBS, HSBC and recently with Syndicate Bank in London. Dipak - a warm welcome to A Done Deal - it's great to have you with us today. So, without further ado - let's get started - could you please tell us what is financial risk all about?

Dipak: Hi Morning Keshav and good morning, afternoon and evening, to all.
* Risk is an end result of any exposure.
* Our exposure to risks are inherent in everything we do in life, be it walking on the street or taking to the skies on an aeroplane or a manned mission to Moon and beyond.
* However our perceptions of risk materialising varies depending on a variety of factors and importantly our assessment of the particular risk.
* For instance we take walking on the streets for granted but statistically the probability of fatality is higher compared with taking a flight or a manned mission to the moon. So when it comes to risk .... Some risks should actually be taken - for instance business risk. If you do not like the risks that are inherent in a particular business, ideally you should not be doing that business. So take business risk.

Keshav: Are you saying the best way to avoid risk is not taking any risk at all - But how can we realistically then prepare for and navigate through risk that cannot be avoided?
Dipak:
* Some risks that cannot be avoided should be mitigated - for instance operational risk.
* Operation risks usually come only with various types of unpleasant outcomes if they materialise and there is rarely any upside.
* One can end up in financial, reputational, loss of business etc.
* Such risks should always be mitigated to the extent they pose a threat and where cost of management or mitigation is lower than the cost of the risk materialising.
* I would put financial risks in the third category as risk that should ideally be managed.
* Financial risk need not necessarily result in pain, as it can sometimes also result in a gain. Hence best strategy is to manage such risks.
* Market risk is one such area that should ideally not be taken nor be fully mitigated.
* Of course there are exception - Firms that trade such a risk and take it for generating a return. For them it is more a Business risk ... i.e. managing a business risk which I mentioned earlier.
* Manufacturing or non-financial activities should treat these as financial risk and manage it rather than simply mitigate it.

In a nutshell regardless of the type of risk, fear of the risk can stop you from doing crazy things but at the same time it stops you from being creative in your thinking on clever and creative ways of mitigating it.

Keshav: OK - thank you for that overview - Let's dive into some of these types of risks - What are the key aspects or steps in managing financial risk?
Dipak:
* The most important element in a financial risk management process is identifying the exposure. Some exposures are apparent and some might be hidden or implied.
* Once the exposure has been identified, risk should be modelled on both historical basis as well as forward looking basis, which is derived from implied volatility of the particular asset class. This helps in assessing the impact of market moves on such exposures to determine the quantum of risk.
* The risk quantum should then be compared with the firm's ability to absorb it or not. Risk above the acceptable level is the unwanted risk, and should be mitigated.

Keshav: OK - Could you please shed some light on the hedging strategy used?
Dipak:
* Ideally there should be a maximum use of natural hedges where possible
* If these are exhausted or there are none then financial products should be used to mitigate the residual risk to bring your potential risk to an acceptable level.
* For instance, if a Sterling company has dollar assets they can try and create liabilities in dollars.
* Or if a company has floating revenues, they can use floating rate debt to counter the same as long as both revenues and liabilities are linked the same index.
* Once all this is done, implementing or executing the strategy is one of the most important steps in the process
* At the final stage, outcome of the decision needs to be constantly reviewed to be able to propose changes. Internal requirements might change and Markets by their very nature are dynamic. Hence it is important to ensure that you have a dynamic strategy, to deal with a dynamic nature of the market. You should not be caught like the frog in a boiling pot.

Keshav: What are the typical risks that Treasurers today consider in their day today Treasury management?
Dipak:
* Historically FX, interest rate and liquidity risk management took up a lion's share of the Treasurers day today role.
* Whilst that has not changed much, a Treasurer today has to deal with much more than just that.
* Event risk management whilst not a regularly occurring risk, can lead to a significant swing in the fortunes of a Corporate. Here we talk about M&A, Leverage acquisition finance, Debt capital markets, Equity capital markets, Project finance etc. These one off transactions are usually high value transactions compared to the day today risk management.
* Next treasurers historically confined to local boundaries to manage risk, with each country managing its own risk.
* This is now turning into a global activity as there could be offsetting exposures between countries or between different exposures/asset classes potentially nullifying the risk or doubling it depending on correlations.
* So Treasuries are today getting more sophisticated to bring it all under one umbrella for a more holistic risk management.
* Lastly ever changing regulatory landscape has also influenced the way Treasurers manage the risk. One could argue it is the case of the tail wagging the dog for instance that was how it looked under IAS 39 but IFRS 9 has now resulted in more economic hedging as opposed to hedges aimed at satisfying only accounting requirements.

