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Chapter 1 Foreign Exchange Risk Management

1.1 Introduction

The foreign exchange market is a global decentralised or over-the-counter market for the
trading of the currencies. This market determines the foreign exchange rate. It includes all
aspects of buying, selling and exchanging of currencies at a current or determined prices. The
main participants in this market are the larger international banks. Financial centers around
the world function as anchors of trading between a wide range of multiple types of buyers
and sellers around the clock. Foreign exchange is a risk factor that is often overlooked by
small and medium sized enterprises that wish to enter, grow, and succeed in the global
marketplace.

The foreign exchange market assists international trade and investment by enabling currency
conversion. For example, it permits a business it the United States to import goods from the
European Union member states especially Euro zone members and pay Euros, even though
its income is in United States dollars. It also supports direct speculation in the value of
currencies, and the carry trade, speculation on the change in interest rates in two currencies.

In a typical foreign exchange transactions, a party purchases a quantity of one currency by


paying a quantity of another currency. The modern foreign exchange market began forming
during the 1970s after three decades of government restrictions on foreign exchange
transactions, when countries gradually switched to floating exchange rates from the previous
exchange rate regime, which remained fixed as per the Bretton Woods System.

Foreign exchange risk is a financial risk that exists when a financial transaction is
denominated in a currency other than that of the base currency of the company. The exchange
risk arises when there is a risk of appreciation of the base currency in relation to the
denominated currency or depreciation of the denominated currency in relation to the base
currency. The risk is that there may be an adverse movement in the exchange rate of the
denomination currency in relation to the base currency before the date when the transaction is
completed.
The foreign exchange market is unique because:

 Its huge trading volume representing the largest asset class in the word leading to high
liquidity
 Its geographical dispersion
 Its continuous operation: 24 hours a day expect weekends
 The variety of factors that affect exchange rates
 The low margins of relative profit compared with other markets of fixed income
 The use of leverage to enhance profit and loss margins and with respect to account
size.

Overtime, the foreign exchange market has been an invisible hand that guides the sale of
goods, services and raw materials on every corner of the globe. The forex market was created
by necessity. Traders, bankers, investors, importers and exporters recognized the benefits of
hedging risk, or speculating for profit. The fascination with this market comes from its sheer
size, complexity and almost limitless reach of influence.

The market has its own momentum, follows its own imperatives, and arrives at its own
conclusions. These conclusions impact the value of all assets, it is crucial for every individual
or institutional investor to have an understanding of the foreign exchange markets and the
forces behind this ultimate free-market system.

Requisites for Foreign Exchange deals

 Exchange of two currencies


 At an agreed exchange rate
 For a specified settlement date
 Settlement instructions for receipt and payment
 Confidence that the terms of the trade will be adhered to

Definitions:

1. The forex, and also known as ‘The foreign Exchange’ market exists wherever one
currency is traded for another. It’s the largest financial market in the world. Simply, if
we compare the New York Stock Exchange vs. Changing hands in forex, we will
discover Forex market is much larger than Equity and Treasury markets combined.
2. An over-the-counter market where buyers and sellers conduct foreign exchange
transactions. The Forex market is useful because it helps enable trade and transactions
between countries, and it also allows an investment opportunity for risk seeking
investors who don’t mind engaging in speculation. Individuals who trade in the Forex
market typically look carefully at a country’s economic and political situation, as
these factors can influence the direction of its currency. One of the unique aspects of
the Forex market is that the volume of trading is so high, partially bcause the units
exchanged are so small.

1.2 Need for the study

 To identify the factors that cause difficulties in dealing with foreign exchange risk
 To study the relationships between the extent in the use of the various foreign
exchange risk management technique.
 To gain knowledge about foreign exchange risk management and its impact factors.

1.3 Objectives

 To suggest the investor on understanding the foreign exchange risk management.


 To study the exchange control methods and rate determination.
 To analyze the exchange rates fluctuation in dollar.
 To find out the types of foreign exchange exposure including risk and risk
management techniques which the company is used to minimize the risk.

1.4 Scope of the study

This study extensively focuses on the foreign exchange market and exchange rate volatility.
Within the present model of exchange rate determination, a forecasting exercise can be done
to know the future market and to see how sensitive they are to change in each model.
1.5 Research Methodology

This part of the study presents methods by which the research was conducted and the
procedures used for the study. The research design, data source, preliminary administration,
instrumentation, analysis of data, and research assumptions and delimitations are explained
here.

The primary data is collected by contacting foreign exchange brokers situated in Hyderabad
and also collected some information from foreign investors.

The secondary data is collected from the internet, magazines and articles.

Sample size- Euro and Dollar price

Sample duration- 3years data is taken

Statistical tools- The statistical tools used are correlation and beta coefficient.

1.6 Limitations

 This analysis is purely based on secondary data, so any error in this data might also
affect the study undertaken.
 Confidential matters were not disclosed by the company.
 There were time constraints.
 For analysis I have taken only 3 year data.
 Most of the foreign exchange risk depends on many factors. It is very crucial to
conclude.
 Mathematical and statistical errors may occur.
 Conclusions and suggestions may seem to be biased.
CHAPTER 2

REVIEW OF LITERATURE

Francis X. Diebold, Jinyong Hahn and Anthony S. Tay

We provide a framework for evaluating and improving multivariate density forecasts. Among
other things, the multivariate framework lets us evaluate the adequacy of density forecasts
involving cross-variable interactions, such as time-varying conditional correlations. We also
provide conditions under which a technique of density forecast “calibration” can be used to
improve deficient density forecasts, and we show how the calibration method can be used to
generate good density forecasts from econometric models, even when the conditional density
is unknown. Finally, motivated by recent advances in financial risk management, we provide
a detailed application to multivariate high-frequency exchange rate density forecasts.

Jonathan Batten, Robert Mellor, Victor Wan

This industry-wide, cross-sectional study concentrates on recent foreign exchange risk


management practice and product usage of large Australian-based firms. Results are
discussed from an empirical field study of seventy-two firms operating in Australia. Based on
a statistical analysis of five firm-specific variables with six management-practice variables,
conclusions are drawn on the foreign exchange risk management practices and financial
product usage of firms operating in Australia.

Francis X. Diebold, Til Schuermann, John D. Stroughair.

Extreme value theory (EVT) holds promise for advancing the assessment and management of
extreme financial risks. Recent literature suggests that the application of EVT generally
results in more precise estimates of extreme quantiles and tail probabilities of financial asset
returns. This article assesses EVT from the perspective of financial risk management. The
authors believe that the recent optimism regarding EVT may be appropriate but exaggerated,
and that much of its potential remains latent. They support their claim by describing various
pitfalls associated with the current use of EVT techniques, and illustrate how these can be
avoided. In conclusion, the article defines several specific research directions that may further
the practical and effective application of EVT to risk management.

BERNARD DUMAS, BRUNO SOLNIK

Departures from purchasing power parity imply that different countries have different prices
for goods when a common numeraire is used. Random changes in exchange rates are
associated with changes in these prices and constitute additional sources of risk in asset
pricing models. This article investigates whether exchange rate risks are priced in
international asset markets using a conditional approach that allows for time variation in the
rewards for exchange rate risk. The results for equities and currencies of the world's four
largest equity markets support the existence of foreign exchange risk premium.

Kent D. Miller

Treatments of risk in the international management literature largely focus on particular


uncertainties to the exclusion of other interrelated uncertainties. This paper develops a
framework for categorizing the uncertainties faced by firms operating internationally and
outlines both financial and strategic corporate risk management responses.

Gregory W.Brown

This study investigates the foreign exchange risk management program of HDG Inc., a US-
based manufacturer of durable equipment. Precise examination of factors affecting why and
how the firm manages its foreign exchange exposure are explored through the use of internal
firm documents, discussions with managers, and data on3,110 foreign-exchange derivative
transactions. Informational asymmetries, facilitation of internal contracting, and competitive
pricing concerns appear to motivate why the firm hedges. How HDG hedges depends on
accounting treatment, derivative market liquidity, exchange rate volatility, exposure
volatility, and recent hedging outcomes
Joshua Abor

This paper reports on the foreign exchange risk‐management practices among Ghanaian firms
involved in international trade. The study focuses on how Ghanaian firms manage their
foreign exchange risk and the problems involved in managing exchange rate exposure. It also
seeks to ascertain the extent to which these firms use foreign exchange risk management
techniques.

