A STUDY ON FOREIGN EXCHAGE AND ITS RISK MANAGEMENT

Project submitted in partial fulfillment for the award of Degree of MASTER OF BUSINESS ADMINISTRATION

DECLARATION I hereby declare that this Project Report titled A STUDY ON FOREIGN EXCHANGE AND ITS RISK MANAGEMENT submitted by me to the Department XXXXX is a bonafide work under taken by me and it is not submitted to any other University or Institution for the award of any degree diploma certificate or published any time before!

"ame and #ddress of the $tudent

$ignature of the $tudent

Date

ACKNOWLEDGEMENT I e%press my profound gratitude to &&&&' (aculty )!*!# for his guidance and support all through the completion of the project!

I also e%press my hurtful thanks to &&&&& for providing valuable suggestions in completions of the project!

I take this opportunity to acknowledge unreserved support e%tended to me by the Project and +raining team of ,-. +/-,"0.01I/$!

I am very much indebted to the dedicated and e%perienced staff of )*#!

It is indeed a pleasant task and small effort to thank all the people especially some of my friends who have contributed towards the successful completion of this project work!

(inally' I would like to e%press my gratitude to my parents for their endearing support and cooperation which has made me complete this project fruitfully!

SUMMARY # )ultinational company with high currency risk is likely to face financial difficulties which tend to have a disrupting on the operating side of the business! # disrupted financial conditions are likely to2 Result in the problem of adverse incentives! 3eakens the commitment of various stake holders!

(oreign e%change e%posure and risk are important concept in the study of international finance! It is the sensitivity of the home currency value of asset' liabilities' or operating incomes to unanticitpated changes in the e%change rates!

/%posure e%ists if the home currency values on an average in a particular manner! It also e%ists where numerous currencies are involved! (oreign e%change risk is the variance of the home currency value of items arising on account of unanticipated changes in the e%change rates! +he derivative instruments like forwards' futures and options are used to hedge against the foreign e%change risk of the )ultinational companies! +he original derivatives contract of International (inance is the 4(orward e%change contract5! (orward (oreign e%change is a traditional and popular risk management tool to obtain protection against adverse e%change rate movements! +he e%change rate is 4locked in5 for a specific date in future' which enables the person involved in the contract to plan for and budget the business e%penses with more certainty! (orward e%change market' has since the 6789s' played the role of linking international interest rates! +oday' however' (orward contract have to share other instruments and markets for arbitrage and for hedging! +hese newer derivative instruments include (utures' 0ptions and $waps!

TABLE OF CONTENTS S.no % / 2 3 4 Partic !ar" O&'$cti($" o) t*$ "t +, R$"$arc* .M$t*o+o!o#, Li0itation" .A"" 01tion" Intro+ ction to co01an, N$$+ . i01ortanc$ o) t*$ "t +, In+ "tr, 1ro)i!$ Pa#$ no.

5 7 9 %: %% %%/ %2

Intro+ ction to )or$i#n $6c*an#$ T*$ )or$i#n $6c*an#$ 0ar8$t T*$ )or$i#n $6c*an#$ tran"action" Intro+ ction to )or$i#n $6c*an#$ ri"8 0ana#$0$nt Too!". t$c*ni; $" )or t*$ 0ana#$0$nt o) ri"8 Fin+in#" o) t*$ "t +, Conc! "ion" Bi&!io#ra1*,

LIST OF TABLES S.no % / 2 Partic !ar" Ta&!$<% Ta&!$<Ta&!$</ Ta&!$<2 Pa#$ no.

OB=ECTI>ES OF THE STUDY

OB=ECTI>ES OF THE STUDY +o study and understand the foreign e%change!

+o study and analy:e the revenues of the company when the e%change rates fluctuate! +o analy:e income statement and find out the revenues when the dollars are converted into Indian rupees! +o study the different types of foreign e%change e%posure including risk and risk management techni;ues which the company is used to minimi:e the risk! +o present the findings and conclusions of the company in respect of foreign e%change risk management

RESEARCH AND METHODOLOG

RESEARCH SAMPLING SI?E In this study the sample si:e is taken in the form of income statement of company for the year march <998=<99>!

SOURCES OF DATA +he data has been collected from various secondary sources like books and internet! +he data has been collected inline with the objectives of the study! +he presentation of study of the I+ company provide an insight in knowing the foreign e%change risk policies adopted by them! +his data has been collected from the <998= <99> annual reports of the companies! -onclusions have been drawn after the detailed study of the risk management policies of the I+ company as to know what are the most widely used hedging instruments for minimi:ing foreign e%change risk!

METHODOLOGY +he total revenues of the income statements are converted from U$# ? to Indian rupee! +he revenues of the companies are divided into @9289!

+he rates which are used for the study are taken as mid value i!e!' is Rs!@6 and it is compared with minimum A ma%imum e%change rates!

LIMITATIONS +he study is confined just to the foreign e%change risk but not the total risk!

+he analysis of this study is mainly done on the income statements!

+his study is limited for the year <998=<99>!

It does not take into consideration all Indian companies foreign e%change risk!