Keshav: How effective is financial engineering / derivative products in helping manage risk?
Dipak:
* One can be very clever in what you can achieve by financial engineering.
* But it is key to understand what your objectives are and whether such clever ideas help you meet your objectives.
* For instance it is easy to say buy low sell high, but can someone say with certainty where exactly the high point is and where the low.
* So a strategy should ideally aim at ensuring you put a cap on your losses and aim to benefit from maximum possible move in your favour.
* Buying low and selling high can only happen as a matter of luck and certainly cannot repeat, especially over long periods of time.

Keshav: Is dealing in options and derivatives a dangerous strategy?
Dipak:
* To most corporates, derivatives like options and other structures sound like a dangerous no go area
* They usually stick to transacting a simple forward contract, as it is a product that most people understand as a riskless solution to hedge their risk rather than use an option.
* However many corporates today, especially in the small-mid cap segment, might not realise that a forward contract is actually a combination of 2 option contracts.
* They buy one option and they sell another option, which locks them into a fixed rate.
* The option they buy provides them with protection should the market go against them and the sold option prevents them from benefiting from a favourable move in market.

Of course the aim should always be to keep things simple, but bearing in mind that simple products are not always the most effective way to manage a risk.

Keshav: What are the challenges faced by the Treasurer today?
Dipak:
* Geopolitical tensions and events such as COVID are some of the biggest challenges facing markets today, which in turn make it extremely difficult for Treasurers to manage their risk.
* Treasurers have to deal with Markets not only move on back of tweets from powerful politicians and comments from financial authorities but most correlations that we observed historically have also been broken.
* The text book lessons people learnt about various economic indicators and their impact on markets, no longer seems to necessarily hold.
* Predicting moves is not doubt extremely difficult and one cannot get it right all the time. Issue today is that it is even more difficult today than it has ever been in the past.
* Treasurers need to take a holistic view of risk but it is easier said than done. Especially so in large complex organisations, unless they have robust MIS that assists in managing such a risk. Technology and developing bespoke analytical models is key element in success of such a process.

Keshav: And what about benchmarking?
Dipak:
* Good point, benchmarking is another key step in this process in terms of what competition is doing and how they are hedging a similar risk.
* This is important from the competitive advantage point of view.
* But then remember all said, without volatility life can be a bit boring for Treasurers
* But increased levels of volatility can be extremely challenging but it also makes their life and work more interesting.
* Proactive risk management is key to the success of any Treasurer as it helps them remain on their toes and constantly thinking futuristically.

Keshav: Given what's happening around us with COVID-19, how should Treasurers hedge going ahead?
Dipak:
* COVID has resulted in market disruption at unprecedented levels making the 2008 banking crisis look quite small in comparison.
* In terms of what Treasures can do, there is no one size fits all and each corporate would have their own challenges to be contend with and might be very different to others.
* So it is difficult to answer this question in a generic way but it has to be addressed on a case by case basis.

Keshav: Could you please share the top 5-6 tips for Treasurers?
Dipak:
At a high level one can say:
1. Think global and use technology and systems to consolidate the enterprise wide financial risk
2. Consider risk across asset classes to ensure impact of correlation is taken into account
3. Determine hedge ratios in line with internal guidelines policies
4. From natural hedging to financial derivatives, all ideas should be considered as potential methods of hedging. Simple strategies might not always offer the most effective solution for certain exposures.
5. Markets are dynamic and so should the hedging strategy be. A strategy might work under certain conditions but not necessarily in all.
6. Use educated guesses. For instance a balanced portfolio approach using a mix of hedging tenors and solutions, which are scientifically arrived might not always help you buy low and sell high, but it will over time help you reduce volatility on your exposure.
7. Last but not the least, be ready for the black swan event and regularly consider tail risk hedges.

Keshav: Thank you for your time and insights today, Dipak.

Keshav: Ladies and gentlemen - that was Dipak Khot, partner at Adan Corporate, leading our Market and Treasury Risk Management practice. Our experts with decades of experience in risk management will work for you and help you understand, formulate and implement strategies to offset your identified market risks. Do check out his profile on our website www.adancorporate.com and get in touch with him at Dipak.Khot@adancorporate.com. Looking forward to seeing you on the next episode.