Antti Hakkarainen, Eero Kasanen and Vesa Puttonen

This study investigates foreign exchange risk management in major Finnish firms. The shift
to a floating foreign‐exchange regime has increased risk aversion and intensified risk
management in a number of firms. The managers feel they can forecast foreign exchange
development, and that they have been successful in risk management. Managers pay attention
to economic exposure, and instead of being closed out, the foreign exchange exposures are
managed actively. The transaction risk of both agreed‐upon flows and budgeted items are
hedged. Accounting exposures are also managed extensively.

Tom Aabo, Esben Hog and Jochen Kuhn (published 14 September 2009)

Empirical research has focused on export as a proxy for exchange rate exposure and the use
of foreign exchange derivatives as an instrument to deal with this exposure. This empirical
study applies an integrated foreign exchange risk management approach with a particular
focus on the role of import in medium-sized manufacturing firms in Denmark (a small, open
economy). We find a strong, negative relation between import and the use of foreign
exchange derivatives on the aggregate level. Our findings are consistent with the notion that
firms use import to match the foreign exchange exposure created by foreign sales activities.

Thomas E. Copeland and Yash Joshi

Many organizations have sought to totally eliminate currency exchange risks in an effort to
control cashflow. However, rarely do companies succeed at achieving this since it is almost
impossible. Foreign exchange risk management programs can still be helpful when based on
the use of financial derivatives and other strategies, such as interest rate risk management and
commodity hedging. Hedging foreign exchange attempts to reduce the volatility of
cashflows. Value creation in foreign exchange hedging are discussed..

Niso Abuaf (Published in 1986)

Since the 1970s, exchange rate volatility has increased markedly and, with it, the levels of
foreign exchange risk. In fact, fluctuations in financial variables such as exchange rates and
interest rates have produced capital gains and losses so large as to swamp many companies’
operating results. In response, many financial managers have turned to hedging as well as to
more active risk management strategies in the foreign exchange markets. With this as
background, I then go on to discuss forecasting techniques and risk management strategies.

Stephen D. Makar , Jay DeBruin and Stephen P. Huffman (Published


online: 28 Feb 2012)

This study investigates how large US multinational companies use foreign exchange
derivatives (FXDs) to manage currency risk. The study tests whether a company's use of
FXDs is associated with its exposure to changing exchange rates, and whether such risk
management practices are affected by the company's degree of geographic diversification
indicative of natural hedging. To date, the empirical evidence on the use of derivatives by
large companies is limited, and the impact of geographic diversification on FXD use, in
particular, has not been investigated. This study addresses such a gap in the literature and
provides results that are consistent with expectations. Specifically, the evidence indicates that
large companies' FXD use increases with the level of foreign currency exposure as well as
with the degree of geographic concentration indicative of using less natural hedging.
Evidence consistent with economies of scale in FXD use is also provided.

Gordon Sirr, John Garvey and Liam Gallagher

The correlation between a portfolio's equity and foreign exchange components plays a role in
reducing foreign exchange exposure. Investors must account for this correlation when
determining the extent of foreign exchange risk in emerging market equity portfolio
investments. This study employs a VaR risk factor mapping technique, under the variance–
covariance VaR approach, to decompose portfolio risk in Argentina, Brazil, China, India,
Mexico and Russia. For comparison purposes, the same technique is used to decompose
portfolio risk in the US. The study is conducted from the perspective of a European equity
investor with a portfolio of equities in each country. By employing the VaR decomposition
technique, the correlation between a portfolio's equity and foreign exchange components is
taken into account and portfolio foreign exchange risk is extracted from portfolio systematic
risk. Our results uniquely demonstrate significant variation in foreign exchange risk in
emerging markets.

Woochan Kim and Taeyoon Sung (Published on 15 August 2005)

We examine factors that determine firms' decision to manage foreign exchange risk in an
emerging market. Using survey data on the FX risk management of 223 non-financial firms
in Korea, we find that firm size, a proxy for hedging costs, is the dominant factor. Consistent
with this finding, firm size has stronger explanatory pow1er for external methods than for
internal methods, which have relatively lower costs. Besides firm size, export revenue is
important in determining the hedging. This is particularly so for public firms, which are
subject to disclosure requirements, and thus have more incentive for a stable net income
stream.

Robert Lindley (Published: September 1, 2008)

Much progress has been made in reducing settlement risk in foreign exchange markets,
particularly through use of CLS Bank. However, the remaining exposures are sometimes still
significantly large and not always well managed, creating the potential for systemic risk. To
address this problem, it is particularly important that prudential regulators promote effective
management of the risk by market participants.
Chapter 3 Company Profile

Karvy Stock Broking Pvt Ltd

About Karvy
The Karvy group was formed in 1983 at Hyderabad, India. Karvy ranks among the top player
in almost all the fields it operates. Karvy Computershare Limited is India’s largest Registrar
and Transfer Agent with a client base of nearly 500 blue chip corporate’s, managing over 2
crores accounts. Karvy Stock Brokers Limited, member of National Stock Exchange of India
and the Bombay Stock Exchange, ranks among the top 5 stock brokers in India. With over
6,00,000 active accounts, it ranks among the top 5 Depositary Participant in India, registered
with NSDL and CDSL. Karvy Comtrade, Member of NCDEX and MCX ranks among the top
3commodity brokers in the country. Karvy Insurance Brokers is registered as a Broker with
IRDA and ranks among the top 5 insurance agent in the country. Registered with AMFI as a
corporate Agent, Karvy is also among the top Mutual Fund mobilizer with over Rs. 5,000
crores under management. Karvy Realty Services, which started in 2006, has quickly
established itself as a broker who adds value, in the realty sector. Karvy Global offers niche
off shoring services to clients in the US. Karvy has 575 offices over 375 locations across
India and overseas at Dubai and New York. Over 9,000 highly qualified people staff Karvy.

Karvy -Early days


Karvy the name comes from the names of the directors:
K- Mr. Krishna Prasad
A- Mr. Arun
R- Mr. Radha Krishna
V- Mr. Venkat Krishna
Y- Mr. Yogendar

Organization:
Karvy was started by a group of five chartered accountants in 1979. The partners decided to
offer, other than the audit services, value added services like corporate advisory services to
their clients. The first firm in the group, Karvy Consultants Limited was incorporated on 23rd
July, 1983. In a very short period, it became the largest Registrar and Transfer Agent in India.
This business was spun off to form a separate joint venture with Computer share of Australia,
in 2005. Karvy’s foray into stock broking began with marketing IPOs, in 1993. Within a few
years, Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5. Karvy was among the first few members of National
Stock Exchange, in 1994 and became a member of The Stock Exchange, Mumbai in 2001.
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of shares. Today Karvy is among the top 5 Depositary
Participant in India. While the registry business is a 50:50 Joint Venture with Computershare
of Australia, we have equity participation by ICICI Ventures Limited and Barings Asia
Limited, in Karvy Stock Broking Limited. For a snapshot of our organization structure,
please click here. Karvy has always believed in adding value to services it offers to clients. A
top-notch research team based in Mumbai and Hyderabad supports its employees to advise
clients on their investment needs. With the information overload today, Karvy’s team of
analysts help investors make the right calls, be it equities, mf, insurance. On a typical
working day Karvy:
 Has more than 25,000 investors visiting our 575 offices
 Publishes / broadcasts at least 50 buy / sell calls.
 Attends to 10,000+ telephone calls.
 Mails 25,000 envelopes, containing Annual Reports, dividend cheques / advises,
allotment / refund advises
 Executes 150,000+ trades on NSE / BSE.
 Executes 50,000 debit / credit in the depositary accounts Advises 3,000+ clients on
the investments in mutual funds

Present status of Karvy


Present Karvy is a member of National stock Exchange (NSE), the Bombay Stock Exchange
(BSE), and the Hyderabad Stock Exchange (HSE). Market analysis and market predictions
are done b professional management team.
Karvy as covering the spectrum of financial services such as Stock Broking services,
advisory services, stock broking, depository participants, distribution of financial products-
mutual funds, fixed deposits, equities, insurance broking, commodities broking, personal
finance advisory services, merchant banking and corporate finance, placement finance,
placement of equity, IPO’s, among others

VISION OF KARVY
To achieve and sustain market leadership, Karvy shall aim for complete customer
satisfaction, by combining its human and technological resources to provide world class
quality services. In the process, Karvy shall strive to meet and exceed customer’s satisfaction
and set industry standards.
Their values and vision of attaining total competence in their servicing has served as the
building block for creating a great financial enterprise, which stands solid on their fortresses
of financial strength.