+he hedging techni;ues are studied only which the company adopted to minimi:e foreign e%change risk!

ASSUMPTIONS +he total revenues are assumed @9B as domestic A 89B as foreign revenues!

+he e%change rates are taken averagely!

+he information collected from various websites are assumed to be accurate and true!

Risk management is an integral part of an organi:ation policy and is inevitable!

INTRODUCTION TO HCL TECHNOLOGIES

HCL TECHNOLOGIES O($r(i$@ ,-. /nterprise is a leading 1lobal +echnology and I+ enterprise that comprises two companies listed in India = ,-. +echnologies A ,-. Infosystems! +he C=decade=old enterprise' founded in 67>8' is one of IndiaDs original I+ garage startups! Its range of offerings span Product /ngineering' -ustom A Package #pplications' *P0' I+ Infrastructure $ervices' I+ ,ardware' $ystems Integration' and distribution of I-+ products! +he ,-. team comprises appro%imately @E'999 professionals of diverse nationalities' who operate from 6> countries including C89 points of presence in India! ,-. has global partnerships with several leading (ortune 6999 firms' including leading I+ and technologyfirms! !

,-. +echnologies is one of IndiaDs leading global I+ $ervices companies' providing software=led I+ solutions' remote infrastructure management services and *P0! ,aving made a foray into the global I+ landscape in 6777 after its IP0' ,-. +echnologies focuses on +ransformational 0utsourcing' working with clients in areas that impact and re=define the core of their business! +he company leverages an e%tensive global offshore infrastructure and its global network of offices in 6F countries to deliver solutions across select verticals including (inancial $ervices' Retail A -onsumer' .ife $ciences A ,ealthcare' ,i=+ech A )anufacturing' +elecom and )edia A /ntertainment G)A/H! (or the ;uarter ended C9th $eptember <99>' ,-. +echnologies' along with its

subsidiaries had last twelve months G.+)H revenue of U$ ? 6!E billion GRs! 8C8C croresH and employed @E'8<< professionals!

Hi"tor, o) co01an,

3hile ,-. /nterprise has a C9=year history' ,-. +echnologies is a relatively young company formed' nine years ago' in 677F! During this period' ,-. has built uni;ue strengths in I+ applications Gcustom applications for industry solutions and package implementationH' I+ infrastructure management and business process outsourcing' while maintaining and e%tending its leadership in product engineering! ,-. has also built domain depth through a micro= verticali:ation strategy in industries such as (inancial $ervices' ,i=tech and )anufacturing' Retail' )edia and /ntertainment' .ife $ciences' and +elecom! ,-. has created the ability to distribute value across the customerDs I+ landscape through its well=distributed services portfolio' significant domain strengths' and locally relevant geographic distribution! ,-. has the widest service portfolio among Indian I+ service providers' with each of its services having attained critical mass!

0ur five mature lines of business are RAD and /ngineering' -ustom #pplications' /nterprise #pplications' I+ Infrastructure )anagement' and *P0 $ervices! In addition' ,-. has recently launched its /nterprise +ransformation $ervice offerings comprising of *usiness' +echnology' #pplication and Data +ransformation I the four broad needs of any enterprise! 0ur ability to synergistically integrate these service lines across the entire I+ landscape creates new :ones for value creation! #dditionally' ,-. has created uni;ue service leadership in each of these areas through best=of=breed uni;ue propositions! ,-.5s leadership in these service areas has been recogni:ed by several leading independent analysts!

In <99E' ,-. started ;uestioning the linearity of scale=driven business models adopted by service providers Glargely in the I+ application businessH! +he ;uestioning led us to the belief that the market was rapidly approaching a point of inflection' that is a point where the volume and value proportionality would change' opening up new opportunities for service providers who aspire to focus on value! 3ith this reali:ation' ,-. embarked on a transformational journey that focuses on value centricity in customer relationships and on leveraging new market opportunities' while creating a uni;ue employee e%perience! ,ence ,-. entered a new phase of evolution I transforming it from a volume=driven service provider to value=centric enterprise that turns technology into competitive advantage for all its customers across the globe! +oday ,-.5s new way of doing business is being recogni:ed by ,arvard' ID-' (ortune' (orbes' /conomist' *usiness 3eek and the likes!

NEED AND IMPORTANCE OF THE STUDY

NEED AND IMPORTANCE OF THE STUDY +he world nations are increasingly becoming more interrelated global trade' and global investment! +hese international result in cross country flow of world nations! -ountries hold currencies of other countries and that a market' dealing of foreign e%change results! (oreign e%change means reserves of foreign currencies! )ore aptly' foreign e%change refers to claim to foreign money balances! (oreign e%change gives resident of one country a financial claim on other country or countries! #ll deposits' credits and balances payable in foreign currency and any drafts' travelers5 che;ues' letters of credit and bills of e%change payable in foreign currency constitute foreign e%change! (oreign e%change market is the market where money denominated in one currency is bought and

sold with money denominated in another currency! +ransactions in currencies of countries' parties to these transactions' rates at which one currency is e%changed for other or others' ramificataion in these rates' derivatives to the currencies and dealing in them and related aspects constitute the foreign e%change Gin short' fore%H market! (oreign e%change transactions take place whenever a country imports goods and services' people of a country undertake visits to other counties' citi:ens of a country remit money abroad for whatever purpose' business units set up foreign subsidiaries and so on! In all these cases the nation concerned buys relevant and re;uired foreign e%change' in e%change of its currency' or draws from foreign e%change reserves built! 0n the other hand' when a country e%ports goods and services to another country' when people of other countries visit the country' when citi:ens of the country settled abroad remit money homewards' when foreign citi:ens' firms and institutions invest in the country and when the country or its business community raises funds from abroad' the country5s currency is bought by others' giving foreign e%change' in e%change! )ultinational firms operate in more than one country and their operations involve multiple foreign currencies! +heir operations are influenced by politics and the laws of the counties where they operate! +hus' they face higher degree of risk as compared to domestic firms! # matter of great concern for the international firms is to analy:e the implications of the changes in interest rates' inflation rates and e%change rates on their decisions and minimi:e the foreign e%change risk! +he importance of the study is to know the features of foreign e%change and the factors creating risk in foreign e%change transactions and the techni;ues used for managing that risk!

INDUSTRY PROFILE +he vision of information +echnology GI+H policy is to use It as a tool for raising the living standards of the common man and enriching their lives! +hough' urban India has a high internet density' the government also wants P- and Internet penetration in the rural India!

In Information technology GI+H' India has built up valuable brand e;uity in the global markets! In I+=enables services GI+/$H' India has emerged asa the most preferred destination for business process outsourcing G*P0H'a key driver of growth for the software industry and the services sector! India5s most pri:ed resource in today5s knowledge economy is its readily available technical work force! India has the second largest /nglish speaking scientific professionals in the world' second only to the U!$! #ccording the data from ministry of communication and information technology' the I+/$=*P0 industry has grown by E@ per cent with e%port earnings of U$? C!8 billion during <99C=<99@! 0utput of the Indian electronic and I+ industry is estimated to have grown by 6F!< percent to Rs!6'6@'8E9 crore in <99C=<99@! +he share of hardware and non=software services in the I+ sector has declined consistently every year in the recent past! +he share of software services in electronic and I+ sector has gone up from CF!> per cent in 677F=77 to 86!F percent in <99C=9@! ,owever' there has been some welcome acceleration in the hardware sector with a sharp deceleration in the rate of decline of hardware5s share in electronic and I+ industry! 0utput of computers in value terms' for e%ample' increased by C8!9' 67!> andE>!8 percent in <999=96' <99<=9C' and <99C=9@' respectively! #ll the sub=sectors of the non= software components of electronic and It industry grew at over F percent in <99C=9@' but this was far below the rate of growth of software services! 0verall' after declining precipitously from 86!@ percent in 677F=77 to @9!7 percent in <996=9<' the share of hardware in this important industry declined only marginally to CF!< percent in the two subse;uent years! /%ports markets continue to dominant the domestic segment! +he si:e of the domestic market in software relative to the e%port market for Indian software' which was @E!< percent in 677F=77' after declining rapidly to <7!F percent in 996=9<' fell only to <7!6 percent and <>!> percent in the two subse;uent years!

Jalue of software and services e%port is estimated to have increased by C9 percent to U$?6<!E billion in <99C=9@! +he software technology parks of India have reported software e%ports of R$!C6'E>F crore G U$?8'7@> millionH during #pril=December <99@= <99E as against Rs!<<'8>F crore GU$?@'76CH during the corresponding period last year! +he annual growth rate of India5s software e%ports has been consistently over E9 percent since 6776! "o other Indian industry has performed so well against the global competition! #ccording to a "#$-0)=)cKinsey report' annual revenue projections for India5s It industry in <99F area U$? F> billion and market openings are emerging across four broad sectors' I+ services' software products' I+ enabled services' I" addition to the e%port market' all of these segments have a domestic market competition as well! +he I+= enabled services industry in India began to evolve in the early nineties when companies such as #merica /%press' *ritish #irways' 1/ and $wissair set up their offshore operations in India! +oday a large number of foreign affiliates operate I+= enabled services in India! +he different services lines of I+ enabled services offshored to India include customer care' finance' human resources' billing and payment services' administration and content development!

MA=OR STEPS TAKEN FOR PROMOTION OF IT INDUSTRY 3ith the formation of a ministry for I+' 1overnment of India has taken a major step towards promoting the domestic industry and achieving the full potential of he Indian I+ entrepreneurs! -onstraints have been comprehensively identified and steps taken to overcome them and also to provide incentives!

In order to broaden the internet base' the Department of Information technology has also announced a programme to establish $tate 3ide #rea "et work G$3#"H up to the block level to provide connectivity for e=governance! +he Department also set up community Information centers G-I-sH in hilly' far=flung areas of the "orth=/ast and Lammu and Kashmir to facilitate the spread of benefit of information and communication technology! It is also proposed to set up -I-s in other hilly' far=flang areas of the country like Uttaranchal' #ndamanA"icobar and .akshadweep! # number of steps have taken to meet the challenge of :ero duty regime in <99E under the Information +echnology #greement GI+#=6H +ariffs on raw materials' parts' other inputs and capital goods have been rationali:ed to make domestic manufacturing viable and competitive!