MISSION OF KARVY
Our mission is to be a leading and preferred services provider to our customers, and we aim
to achieve this leadership by building an innovative, enterprising, and technology driven
organization which will provide highest standards of services and business ethics.

Karvy Group comprises the following:-


Karvy Consultants Ltd-
As the flagship company of the Karvy group, Karvy Consultant Limited has always enabled
at the heim of organization affairs, pioneering business policies, works ethics and channels of
progress. Karvy as a leader in the registry business now transferred this business into a joint
venture with computer share limited of Australia, the world’s largest registrar. Today, we
service over 6 lacks customer accounts in this business spread across over 250 cities/towns in
India and are ranked amongst the largest Depository participant in the country, Deal in
Register and investment services. We are rated as India’s “Most Admired Registrar” for
overall excellence in volume management, quality processes and technology driven services.
Our services include Initial Public Offers (IPO’s) processing, share holder servicing,
effecting corporate actions, investor information services and host of technology enabled
services to facilitate efficient and effective service delivery.
Karvy Stock Broking Limited-
They offer trading on a vast platform- NSE, BSE, HSE. Information is given as a constant
feedback to our customers through daily reports delivered thrice The Pre- session Report,
where market scenario for the day is predicated, the Mid-session Report, times to arrive
during lunch break, where the market forecasts for the rest of the day is given and the Post-
session Report, the final report for the day where the market and the report itself is reviewed.
A monthly magazine is published “Karvy.... The Finapolis” which analyses the latest stock
market trends and takes a close look at the various investment option, and product available
in the market while a weekly report, called “ Karvy Bazaar Baatein” keeps you ore informed
on the immediate trends in the stock market.

Karvy Investory Services Limited-


Karvy Investor Services Limited, a SEBI registered Merchant Banker is a 100% subsidiary of
Karvy Consultants Limited and is among the top 10 merchant bankers in India today. The
parent company i.e Karvy Consultants Limited was founded by a group of professionals in
1982 and today it has evolved as integrated financial services company of repute, offering
various financial services to suit every requirement/need of our customers. By virtue of its
access to millions of Indian Shareholders, in addition to companies, banks and financial
institutions, Karvy has in the process built up a positive reputation with regulatory authorities
and other government agencies.

As an investment banker, Karvy provides

 Management of capital issues


 Management of buybacks, takeovers and delisting offers
 Private placement of debt and equity
 Mergers and amalgamations
 Loan syndication

Karvy Commodities Broking Private Limited


Focused on taking commodities trading to new dimensions of reliability and profitability. We
have made commodities trading an essentially age-old practice into a sophisticated and
scientific investment option.
Here we enable trade in all goods and products of agricultural and mineral origin that include
lucrative commodities like gold, silver and other popular items like oil, pulses and cotton
through a well-systematized trading platform. Our technological and infrastructure strengths
and especially our street-smart skills make us an ideal broker.
Regular trading and workshops and seminars are conducted to hone trading strategies to
perfection. Every move made is a calculated one based on reliable research that is converted
into valuable information through daily, weekly and monthly newsletters, calls and intraday
alerts. Further, personalised service is provided here by a dedicated team committed to giving
hassle-free service while the brokerage rates offered are extremely competitive. Our
commitment to excel in this sector stems from the immense importance those commodities
broking has to a cross-section of investors, farmers, exporters, importers, manufacturers and
the Government of India.

Karvy Mutual Funds Services-


Investment is the stepping stone to achieve one’s financial dreams. Mutual funds offer an
opportune way to long-term wealth creation. However, with more and more funds flooding
the market, the task of selecting the most suitable scheme gets even more complicated.
Mutual fund advisory service at Karvy guides you through this maze and ensures that your
investments are backed by our quality research. We, at Karvy help you to reach your goals by
offering:
 Products of 33 AMC’s
 Research reports
 Customized mutual fund portfolios
 Portfolio revision
 Access to online consolidated portfolio statement

And other companies like,

 Karvy fixed income securities and trading


 IPO Introduction pvt ltd
 Karvy reality ltd
 Karvy insurance broking private ltd
 Karvy portfolio management service ltd
 Karvy depository services ltd.
STRATEGY OF THE COMPANY
Karvy believes that the foremost ingredient for success in the has been the cooperation ability
to continuously evolve both organizational structure and product offerings, thereby remaining
on the cutting financial services.
Karvy believes that three capitals viz., financial, human and technology would drive the
financial services sector in the future and draw the boundaries for achieving leadership.
Karvy believes that customized solutions are now the key drivers for market share and profit
margins

Retail Services

1. Equities and Derivatives

“It pays well to be informed and stay connected” – a philosophy that drives the research team
at KARVY to produce and deliver in-depth and incisive market research to you. All of
KARVY’s businesses are backed by a dedicated research unit which strives to keep investors
abreast with news, information, events and conditions of markets.

Penetrative and investigative research techniques unearth a wealth of information that


empowers investors in their investment decisions. The KARVY research team creates the
following reports and publications for consumption by investors in the Indian equity markets.

2. Commodities

Commodities market, contrary to the beliefs of many people, has been in existence in India
through the ages. However the recent attempt by the Government to permit Multi-commodity
National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges
Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange
(NCDEX) have come into being. These exchanges, by virtue of their high profile promoters
and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures
and a hassle-free settlement system. The futures contracts available on a wide spectrum of
commodities like Gold, Silver, Cotton, Steel, Soya oil, Soya beans, Wheat, Sugar, Chana etc.,
provide excellent opportunities for hedging the risks of the farmers, importers, exporters,
traders and large scale consumers. They also make open an avenue for quality investments in
precious metals. The commodities market, as it is not affected by the movements of the stock
market or debt market provides tremendous opportunities for better diversification of risk.
Realizing this fact, even mutual funds are contemplating of entering into this market. Karvy
Comtrade Limited is another venture of the prestigious Karvy group. With our well
established presence in the multifarious facets of the modern Financial services industry from
stock broking to registry services, it is indeed a pleasure for us to make foray into the
commodities derivatives market which opens yet another door for us to deliver our service to
our beloved customers and the investor public at large. With the high quality infrastructure
already in place and a committed Government providing continuous impetus, it is the
responsibility of us, the intermediaries to deliver these benefits at the door-steps of our
esteemed customers. With our expertise in financial services, existence across the lengths and
breadths of the country and an enviable technological edge, we are all set to bring to you, the
pleasure of investing in this burgeoning market, which can touch upon the lives of a vast
majority of the population from the farmer to the corporate alike. We are confident that the
commodity futures can be a good value addition to your portfolio. The company provides
investment, advisory and brokerage services in Indian Commodities Markets. And most
importantly, we offer a wide reach through our branch network of over 225 branches located
across 180 cities.

3. Mutual Funds Services

Investment is the stepping stone to achieving one's financial dreams. Mutual funds offer an
opportune way to long-term wealth creation. However, with more and more funds flooding
the market, the task of selecting the most suitable scheme gets even more complicated.
Mutual Fund Advisory Service at Karvy guides you through this maze and ensures that your
investments are backed by our quality research. We, at Karvy help you to reach your goals by
offering:

Products of 33 AMCs

Research reports (existing funds & NFOs; strategy reports etc.)

Customized mutual fund portfolios


Portfolio revision (depending on changing market outlook and evolving trend )
Access to online consolidated portfolio statement

4. Insurance Broking Services

At Karvy Insurance Broking (P) Ltd. we provide both life and non-life insurance products to
retail individuals, high net-worth clients and corporates. With the opening up of the insurance
sector and with a large number of private players in the business, we are in a position to
provide tailor made policies for different segments of customers. In our journey to emerge as
a personal finance advisor, we will be better positioned to leverage our relationships with the
product providers and place the requirements of our customers appropriately with the product
providers. With Indian markets seeing a sea change, both in terms of investment pattern and
attitude of investors, insurance is no more seen as only a tax saving product but also as an
investment product. By setting up a separate entity, we would be positioned to provide the
best of the products available in this business to our customers.

5. Currency Derivatives

Karvy Forex & Currency Private Limited (KFCL) is another business enterprise of the
prestigious Karvy group. Having laid a strong foundation in Indian financial services, it is
indeed a pleasure for the Karvy group to venture into the currency derivatives segment. This
enables us to provide extended services to our esteemed customers, thereby making the group
a single window for all financial services .KFCL offers advisory and brokerage services for
the Indian currency derivative markets. We provide online trading platforms to our clients
that enable them to trade whenever they choose while receiving instant professional support.
With our powerful expertise in financial services that exists across India, along with an
enviable technological edge, we are all set to bring to you the opportunity of investing in the
rapidly growing currency market. The currency derivatives market will be an added
advantage to your portfolio as it will help you to manage your price risks and add to your
investment avenues. Today, we have an extensive network throughout the country, with225
branches spread across 180 cities.
INDUSTRIAL PROFILE

The foreign exchange market in India has been around for about 40 years now. The market
started operating in 1978 after the government's decree. After its establishment, the forex
market has seen significant growth over the years. The market is regulated by the central
government and all aspects of the trade are defined by national laws. There are many things
about this market that make it distinct from other markets in the world. To start with, its
structure is slightly unique and defined by different market dynamics. In order to understand
the forex market in India, you need to study its structure and what makes it different.

The foreign exchange currency trading in India is growing at a really good pace however it is
said that the forex market is still in the early phase in India. Nevertheless there are already
several big players in the Indian forex market. Let us find out details on the forex market
history in India to know more about Indian forex market.The history of forex market in India
owes its origin to an important decision taken by the Reserve Bank of India (RBI) in the year
1978 which allows banks to undertake intra-day trading in foreign currency exchange. As a
result of this step, the agreement of maintaining ‘square’ or ‘near square’ position was to be
complied with only at the close of business every day. The history of currency trading in
India also clearly shows that during the initial period when these economic reforms started,
the exchange rate of national currency i.e. Indian rupee used to be determined by the RBI in
terms of a weighted basket of currencies of India’s major trading partners. Moreover, there
were some fairly significant restrictions on the current account transactions.Then again during
early nineties, more economic reforms were introduced which witnessed the important two-
step downward adjustment in the exchange rate of the Indian rupee in order to place it at a
suitable level in line with the inflation differential so that the competitiveness in exports could
be maintained. With these economic reforms which resulted in the unification exchange rate
of the rupee heralded the commencement of the new era of market determined forex currency
rate regime of rupee in the Indian forex history which was based on the demand and supply
principle in the forex market.Another landmark in Forex history of India came with the
appointment of an Expert Group committee on Forex currency in 1994. This committee was
made to study the forex market in detail so that step can be taken out to develop, deepen and
widen the forex market in India. The result of this exercise was that banks were significant
freedom in many of its market operations related to like forex market development and
liberalization. The freedomwas granted to banks in term of fixing their trading limits, allowed
to borrow and invest funds in the overseas markets up to specified limits, accorded freedom
to make use of derivative products for asset-liability management purposes. The corporate
were granted the flexibility to book forward cover based on previous turnover and were given
freedom to make use of financial instruments like interest rates and currency swaps in the
international currency exchange market. The other feature of forex history in India is that a
large sum of foreign exchange in India came through the large Indian population working in
foreign countries. However, the common man was not much interested in forex trading. the
things are changing now and with the growing economy more and more people areshowing
interest in forex trading and are looking out for hedging currency risks. National Stock
Exchange of India popularly known as NSE was the first recognized exchange in Indian forex
history to launch forex currency futures trading in India. These currency futures are beneficial
over overseas forex trading especially to comparatively small traders and retail investors.
Another important point to know is that before discussing the history of forex market in
India, it is important to know the central government of India has the powers to control
transactions in foreign exchange and hence forex transactions in India are managed by the
government authorities

Besides the primary powers of demand and supply, the Indian exchange rate is affected by
following factors:
1. RBI Intervention: When there is too much volatility in the rupee-dollar rates, the
RBI prevents rates going out of control to protect the domestic economy. The RBI does this
by buying dollars when the rupee appreciates too much and by selling dollars when the rupee
depreciates way too much.
2. Inflation: When inflation increases there will be less demand of domestic goods
and more demand of foreign goods i.e. increases demand for foreign currency, thus value of
foreign currency increases and home currency depreciates thus negatively affecting exchange
rate of home currency.
3. Imports and Exports: Importing foreign goods requires us to make payment in
foreign currency thus strengthening the foreign currency’s demand. Increase in demand
increases the value of foreign currency and exports do the reverse.
4. Interest rates: The interest rates on Government bonds in emerging countries such
as India attract foreign capital to India. If the rates are high enough to cover foreign market
risk, money would start pouring in India and thus would provide a push to rupee demand thus
appreciating rupee value for exchange.
5. Operations: The major sources of supply of foreign exchange in the Indian foreign
exchange market are receipts on account of exports and invisibles in the current account,
drafts, travellers cheque and inflows in the capital account such as foreign direct investment
(FDI), portfolio investment, external commercial borrowings (ECB) and non-resident
deposits. On the other hand, the demand for foreign exchange rises from imports and
invisible payments in the current account, amortisation of ECB and external aid, redemption
of NRI deposits and outflows on account of direct and portfolio investment.

HISTORY OF FOREIGN EXCHANGE MARKET:

Gold Standard System:

The creation of the gold standard monetary system in 1875 is one of the most important
events in the history of the forex market. Before the gold standard was created, countries
would commonly use gold and silver as method of international payment. The main issue
with using gold and silver for payment is that the value of these metals is greatly affected by
global supply and demand. For example, the discovery of a new gold mine would drive gold
prices down given the sharp increase in gold supply.

The basic idea behind the gold standard was that governments guaranteed the conversion of
currency into a specific amount of gold, and vice versa. In other words, a currency was
backed by gold. The gold standard eventually broke down during the beginning of World
War I. Due to the political tension with Germany, the major European powers felt a need to
complete large military projects, so they began printing more money to help pay for these
projects. The financial burden of these projects was so substantial that there was not enough
gold at the time to exchange for all the extra currency that the governments were printing.

Although the gold standard would make a small comeback during the years between the
wars, most countries had dropped it again by the onset of World War II. However, gold never
stopped being the ultimate form of monetary value and is generally regarded as a safe haven
for those seeking stability.

Bretton Woods System:

Before the end of World War II, the Allied nations felt the need to set up a monetary system
in order to fill the void that was left when the gold standard system was abandoned. In July
1944, more than 700 representatives from the Allies met in Bretton Woods, New Hampshire,
to deliberate over what would be called the Bretton Woods system of international monetary
management.

The main feature of Bretton Woods was that the U.S. dollar replaced gold as the main
standard of convertibility for the world's currencies. Furthermore, the U.S. dollar became the
only currency in the world that would be backed by gold. Over the next 25 or so years, the
system ran into a number of problems. By the early 1970s, U.S. gold reserves were so low
that the U.S. Treasury did not have enough gold to cover all the U.S. dollars that foreign
central banks had in reserve. Finally, on August 15, 1971, U.S. President Richard Nixon
closed the gold window, essentially refusing to exchange U.S. dollars for gold. This event
marked the end of Bretton Woods.

Even though Bretton Woods didn't last, it left an important legacy that still has a significant
effect today. This legacy exists in the form of the three international agencies created in the
1940s: the International Monetary Fund, the International Bank for Reconstruction and
Development (now part of the World Bank) and the General Agreement on Tariffs and Trade
(GATT), which led to the World Trade Organization.

PROBLEMS IN INDIAN FORIGN EXCHANGE MARKET

Our foreign exchange market suffers from several constraints.


i) There are a lot of ceilings on open positions and gaps and hence there is a virtual absence
of market making and position trading.
ii) There is prohibition of initiating transactions in the cross currency in the overseas market.
iii) Besides the forward contracts, there is no free access to the other products like futures,
swaps, etc. The market lacks the required liquidity and depth for the derivatives to be
economically viable.