THEORETICAL CONCEPTS

INTRODUCTION TO FOREIGN EXCHNGE AND ITS ADMINISTRATI>E FRAME WORK D$)inition o) Int$rnationa! Tra+$2 International trade refers to trade between the residents of two different countries! /ach country functions as a sovereign state with its own set of regulations and currency! +he difference in the nationality of the e%port and the importer presents certain peculiar problem in the conduct of international trade and settlement of the transactions arising there from! Important among such problems are2 aH bH cH dH Different countries have different monetary unitsM Restrictions imposed by counties on import and e%port of goods2 Restrictions imposed by nations on payments from and into their countriesM Different in legal practices in different countries!

+he e%isting of national monetary units poses a problem in the settlement of international transactions! +he e%porter would like to get the payment in the currency of own country! (or instance' if #merican e%porter of "ew Nork e%port machinery to Indian rupee will not serve their purpose because Indian rupee cannot be used as currency inn rupees! +hus the e%porter re;uires payment in the importer5s country! # need' therefore' arises for conversion of the currency of the importer5s country into that of the e%porters country! For$i#n $6c*an#$A (oreign e%change is the mechanism by which the currency of one country gets converted into the currency of another country! +he conversion is

done by banks who deal in foreign e%change! +hese banks maintain stocks of foreign currencies in the form of balances with banks abroad! (or instance' Indian *ank may maintain an account with *ank of #merica' new Nork' in which dollar are held! In the earlier e%ample' if Indian importers pay the e;uivalent rupee to Indian bank' it would arrange to pay #merican e%port at "ew Nork in dolor from the dollar balances held by it with *ank of #merica! E6c*an#$ rat$A +he rate at which one currency is converted into another currency is the rate of e%change between the currencies concerned! +he rate of e%change for a currency is known from the ;uotation in the foreign e%change market! In the illustration' if Indian bank e%changed us for Indian rupee at Rs!@9 a dollar' the e%change rate between rupee and dollar can be e%pressed as U$D 6ORs!@9! +he banks operating at a financial center' and dealing in foreign e%change' constitute the foreign e%change market! #s in any commodity or market' the rates in the foreign e%change market are determined by the interaction of the forces of demand and supply of the commodity dealt' vi:!' foreign e%change! $ince the demand and supply are affected by a number of factors' both fundamental and transitory' the rates keep on changing fre;uently' and violently too!

So0$ o) t*$ i01ortant )actor" @*ic* a))$ct $6c*an#$ rat$" ar$A *alance of payments Inflation Interest rates )oney $upply "ational Income Resource Discoveries

-apital )ovements Political (actors Psychological (actors and $peculation +echnical and )arket (actors

Ba!anc$ o) 1a,0$ntA It represents the demand for and supply of foreign e%change which ultimately determine the value of the currency! /%porters from the country demand for the currency of the country in the fore% market! +he e%porters would offer to the market the foreign currencies have ac;uired and demand in e%change the local currency! -onversely' imports into the country will increase the supply of currency of the country in the fore% market! 3hen the *0P of a country is continuously at deficit' it implies that demand for the currency of the country is lesser than the supply! +herefore' its value in the market declines! If the *P0 is surplus' continuously' it shows the demand for the currency is higher than its supply and therefore the currency gains in value! In)!ationA inflation in the country would increase the domestic prices of the commodities! 3ith increase in pri:es e%ports may dwindle because the price may not be competitive! 3ith the decrease in e%port the demand for the currency would also declineM this it in turn would result in the decline of e%ternal value of the currency! It should be noted that it is the relative rate of inflation in the two counties that cause changes in the e%change rates! Int$r$"t rat$"A +he interest rate has a great influence on the short=term movement of capital! 3hen the interest rate at a center rises' it attracts short term funds from other centers! +his would increase the demand for the currency at the center and hence its value! Rising of interest rate may be adopted by a country due to money conditions or as a deliberate attempt to attract foreign investment! Mon$, " 11!,A #n increase in money supply in the country will affect the e%change rates through causing inflation in the country! It can also affect the e%change rate directly!

Nationa! inco0$A #n increase in national income reflects increase in the income of the residents of the country! +he increase in the income increases the demand for goods in the country! If there is underutili:ed production capacity in the country' this would lead to increase in production! +here is a change for growth in e%ports too! 3here the production does not increase in sympathy with income rises' it leads to increased imports and increased supply of the currency of the country in the foreign e%change market! +he result is similar to that of inflation vi:!' and decline in the value of the currency! +hus an increase in national income will lead to an increase in investment or in the consumption' and accordingly' its effect on the e%change rate will change! R$"o rc$ +i"co($ri$"A 3hen the country is able to discover key resources' its currency gains in value! Ca1ita! Mo($0$nt"A +here are many factors that influence movement of capital from one country to another! $hort term movement of capital may be influenced by the offer of higher interest in a country! If interest rate in a country rises due to increase in bank rate or otherwise' there will be a flow of short=term funds into the country and the e%change rate of the country will rise! Reserves will happen in case of fall in interest rates! *right investment climate and political stability may encourage portfolio investment in the country! +his leads to higher demand for the currency and upward trend in its rate! Poor economic outlook may mean repatriation of the investments leading to decreased demand and lower e%change value for the currency of the country! )ovement of capital is also caused by e%ternal borrowings and assistance! .arge=scale e%ternal borrowings will increase the supply of foreign e%change in the market! +his will have a favorable effect on the e%change rate of the currency of the country! 3hen a repatriation of principal and interest starts the rata may be adversely affected!