DIFFERENT CURRENCY

SWIFT CODE CURRENCY NAME


USD US Dollar
EUR Euro
GBP Great Britain Pound
JPY Japanese Yen
AUD Australian Dollar
AED UAE Dirham
SAR Saudi Arabian Riyal
KWD Kuwaiti Dinar
CAD Canadian Dollar
ZAR South African Rand
HKD Hong Kong Dollar
MYR Malaysian Ringgit
NZD New Zealand Dollar
SGD Singapore Dollar
NOK Norwegian Krone
CHF Swiss Franc
SEK Swedish Krone
DKK Danish Kroners
THB Thai Bhat
BHD Bahrain Dinar
OMR Oman Rial
QAR Qatar Rial
CNY Chinese Yaun
STRUCTURE OF FOREX MARKET IN INDIA

Like other forex markets in the world, the forex in India consists of several stakeholders. The
main stakeholders in this market are:
 Traders
 Banks /Authorized dealers
 The Reserve Bank of India

Traders
The three actors mentioned above play different roles in the trade. Traders are generally all
individuals in the public who are also corporate customers of the banks. These customers use
the banks as authorized dealers to access the forex market. There are traders of different kinds
but all of them are able to access the market only through dealers. This is much like
elsewhere in the world where brokers are the intermediaries between the forex and ordinary
traders.

Banks
The banks, on the other hand, are the legally authorized institutions to handle currency. In
India, banks exist in different tiers and there are clear laws that determine which institution is
categorized as a financial institution. From these legal institutions, all those who want to trade
can create accounts, access the market and choose products that they would like to trade in.
The trading landscape has changed a lot over the years especially since the 1990's when the
Indian regulatory authorities liberalized this market.

Reserve Bank of India


Lastly, the Reserve Bank of India (RBI) is the central financial institution which is
responsible for the monetary policy in India. This institution has been instrumental in shaping
the trading landscape in India. Before 1993, the Indian Rupee had a fixed value which was
determined by the RBI. This meant that the currency only attracted a certain exchange rate
even though the market dynamics were changing. In 1993, though, the RBI repealed the
prevailing law at the time to allow for an exchange rate determined by the market itself. Since
then, the Rupee's value has changed a lot in relation to different currencies.
THE INDIAN FOREX MARKET

Indian foreign exchange market as compared with their American and European counterparts
is still in its infants. The post liberalisation period has witnessed many exchange controls
been lifted and introduction of few “hedging” tools like cross currency option, range
forwards, currency swaps etc., which provide a degree of flexibility to corporates in using the
forex markets effectively. The Rupee has been made fully convertible on current account
accepting the article VIII status laid down by IMF. This step has seen increased volume of
trade in the Indian forex market.

ADMINISTRATION OF FOREIGN EXCHANGE IN INDIA


The foreign exchange market in India functions with a three-tier structure which includes (1)
Reserve Bank of India, at the apex level, (ii) authorised dealers/money changers conducting
foreign exchange trading activities, and (iii) customers which include exporters/importer,
corporates and other foreign exchange earners like NRI’s etc.
The market is highly influenced by State Bank of India and Reserve Bank of India because of
their Sheer Size. The RBI constantly intervenes to keep the rupee from appreciating and is
responsible for highly liquid spot market as it is a last resort buyer of dollars.
The forward market in India is fairly liquid and quotes are easily available up to six months.
The RBI prohibits any international speculative access to rupee.

SIZE AND DEPTH OF THE MARKET


The daily turnover in the Indian Foreign exchange market is over US $400 million that is
dominated by dealings in dollars. The foreign exchange reserve of $30 million provides the
market with enough liquidity.

STATUS OF FOREX MARKET IN INDIA

In 2018, the forex market in India is quite vibrant. Even though it is not the market with the
most daily volume, it is among the top ten markets in the world. As of 2017, the forex assets
in India place it as the 8th best market in the world by forex reserves. The top asset in this
market is the United States as represented by US institutional bonds and government bonds.
The Indian forex reserves are also held in terms of gold. Indeed, India is the first nation in the
world in terms of gold consumption.
Statistically, the Indian forex market has changed a lot. To start with, the daily turnover for
the market is well over several billion dollars down from a couple of millions when it started.
The Indian forex market has several forex players that facilitate the exchange of currency.
The markets in these exchanges have several listed brokers and authorized institutions. There
are several non-bank financial institutions that are legally authorized to facilitate trade in the
Indian market. These institutions are regulated by the FEDAI and they use the USP for better
rates of exchange. The market is open 24 hours every day and it is linked to the rest of the
world markets.

PARTICIPANTS OF FOREIGN EXCHANGE MARKET IN


INDIA

Anyone who exchange currency of one country with another or needs such services is said to
participants in forex market. The main players in forex market are:

a) Customers:
The customers who are engaged in foreign trade participants in foreign exchange market by
availing the service for the agencies under taking foreign exchange operation. It includes
individuals, tourists, investors and exporter’s investment managers and corporate treasures
who exchange domestic for foreign currency and vice versa.

b) Commercial banks:
They are most active players in the forex market. Major commercial banks dealing with
international transactions offer services for conversion of one currency into another. They are
a wide network of branches, corresponding banks all over the world enabling them to
undertake international transactions in an efficient manner.

c) Central banks:
The central banks in the most of the countries have been charge with the responsibilities of
maintaining the external value in the foreign market. When the market rate of the currency
reaches the upper lines called as” Upper Intervention Point” the central banks of that country
must increased the sale of its own currency in exchange of the other currencies. Similarly, the
central banks must sale foreign currencies and buy its own currency when the market rate
reaches the lower line called “Lower Intention Point”.

d) Exchange Brokers:
Forex brokers play a very important role in the forex market. However, the extent to which
services of Forex brokers are utilized depends on the tradition and practices prevailing at a
particular Forex market center.

e) Speculators:
Central banks, commercial banks, corporate and individuals who undertake activity of buying
and selling of foreign currencies for booking short-term profit by taking advantages of
exchange rate movement are known as speculator.

f) Commercial Companies:
An important part of this market comes from the financial activities of companies seeking
foreign exchange to pay for goods and services. Commercial companies often trade fairly
small amounts of compared to those of banks or speculators, and their traders often have little
short term impact on market rates. Nevertheless, trade flows are an important factor in the
long-term direction of a currency’s exchange rate. Some multinational companies can have
an unpredictable impact when very large positions are covered due to exposures that are not
widely known by other market participants.

g) Investment management firms:


Investment management firms use the foreign exchange market to facilitate transactions in
foreign securities. For example, an investment manager with an international equity portfolio
will need to buy and sell foreign currencies in the spot market in order to pay for purchases of
foreign equities. Since the forex transactions are secondary to the actual investment decision,
they are not seen as speculative or aimed at profit-maximization.
CLASSIFICATION OF FOREX MARKET

The foreign exchange market is classified into two types that are as a spot market and
forward market.

SPOT MARKET:

In spot market, currencies are traded for immediate delivery at a rate existing on the day of
transaction. If currency is delivered at the same day it is known as the value-same-day-
contract. If it is done the next, the contract is known as value-next-day-contract. Most of the
markets do the transfer of funds electronically thus savings time and energy. The system
existing in New York is known as clearing house inter bank payment system (CHIPS). The
spot market covers spot quotations, transactions costs and the mechanics of trading.

SPOT QUOTATIONS:

Almost all major newspapers print a daily list of exchange rates. For major currencies, up to
four different quotes are displayed. One is the spot price and the other includes the 30-day,
90-day, 180-day forward prices. These quotes are for trades among the dealers in the inter
market.

In their dealing with non-blank customers, banks in most countries use a system of DIRECT
QUOTATION. A direct exchange rate quotes give the home currency price of certain
quantity of foreign currency quoted. There are expectations to this rule, through banks in
Great Britain quote the value of pound sterling in terms of foreign currency. This method of
INDIRECT QUOTATION is also used in United States for domestic purposes and for the
Canadian dollar.

TRANSACTION COST:

The bid-ask-spread that is the spread between bids and ask rates for a currency is based on
the breadth and depth of the market of that currency as well as on the currency’s volatility.
This spread is usually stated as a percentage cost of transacting in the foreign exchange
market, which is computed as follows:

Percentage spread= (ask price-bid price)/ ask price*100

FORWARD MARKET:

In forward market contracts are made to buy and sell currencies for future deliveries say, after
a fortnight, two month and so on. The rate of exchange for the transactions agreed upon the
ever y day the deal is finalized. The forward rates with varying maturity are quoted in the
newspapers and those rates from the basis of the contract.

CURRENCY FUTURES AND OPTIONS

CURRENCY FUTURES:

Contract for future delivery of specific quantity, of given currency, with the exchange rate
fixed at the time of contract is entered. Futures contracts are similar to the forward contracts
expect that they are traded on organized future exchange and the gains and losses on the
contracts are settled each day.

CURRENCY OPTIONS:

A currency option is no different from a stock option except that the underlying asset in
foreign exchange. The basic premises remain the same. The buyer of option has the right but
not any obligation to enter into a contract with the seller. Therefore the buyer of a currency
option has the right to his advantage to enter into the specified contract.

In every currency transaction one currency is brought and another is sold. For example, an
option to buy US dollar (USD) for Indian Rupee (INR) is an USD call and an INR put.
Conversely, an option to sell USD for INR is an USD put and an INR call. The other basics
like strike price, expiration period, American style or European style are similar to stock
options.
GROWTH OF FOREIGN EXCHANGE MARKET IN INDIA
The Foreign Exchange Market in India is growing very rapidly, since the annual turnover of
the market is more than $400 billion. This Foreign Exchange transaction in India does not
include the Inter-Bank transactions. According to the record of Foreign Exchange in India,
Reserve Bank of India released these transactions. The average monthly turnover in the
merchant segment was $40.5 billion in 2003-04 and the Inter-Bank transaction was $134.2
for the same period. The average total monthly turnover in the sector of Foreign Exchange in
India was about $174.7 billion for the same period. The transactions are made on spot and
also on forward basis, which include currency swaps and interest rate swaps.

The Indian Foreign Exchange Market is made up of the buyers, sellers, market mediators and
the Monetary Authority of India. The main centre of Foreign Exchange in India is Mumbai,
the commercial capital of the country. There are several other centres for Foreign Exchange
Transactions in India including the major cities of Kolkata, New Delhi, Chennai, Bengaluru,
Pondicherry and Cochin. With the development of technologies, all the Foreign Exchange
Markets of India work collectively and in much easier process.

Foreign Exchange Dealers Association is a voluntary association that also provides some help
in regulating the market. The Authorised Dealers and the attributed brokers are qualified to
participate in the Foreign Exchange Markets of India. When the Foreign Exchange Trade is
going on between Authorized Dealers and Reserve Bank of India or between the Authorised
Dealers and the Overseas Banks, the brokers usually do not have any role to play. Besides the
Authorised Dealers and Brokers, there are some others who are provided with the limited
rights to accept the Foreign Currency or Travellers' Cheque; they are the Authorised
Moneychangers, Travel Agents, certain Hotels and Government Shops. The IDBI and Exim
Bank are also permitted at specific times to hold Foreign Currency.

The Foreign Exchange Market in India is a flourishing ground of profit and higher initiatives
are taken by the Central Government in order to strengthen the foundation.
CHAPTER- 4

Theoretical Framework

FOREIGN EXCHANGE RISK MANAGEMENT

DESCRIPTION
As a business engaged in the buying and selling of goods and services overseas, a company is
exposed to foreign exchange risks. These risks arise from the fluctuations in the currency
market, which will impact outgoing payments for imports or incoming funds from exports.
Changes in the exchange rate between two currencies will translate into additional profits or
losses to the payable or receivables. The amount of risk depends on factors such as the
volatilities of the currencies involved and the value of the contract.
Understanding the risk:
 Identify your exposure:
Risk is not just limited to imports and exports. It can exist for any area of a business
that has an international component and requires foreign funds.
For example, these can include:
I. Goods and services for import and export
II. Company assets that are purchased from a supplier abroad
III. Operational costs for overseas offices or factories
IV. Staff’s global travel expenses
 Calculate your exposure:
Figure out the sum value of all the components of business that are exposed to foreign
exchange risk. Then calculate as to what would happen if one currency falls or rises
by a certain amount against another currency. Also consider the timeframe for
payables or receivables and the corresponding profits or losses over 30-60-90 days.
 Confirm your company’s foreign exchange objectives:
Each company will have a different approach to foreign exchange that is based upon
their industry, trade volumes, geographical markets etc. To develop one’s own
company’s strategy, it is important to understand whether or not a company is risk-
adverse, the level of risks for the currencies you deal with and how sophisticated your
knowledge is regarding financial services.

NATURE OF FOREIGN EXCHANGE RISK

Risk exists when the future is unknown or when the actual outcomes deviate from the
expected outcomes. Foreign exchange risk also known as currency risk is one of the market
risks, which is faced by a company that has its operations in more than one country. With
regard to foreign exchange risk, risk exists if and only if, when the actual change deviates
from the expected change in the foreign currency value.
A multinational company has an exposure to foreign exchange risk when the values of its
assets or liabilities change with unexpected change in the foreign currency values. Exposure
is the amount, which is at risk. In the International Finance literature, though the two terms
foreign exchange risk and foreign exchange exposure are being used synonymously, there
exists a slight difference between the two

FOREIGN EXCHANGE RISK MANAGEMENT


FRAMEWORK

Once a firm recognises its exposure, it then has to deploy resources in managing it. A
heuristic for firms to manage this risk effectively is presented below which can be monitored
to suit firm-specific needs i.e, some or all the following tools could be used.
1. Forecasts: after determining its exposure, the first step for a firm is to develop a
forecast on the marker trends and what the main direction/trend is going to be on the foreign
exchange rates. The period for forecasts is typically 6 months. It is important to base the
forecasts on valid assumptions. Along with identifying trends, a profitability should be
estimated for the forecast coming true as well as hiw much the change would be
2. Risk Estimation: based on the forecast, a measure of the Value at Risk and the
profitability of this risk should be as ascertained. The risk that a transaction would fail due to
market-specific problems should be taken into account. Finally, the Systems Risk that can
arise due to inadequacies such as reporting gaps and implementation gaps in the firm’s
exposure management system should be estimated.
3. Benchmarking: given the exposures and the risk estimates, the firm has to set its
limits for handling foreign exchange exposure. The firm also has to decide whether to
manage its exposures on a cost center or profit center basis. A cost center approach is a
defensive one and the main aim is to ensure that cash flows of a firm are not adversely
affected beyond a point. A profit center approach on the other hand is a more aggressive
where the firm decides to generate a net profit on its exposure obver time.
4. Hedging: Based on the limits a firm set for itself to mange exposure, the firms then
decides an appropriate hedging strategy. There are various financial instruments available for
the firm to choose from futures, forwards, options and swaps and issue of foreign debt.
5. Stop Loss: The firms risk management decisions are based on forecasts which are but
estimates of reasonably unpredictable trends. It is imperative to have stop loss arrangements
in order to rescue the firm if she forecasts turn out wrong. For this, there should be certain
monitoring systems in place to detect critical levels in the foreign exchange rates for
appropriate measure to be taken.
6. Reporting and Review: Risk management policies are typically subjected to review
based on periodic reporting. The reports mainly include profit and loss status on open
contracts after marking to market, the actual exchange/interest rate achieved on each
exposure and profitability vis-a-vis the benchmark and the expected changes in overall
exposure due to forecasted exchange or interest rate movements. The review analyses
whether the benchmarks set are valid and effective in controlling the exposures, what the
market trends are and finally whether the overall strategy is working or needs change.

FORIEGN EXCHANGE RISK MANAGEMENT POLICY

As corporations grow beyond their traditional domestic markets and become multinational in
scope, they must develop a financial system capable of managing the transactions and the
risks of the individual operating divisions and of the corporation as a whole. The treasury
division of the multinational corporation fulfills this role, serving as a corporate bank that
manages cash flows within the corporation and between the corporation and its external
partners. Treasury management has both an internal and external dimension. Internally,
treasury must set policies and establish guidelines for how the operating divisions of the firm
are to interact with each other. Treasury also must coordinate the interaction of the firm with
its various external constituents, including suppliers, customers, banks, creditors, equity
investors, and governments.
The way that the firm deals with currency risk is a key element of financial policy. Failure to
set risk management guidelines and then monitor the corporation’s risk management
activities can expose the firm to financial loss or even ruin. Management must decide
whether currency risk exposures will be managed, how actively they will be managed, and
whether the firm is willing to take speculative positions in the pursuit of its business and
financial objectives. Failure to take action in hedging currency risk is a de facto decision to
take a speculative position in foreign exchange. Yet the firm may choose to go well beyond a
passive posture toward currency risk as it attempts to extract as much value as possible from
the firm’s operating cash flows.
Risk management requires skills and knowledge, it also requires infrastructure and data
acquisition and processing.