0ther factors include political factors' Psychological factors and $peculation' +echnical and )arket factors!

ADMINISTRATION FRAME WORK FOR FOREIGN EXCHANGE IN INDIA +he -entral 1overnment has been empowered under $ection @8 of the (oreign /%change )anagement #ct to make rules to carry out the provisions of the #ct! $imilarly' $ection @> empowers the Reserve *ank to make regulations to carry out the provisions of the #ct and the rules made there under! +he (oreign -ontribution GRegulationH #ct' 67>8 is to regulate the acceptance and utili:ation of foreign contribution donation or foreign hospitality by certain persons or associations ' with a view to ensuring that Parliamentary institutions' political associations and academic and other voluntary organi:ations as well as individuals working in the important areas of national life may function in a manner consistent with the values of a sovereign democratic republic! It is basically an act to ensure that the integrity of Indian institutions and persons is maintained and that they are not unduly influenced by foreign donations to the prejudice of India5s interests! +he (oreign /%change )anagement #ct G(/)#H is a law to replace the draconian (oreign /%change Regulation #ct' 67>C! #ny offense under (/R# was a criminal

offense liable to imprisonment' 3hereas (/)# seeks to make offenses relating to foreign e%change civil offenses! Unlike other laws where everything is permitted unless specifically prohibited' under (/R# nothing was permitted unless specifically permitted! ,ence the tenor and tone of the #ct was very drastic! It provided for imprisonment of even a very minor offense! Under (/R#' a person is presumed innocent unless he is proven guilty! 3ith liberali:ation' a need was felt to remove the drastic measure of (/R# and replace them by a set of liberal foreign e%change management regulations! +herefore (/)# was enacted to replace (/R#! (/)# e%tends to the whole of India! It applies to all *ranches' offences and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person to whom this #ct applies! (/)# contains definitions of certain terms which have been used throughout the #ct! +he meaning of these terms may differ under other laws or common language! *ut for the purpose of (/)#' the terms will signify the meaning as defined there under! A t*oriB$+ 1$r"on"A 3ith the Reserve *ank has the authority to administer foreign e%change in India' it is recogni:ed that it cannot do so by itself! (oreign e%change is received or re;uired by a large number of e%ports and imports in the country spread over a vast geographical area! It would be impossible for the reserve *ank to deal with them individually! +herefore' provisions has been made in the #ct' enabling the Reserve *ank to authority any person to be known as authority person to deal in the foreign e%change or foreign securities' as an authori:ed dealer' money changer or off= shore banking unit or any other manner as it deems fit! A t*oriB$+ +$a!$r"A # major portion of actual dealing in foreign e%change from the customers Gimporters' e%porters and others receiving or making personal remittanceH is dealt with by such of the banks in India which have been authori:ed by Reserve

*ank to deal in foreign e%change! $uch of the banks and selected financial institutions who have been authori:ed Dealer! Fi#A ADMINISTRATION OF FOREIGN EXCHANGE IN INDIA

(0R/I1" /&-,#"1/ )#"#1/)/"+ #-+ -/"+R#. 10J/R")/"+ R/$/RJ/ *#"K 0( I"DI# #U+,0RI$/D P/R$0"$ (0R/I1" /&-,#"1/ D/#./R #$$0-I#+I0" 0( I"DI# #U+,0RI$/D )0"/N -,#"1/R$ #+,0RI$/D D/#./R$

(U.. (./D1/

R/$+RI-+/D

FOREIGN EXCHANGE DEALERCS ASSOCIATION OF INDIA DFEDAIE (/D#I was establishing in 67EF as an association of all authori:ed dealers in India! +he principal functions of (/D#I are2

+o frame rules for the conduct of foreign e%change business in India! +hese rules cover various aspects like hours of business' charges for foreign e%change transactions' ;uotation of rates to customer' inter bank dealings' etc! #ll authori:ed dealers have given undertaking to the Reserve *ank to abide these rules! +o coordinate with Reserve *ank of India in Proper administration of e%change control! +o control information likely to be of interest to its members! +hus' (/D#I provides a vital link in the administrative set=up of foreign e%change in India! AUTHORI?ED MONEY CHANGERS +o provide facilities for encashment of foreign currency for tourists' etc!' Reserve *ank has granted limited licenses to certain established firms' hotels and other organi:ations permitting them to deal in foreign currency notes' coins and travelers5 che;ues subject to directions issued to them from time to time! +hese firms and organi:ations are called 4#uthori:ed )oney -hangers5! #n authori:ed money changer may be a full fledged money changer or a restricted money changer! # full fledged money changer is authori:ed to undertake both purchase and sale transactions with the public! # restricted money changer is authori:ed only to purchase foreign currency notes' coins and travelers5 che;ues subject to the condition that all such collections are surrendered by him in turn to authori:ed dealer in foreign e%change! +he current thinking of the Reserve *ank is to authori:e more establishments as authori:ed money changers in order to facilitate easy conversion facilities!