TYPES OF FOREIGN EXCHANGE RISK

Transaction risk

This is the risk of an exchange rate changing between the transaction date and the subsequent
settlement date, i.e. it is the gain or loss arising on conversion. This type of risk is primarily
associated with imports and exports. If a company exports goods on credit then it has a figure
for debtors in its accounts. The amount it will receive depends on the foreign exchange
movement from the transaction date to the settlement date. As transaction risk has a potential
impact on the cash flows of a company, most companies choose to hedge against such
exposure. Measuring and monitoring transaction risk is normally an important component of
treasury risk management.
The degree of exposure is dependent on:
(a) The size of the transaction, is it material.
(b) The hedge period, the time period before the expected cash flows occurs.
(c) The anticipated volatility of the exchange rates during the hedge period..
Economic risk
Transaction exposure focuses on relatively short-term cash flows effects; economic exposure
encompasses these plus the longer-term affects of changes in exchange rates on the market
value of a company. Basically this means a change in the present value of the future after tax
cash flows due to changes in exchange rates.

There are two ways in which a company is exposed to economic risk.


Directly: If your firm's home currency strengthens, then foreign competitors are able to gain
sales at your expense because your products have become more expensive in the eyes of
customers both abroad and at home.

Indirectly: Even if your home currency does not move vis-a -vis your customer's currency
you may lose competitive position. For example suppose a South African firm is selling into
Hong Kong and its main competitor is a New Zealand firm. If the New Zealand dollar
weakens against the Hong Kong dollar the South African firm has lost some competitive
position.
Economic risk is difficult to quantify but a favoured strategy to manage it is to diversify
internationally, in terms of sales, location of production facilities, raw materials and
financing. Such diversification is likely to significantly reduce the impact of economic
exposure relative to a purely domestic company, and provide much greater flexibility to react
to real exchange rate changes.

Translation risk
The financial statements of overseas subsidiaries are usually translated into the home
currency in order that they can be consolidated into the group's financial statements. Note that
this is purely a paper-based exercise - it is the translation not the conversion of real money
from one currency to another. The reported performance of an overseas subsidiary in home-
based currency terms can be severely distorted if there has been a significant foreign
exchange movement.
If initially the exchange rate is given by $/£1.00 and an American subsidiary is worth
$500,000, then the UK parent company will anticipate a balance sheet value of £500,000 for
the subsidiary. A depreciation of the US dollar to $/£2.00 would result in only £250,000
being translated.

Unless managers believe that the company's share price will fall as a result of showing a
translation exposure loss in the company's accounts, translation exposure will not normally be
hedged. The company's share price, in an efficient market, should only react to exposure that
is likely to have an impact on cash flows.
DATA ANALYSIS AND INTERPRTATION

USD/INR from 1st JANUARY-15 to 31st DECEMBER-15

Date Price Open USD Reserves ROR Risk & Return


Jan-15 62.02 63.18 29227186 -1.84 -53661816.65
Feb-15 61.659 62.005 62423117 -0.56 -34833317.45
Mar-15 62.291 61.712 86306526 0.94 80975302.3
Apr-15 63.529 62.291 10405302 1.99 20679976.04
May-15 63.743 63.531 72398622 0.33 24159084.33
Jun-15 63.604 63.733 14545063 -0.20 -2944021.35
Jul-15 63.988 63.609 44924364 0.60 26767177.53
Aug-15 66.412 63.996 29872334 3.78 112775109.3
Sep-15 65.517 66.398 33134827 -1.33 -43964852.24
Oct-15 65.423 65.524 82482947 -0.15 -12714085.9
Nov-15 66.462 65.413 10484111 1.60 16812915.54
Dec-15 66.208 66.462 75541163 -0.38 -28869813.43

200000000

150000000

100000000

Risk & Return


50000000
USD Reserves

0
Apr-15

Dec-15
May-15

Jun-15

Oct-15
Jan-15

Mar-15

Aug-15

Nov-15
Feb-15

Jul-15

Sep-15

-50000000

-1E+08

The above table and graph are showing the change of USD dollar for a period from 1st
January 2015 to 31st December 2015. In the month of July the risk and return peaked up to
26767177.53 and in the month of January the risk and return tailed down to -53661816.
USD/INR from 1st JANUARY-16 to 31st DECEMBER-16

Date Price Open USD Reserves ROR Risk & Return


Jan-16 67.878 66.209 44312274 2.52 111702616.4
Feb-16 68.208 67.878 59737024 0.49 29042131.35
Mar-16 66.255 68.201 63380402 -2.85 -180845240.2
Apr-16 66.425 66.355 29670258 0.11 3130009.886
May-16 67.209 66.425 52745765 1.18 62254692.9
Jun-16 67.504 67.207 42654296 0.44 18849711.95
Jul-16 66.655 67.524 7993141 -1.29 -10286771.41
Aug-16 66.973 66.72 97541956 0.38 36987582.24
Sep-16 66.556 66.962 96666113 -0.61 -58610020.43
Oct-16 66.686 66.556 25451023 0.20 4971201.68
Nov-16 68.598 66.685 92719826 2.87 265986394.4
Dec-16 67.955 68.595 36063414 -0.93 -33647620.03

400000000

300000000

200000000

Risk & Return


100000000
USD Reserves

0
Apr-16

May-16

Dec-16
Jan-16

Mar-16

Aug-16

Oct-16
Jun-16

Jul-16

Nov-16
Feb-16

Sep-16

-1E+08

-2E+08

The above table and graph are showing the change of USD dollar for a period from 1st
January 2016 to 31st December 2016. In the month of August the risk and return peaked up to
36987582.24 and in the month of September the risk and return tailed down to -58610020.43
USD/INR from 1st JANUARY-17 to 31st DECEMBER-17

Date Price Open USD Reserves ROR Risk & Return


Jan-17 67.515 67.97 81742051 -0.67 -54719189.65
Feb-17 66.725 67.675 7199759 -1.40 -10106791.36
Mar-17 64.86 66.7 16941767 -2.76 -46735908.97
Apr-17 64.29 64.82 51428436 -0.82 -42050402.78
May-17 64.51 64.275 84709712 0.37 30971267.71
Jun-17 64.62 64.487 45619277 0.21 9408661.964
Jul-17 64.2 64.68 75457376 -0.74 -55998052.69
Aug-17 63.935 64.105 13137820 -0.27 -3484017.471
Sep-17 65.31 63.925 47117895 2.17 102085701.3
Oct-17 64.75 65.6 95710829 -1.30 -124015555.9
Nov-17 64.49 64.71 4751814 -0.34 -1615513.955
Dec-17 63.84 64.505 23761452 -1.03 -24496342.27

150000000

100000000

50000000

Risk & Return


0
USD Reserves
Apr-17

May-17
Mar-17

Dec-17
Aug-17
Jan-17

Jun-17

Oct-17

Nov-17
Feb-17

Jul-17

Sep-17

-50000000

-1E+08

-1.5E+08

The above table and graph are showing the change of USD dollar for a period from 1st
January 2017 to 31st December 2017. In the month of June the risk and return peaked up to
9408661.964 and in the month of February the risk and return tailed down to -10106791.36
USD/INR from 1st JANUARY-18 to 31st DECEMBER-18

Date Price Open USD Reserves ROR Risk & Return


Jan-18 63.55 63.86 34051853 -0.49 -16530025.73
Feb-18 65.21 63.65 9452794 2.45 23167884.74
Mar-18 65.115 65.205 58850510 -0.14 -8122913.734
Apr-18 66.46 65.12 95965395 2.06 197471789.5
May-18 67.43 66.46 11116915 1.46 16225410.1
Jun-18 68.46 67.46 37861926 1.48 56125001.48
Jul-18 68.46 68.495 67674964 -0.05 -3458097.292
Aug-18 71.005 68.555 88253915 3.57 315399448.3
Sep-18 72.51 70.795 23436873 2.42 56775531.03
Oct-18 73.96 72.61 66382794 1.86 123422079.5
Nov-18 69.65 73.86 3771701 -5.70 -21498593.57
Dec-18 69.57 69.88 57062038 -0.44 -25313726.07