THE FOREIGN EXCHANGE MARKET

+he (oreign e%change market is the market where in which currencies are bought and sold against each other! It is the largest market in the world! It is to be distinguished from a financial market where currencies are borrowed and lent! (oreign e%change market facilitate the conversion of one currency to another for various purposes like trade' payment for services' development projects' speculation etc! $ince the number of participants in the market s has increased over the years have become highly competitive and efficient! 3ith improvement in trade between countries' there was a pressing need to have some mechanism to facilitate easy conversion of currencies! +his has been made possible by the foreign e%change markets! -onsidering international trade' a country would prefer to import goods for which it does not have a competitive advantage' while e%porting goods for which it has a competitive advantage over others! +hus trade between countries is important for common good but nations are separated by distance' which that there is a lot of time between placing an order and its actual delivery! "o supplier would be willing to wait until actual delivery for receiving payments! ,ence' credit is very important at every stage of the transaction! +he much needed credit servicing and conversion of the currency is facilitated by the foreign e%change market! #lso the e%change rates are subject to wide fluctuations! +here is therefore' a constant risk associated e%change markets cover the arising out of the fluctuations in e%change rates through hedging! (ore% market is not e%actly a place and that there is no physical meeting but meeting is affected by mail or over phone!

FOREIGN EXHANGE TRANSACTIONS (oreign e%change transactions taking place in foreign e%change markets can be broadly classified into Inter bank transactions and )erchant transactions! +he foreign e%change transactions taking place among banks are known as inter bank transactions and the rates ;uoted are known as inter bank rates! +he foreign e%change transactions that take place between a bank and its customer known as5 )erchant transactions5 and the rates ;uoted are known as merchant rates! )erchant transactions take place when as e%porter approaches his bank to convert his sale proceeds to home currency or when an importer approaches his banker to convert domestic currency into foreign currency to pay his dues on import or when a resident approaches his bank to convert foreign currency received by him into home currency or vice versa! 3hen a bank buys foreign e%change from a customer it sells the same in the inter bank market at a higher rate and books profit! $imilarly' when a bank sells foreign e%change to a customer' it buys from the inter bank market' loads its margin and thus makes a profit in the deal! T*$ 0o+$" o) )or$i#n $6c*an#$ r$0ittanc$" (oreign e%change transactions involve flow of foreign e%change into the country or out of the country depending upon the nature of transactions! # purchase transaction results in inflow of foreign e%change while a sale transaction result in inflow of foreign e%change! +he former is known as inward remittance and the latter is known as outward remittance!

Remittance could take place through various modes! $ome of them are2 Demand draft

)ail transfer

+elegraphic transfer

Personal che;ues

T,1$" o) & ,in# rat$"A ++ buying rate and

*ill buying rate

++ buying rate is the rate applied when the transaction does not involve any delay in the reali:ation of the foreign e%change by the bank! In other words' the "astro account of the bank would already have been credited! +his rate is calculated by deducting from the inter bank buying rate the e%change margin as determined by the bank! Bi!! & ,in# rat$A +his is the rate to be applied when foreign bill is purchased! 3hen a bill is purchased' the rupee e;uivalent of the bill values is paid to the e%porter immediately! ,owever' the proceeds will be reali:ed by the bank after the bill is presented at the overseas centre! T,1$" o) "$!!in# rat$"A ++ selling rates

*ill selling rates

TT S$!!in# rat$A #ll sale transactions which do not handling documents are put through at ++ selling rates! *ill $elling rates2 +his is the rate applied for all sale transactions with public which involve handling of documents by the bank! Int$r Ban8 tran"action"A +he e%change rates ;uoted by banks to their customer are based on the rates prevalent in the Inter *ank market! +he big banks in the market are known as market makers' as they are willing to pay or sell foreign currencies at the rates ;uoted by them up to any e%tent! Depending upon its resources' a bank may be a market in one or few major currencies! 3hen a banker approaches the market maker' it would not reveal its intention to buy or sell the currency! +his is done in order to get a fair price from the market maker! T@o @a, ; otation" +ypically' then ;uotation in the Inter *ank market is a two= way ;uotation! It means' the rate ;uoted by the market maker will indicate two prices' one which it is willing to buy the foreign currency and the other at which it is willing to sell the foreign currency! (or e%ample' a )umbai bank may ;uote its rate for U$ dollars as under! U$D 6O Rs!@6!6E<EE 68E9 )ore often' the rate would be ;uoted as 6E<E 68E9 since the players in the market are e%pected to know the 4big number5 i!e!' Rs!@6! in the above ;uotation' once rate us Rs!@6!6E<E per dollar and the other rate is Rs!@6!68E9 per dollar! Dir$ct ; otation It will be obvious that the ;uotation bank will be to buy dollars at @6!6E<E and sell dollars at Rs@6!68E9! if once dollar bought and sold' the bank makes a profit of 9!96<E! In a foreign e%change ;uotation' the foreign currency is the commodity that is being bought and sold! +he e%change ;uotation which gives the price for the foreign

vPcurrency in term of the domestic currency is known as direct ;uotation! In a direct ;uotation' the ;uoting bank will apply the rule2 buy low5 sell high! In+ir$ct ; otation +here is another way of ;uoting in the foreign e%change market! +he )umbai bank ;uote the rate for dollar as2