450000000

400000000

350000000

300000000

250000000
Risk & Return
200000000
USD Reserves
150000000

100000000

50000000

0
Dec-18
Apr-18

May-18

Aug-18
Feb-18

Oct-18
Jan-18

Mar-18

Jun-18

Jul-18

Nov-18
Sep-18

-50000000

The above table and graph are showing the change of USD dollar for a period from 1st
January 2018 to 31st December 2018. In the month of September the risk and return peaked
up to 56775531.03 and in the month of January the risk and return tailed down to -
16530025.73
EURO/INR from 1st JANUARY-15 to 31st DECEMBER-15

Date Price Open Euro Reserves ROR Risk & Return


Jan-15 70.0115 76.2805 96110625 -8.22 -789870947.5
Feb-15 69.0305 69.9865 43406498 -1.37 -59292309.36
Mar-15 66.845 68.977 1881285 -3.09 -5814836.279
Apr-15 71.309 66.874 74021357 6.63 490900377.3
May-15 70.041 71.292 42907406 -1.75 -75291989.15
Jun-15 70.839 70.044 19059377 1.14 21632409.22
Jul-15 70.31 70.848 49902380 -0.76 -37894478.94
Aug-15 74.4785 70.2055 89302151 6.09 543530195.2
Sep-15 73.228 74.448 18754219 -1.64 -30733058.22
Oct-15 72.001 73.218 80503008 -1.66 -133808845.8
Nov-15 70.2145 72.1275 47462291 -2.65 -125881754.8
Dec-15 71.9055 70.2285 28834941 2.39 68855516

800000000

600000000

400000000

200000000
Risk & Return
0
Euro Reserves
Apr-15

May-15

Dec-15
Jan-15

Mar-15

Aug-15

Oct-15
Jun-15

Jul-15

Nov-15
Feb-15

Sep-15

-2E+08

-4E+08

-6E+08

-8E+08

The above table and graph are showing the change of EURO for a period from 1st January
2015 to 31st December 2015. In the month of August the risk and return peaked up to
543530195.2 and in the month of January the risk and return tailed down to -789870947.5
EURO/INR from 1st JANUARY-16 to 31st DECEMBER-16

Date Price Open Euro Reserves ROR Risk & Return


Jan-16 73.5555 71.9185 79812685 2.28 181668646.2
Feb-16 74.1625 73.5315 20547951 0.86 17632928.85
Mar-16 75.398 74.151 23997068 1.68 40355954.47
Apr-16 76.0965 75.4035 36376185 0.92 33431732.22
May-16 74.8165 76.0355 13878710 -1.60 -22250327.14
Jun-16 74.966 74.813 45830706 0.20 9372833.622
Jul-16 74.4805 74.9725 82510379 -0.66 -54146662.4
Aug-16 74.7355 74.4775 79550738 0.35 27557437.35
Sep-16 74.8155 74.7355 16616448 0.11 1778693.981
Oct-16 73.2275 74.7755 72959838 -2.07 -151041222.4
Nov-16 72.6315 73.2275 74207748 -0.81 -60397825.69
Dec-16 71.461 72.632 52788852 -1.61 -85108141.99

300000000

250000000

200000000

150000000

100000000
Risk & Return
50000000
Euro Reserves
0
Apr-16

Dec-16
Mar-16

May-16

Aug-16

Oct-16
Jan-16

Jun-16

Nov-16
Feb-16

Jul-16

Sep-16

-50000000

-1E+08

-1.5E+08

-2E+08

The above table and graph are showing the change of EURO for a period from 1st January
2016 to 31st December 2016. In the month of June the risk and return peaked up to
9372833.622 and in the month of December the risk and return tailed down to -835108141.99
EURO/INR from 1st JANUARY-17 to 31st DECEMBER-17

Date Price Open Euro Reserves ROR Risk & Return


Jan-17 72.9025 71.5795 96147660 1.85 177709196.3
Feb-17 70.575 72.909 12717852 -3.20 -40713034.84
Mar-17 69.0955 70.5455 99015261 -2.06 -203517061.3
Apr-17 70.0565 69.1515 16758278 1.31 21931905.44
May-17 72.532 70.108 85931888 3.46 297111451.6
Jun-17 73.835 72.529 3435549 1.80 6186252.387
Jul-17 76.0255 73.8255 74366355 2.98 221611748
Aug-17 76.1465 75.9955 48719480 0.20 9680364.601
Sep-17 77.157 76.153 48736880 1.32 64254628.87
Oct-17 75.4075 77.1885 11235965 -2.31 -25925174.95
Nov-17 76.769 75.408 82345250 1.80 148620683.8
Dec-17 76.595 76.769 7240357 -0.23 -1641055.788

400000000

300000000

200000000

100000000 Risk & Return


Euro Reserves
0
Apr-17

May-17

Dec-17
Jan-17

Mar-17

Aug-17
Jun-17

Oct-17
Jul-17

Nov-17
Feb-17

Sep-17

-1E+08

-2E+08

-3E+08

The above table and graph are showing the change of EURO for a period from 1st January
2017 to 31st December 2017. In the month of August the risk and return peaked up to
9680364.601 and in the month of February the risk and return tailed down to -40713034.84
EURO/INR from 1st JANUARY-18 to 31st DECEMBER -18

Date Price Open Euro Reserves ROR Risk & Return


Jan-18 78.9355 76.6205 16157797 3.02 48818919.29
Feb-18 79.517 78.891 98689788 0.79 78310336.14
Mar-18 80.238 79.514 99092144 0.91 90226516.41
Apr-18 80.274 80.244 45431973 0.04 1698518.506
May-18 78.839 80.27 51459827 -1.78 -91739145.93
Jun-18 79.9955 78.8465 19759593 1.46 28794901.94
Jul-18 80.04 79.759 65840112 0.35 23196217.95
Aug-18 82.387 80.031 57219019 2.94 168444738.6
Sep-18 84.177 82.344 28570477 2.23 63598664.55
Oct-18 83.6595 84.1735 23570871 -0.61 -14393398.98
Nov-18 78.823 83.662 57987709 -5.78 -335400210.2
Dec-18 79.8 78.806 81100849 1.26 102294551.1

300000000

200000000

100000000

0 Risk & Return


Apr-18

May-18

Dec-18
Mar-18

Aug-18
Jan-18

Jun-18

Oct-18

Nov-18
Feb-18

Jul-18

Sep-18

Euro Reserves
-1E+08

-2E+08

-3E+08

-4E+08

The above table and graph are showing the change of EURO for a period from 1st January
2018 to 31st December 2018. In the month of March the risk and return peaked up to
90226516.41 and in the month of May the risk and return tailed down to -91739145.93
CHAPTER 5

FINDINGS AND SUGGESTIONS

FINDINGS

1. USD dollar for a period from 1st January 2015 to 31st December 2015. In the month of July
the risk and return peaked up to 26767177.53 and in the month of January the risk and return
tailed down to -53661816.65
2. USD dollar for a period from 1st January 2016 to 31st December 2016. In the month of
August the risk and return peaked up to 36987582.24 and in the month of September the risk
and return tailed down to -58610020.43
3. USD dollar for a period from 1st January 2017 to 31st December 2017. In the month of June
the risk and return peaked up to 9408661.964 and in the month of February the risk and
return tailed down to -10106791.36
4. USD dollar for a period from 1st January 2018 to 31st December 2018. In the month of
September the risk and return peaked up to 56775531.03 and in the month of January the risk
and return tailed down to -16530025.73
5. EURO for a period from 1st January 2015 to 31st December 2015. In the month of August the
risk and return peaked up to 543530195.2 and in the month of January the risk and return
tailed down to -789870947.5
6. EURO for a period from 1st January 2016 to 31st December 2016. In the month of June the
risk and return peaked up to 9372833.622 and in the month of December the risk and return
tailed down to -835108141.99
7. EURO for a period from 1st January 2017 to 31st December 2017. In the month of August the
risk and return peaked up to 9680364.601 and in the month of February the risk and return
tailed down to -40713034.84
8. EURO for a period from 1st January 2018 to 31st December 2018. In the month of March the
risk and return peaked up to 90226516.41 and in the month of May the risk and return tailed
down to -91739145.93
SUGGESTIONS

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