Rs!699OU$D <!@>8< @>8> +his type of ;uotation which gives the ;uality of foreign currency per unit of domestic currency is known as indirect ;uotation! In this case' the ;uoting bank will receive U$D <!@>8> per Rs!699 while buying dollars and give away U$D <!@>8< per Rs!699 while selling dollars In other words' *uy high' sell low is applied! +his buying rate is also known as the 4bid5 rate and the selling rate as the 4offer5 rate! +he difference between these rates is the gross profit for the bank and known as the 4$pread5! S1ot an+ )or@ar+ tran"action" +he transactions in the Inter *ank market )ay place for settlement= 0n the same dayM or +wo days laterM $ome day lateM say after a month

3here the agreement to buy and sell is agreed upon and e%ecuted on the same date' the transaction is known as cash or ready transaction! It is also known as value today! +he transaction where the e%change of currencies takes place after the date of contract is known as the $pot +ransaction! (or instance if the contract is made on )onday' the delivery should take place on 3ednesday! If 3ednesday is a holiday' the delivery will take place on the ne%t day' i!e!' +hursday! Rupee payment is also made on the same day the foreign e%change is received!

+he transaction in which the e%change of currencies takes place at a specified future date' subse;uent to the spot rate' is known as a forward transaction ! +he forwards transaction can be for delivery one month or two months or three months' etc! # forward contract for delivery one month means the e%change of currencies will take place after one month from the date of contract! # forwards contract for delivery two months means the e%change of currencies will take place after two months and so on!

S1ot an+ For@ar+" rat$" $pot rate of e%change is the rate for immediate delivery of foreign e%change! It is prevailing at a particular point of time! In a forward rate' the ;uoted is for delivery at a future date' which is usually C9' 89' 79 or 6F9 days later! +he forward rate may be at premium or discount to the spot rate' Premium rate' i!e!' forward rate is higher than the spot rate' implies that the foreign currency is to appreciate its value in tae future! )ay be due to larger demand for goods and services of the country of that currency! +he percentage of annuali:ed discount or premium in a forward ;uote' in relation to the spot rate' is computed by the following! (orward Premium O Gdiscount H (orward rate=spot rate Q $pot rate 6<

"o! of months forward

If the spot rate is higher than the forward rate' there is forward discount and if the forward rate higher than the spot rate there is forward premium rate! For@ar+ 0ar#inFS@a1 1oint" (orward rate may be the same as the spot rate for the currency! +hen it is said to be 4at par5 with the spot rate! *ut this rarely happens! )ore often the forward rate for a currency may be costlier or cheaper than its spot rate! +he difference between the forward rate and the spot rate is known as the 4(orward margin5 or 4$wap Points5! +he forward margin may be at a premium or at discount! If the forward margin is at

premium' the foreign currency will be costlier under forward rate than under the spot rate! If the forward margin is at discount' the foreign currency will be cheaper for forward delivery than for spot delivery! Under direct ;uotation' premium is added to the spot rate to arrive at the forward rate! +his is done for both purchase and sale transactions! Discount is deducted from spot rate to arrive at the forward rates! Ot*$r rat$" *uying rate and selling refers to the rate at which a dealer in fore% is willing to buy the fore% and sell the fore%! In theory' there should not be difference in these rates! *ut in practices' the selling rate is higher than the buying rate! +he fore% dealer' while buying the fore% pay less rupees' but gets more when he sells the fore%! #fter adjusting for operating e%penses' the dealer books a profit through the 4buy and sell5 rates differences! +ransactions in e%change market consist of purchases and sales of currencies between dealers and customers and between dealers and dealers! +he dealers buy fore% in the form of bills' drafts and with foreign banks' from customer to enable them to receive payments from abroad! +he resulting accumulated currency balances with dealers are disposed of by selling instruments to customers who need fore% to make payment to foreigners! +he selling price for a currency ;uoted by the dealer Ga bankH is slightly higher than the purchase price to give the bank small profit in the business! /ach dealer gives a two=way ;uote in fore%! Sin#!$ Rat$ refers to the practices of adopting just rate between the two currencies! # rate for e%ports' other for imports' other for transaction with preferred area' etc' if adopted by a country' that situation is known as multiple rates! Fi6$+ rat$ refers to that rate which is fi%ed in terms of gold or is pegged to another currency which has a fi%ed value in terms of gold! (le%ible rate keeps the e%change rate fi%ed over a short period' but allows the same to vary in the long term in view of the

changes and shifts in another as conditioned by the free of market forces! +he rate is allowed to freely float at all times! C rr$nt rat$A -urrent rate of e%change between two currencies fluctuate from day to day or even minute to minute' due to changes in demand and supply! *ut these movements take place around a rate which may be called the 4normal rate5 or the par of e%change or the true rate! International payments are made by different instruments' which differ in their time to maturity! A T$!$#ra1*ic Tran")$r DTTE is the ;uickest means of effecting payments! # +!+ rate is therefore' higher than that of any other kind of bill! # sum can be transferred from a bank in one country to a bank in another part of the world by cable or tele%! It is thus' the ;uickest method of transmitting funds from one center to another! S!i#*t rat$" applicable in the case of bill instrument with attending delay in maturity and possible loss of instrument in transit' are lower than most other rates! $imilarly' there are other clusters of rates' such as' one month5s rate' Cmonth5s rate! .onger the duration' lower the price Gof the foreign currency in terms of domesticH! +he e%change rate between two given currencies may be obtained from the rates of these two currencies in terms of a third currency! +he resulting rate is called the -ross rate! Ar&itra#$ in the foreign e%change market refers to buying a foreign currency in a market where it is selling lower and selling the same in a market where it is bought higher! #rbitrage involves no risk as rates are known in advance! (urther' there is no investment re;uired' as the purchase of one currency is financed by the sale of other currency! #rbitrageurs gain in the process of arbitraging!

D#+# #".#N$I$ #"D I"+R/PR/+#+I0"

,-.
DATA ANALYSIS Table:1 CURRENCY EXCHANGE BETWEEN TWO RATES PROFIT&LOSS A/C FOR THE YEAR ENDED JUNE 2 Pa"#$%&la"' (R')$* %"+"e', !

I*%+-e a*. E/0e*'e'1 2 3 4"+- 4+"e$5* (I* .+lla"',

A6e"a5e E/%7a*5e "a#e 1R')81 INCO9E Ne# +0e"a#$*5 I*%+-e EXPENSES 9a#e"$al %+*'&-0#$+* 9a*&4a%#&"$*5 e/0e*'e' Pe"'+*al e/0e*'e' Sell$*5 E/0e*'e' A.-$*$'#"a#$6e E/0e*'e' Ca0$#al$>e. E/0e*'e' C+'# +4 Sale' Re0+"#e. PBDIT O#7e" "e%&""$*5 $*%+-e A.?&'#e. PBDIT De0"e%$a#$+* O#7e" @"$#e +44' A.?&'#e. PBIT F$*a*%$al e/0e*'e' A.?&'#e. PBT Ta/ C7a"5e' A.?&'#e. PAT N+* "e%&""$*5A$#e-' O#7e" *+* %a'7 A.?&'#-e*#' Re0+"#e. PAT :!2;)22 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) :

I4 #7e E/%7a*5e "a#e181 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) : =)28 !<8)2! 1 2)=: ) 28!)!< 12):2 2:<):= 8<)<2 <;=);! 2<8) 1 ) ;8:);;

I4 #7e E/%7a*5e "a#e18 22 2) 2 ) ::!);= !!8)2 1 )8: :<2)2: ) 18!=)12 !22);2 =)8 !:2)22 1 8):1 ) 2:1)=< 12) 2 21=);= 88)81 <;8)22 28!);1 ) ;2:):

<!!)28 1:22)<= 1!);2 =1:);= 2;:1)<8 =:!) ; 12) ! =<:)1< 1!;)21 !!8)=8 2 )2 !<8):8 !<);! 2!;)8! 82:):< 11 1);2

1R#P,2 6

2< 2 1< 1 <

I4 #7e E/%7a*5e "a#e181 I4 #7e E/%7a*5e "a#e18

<

= 11 1: 1< 1! 1= 21 2:

I"+/RPR/+#+I0"2 +his graph showing total revenues are alteration together' total revenues are decreased Rs!<<86!6> crores to <<98!9<' and gross profit also decreased Rs!>@E!9C to ><8!F8!simultaneously all these values are changing the net income! If the /%change rate had fi%ed R Rs!@6' the revenues would have been same!

,-.

DATA ANALYSIS Table:2 CURRENCY EXCHANGE BETWEEN TWO RATES PROFIT&LOSS A/C FOR THE YEAR ENDED JUNE 2 Pa"#$%&la"' (R')$* %"+"e', !

I*%+-e a*. E/0e*'e'1 2 3 4"+- 4+"e$5* (I* .+lla"', A6e"a5e E/%7a*5e "a#e 1R')81 I4 #7e E/%7a*5e "a#e181 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) : =)28 !<8)2! 1 2)=: ) 28!)!< 12):2 2:<):= 8<)<2 <;=);! 2<8) 1 ) ;8:);; I4 #7e E/%7a*5e "a#e1:= 21< );! ) :2=)8< !<8);8 1 )1! :8!)!2 ) 18;8)== ! ;)2= =)1! !1!);2 1 1)!1 ) 212)1< 11)!2 2 8)8 8:): <21)1 281)22 ) ; 2)!2

INCO9E Ne# +0e"a#$*5 I*%+-e EXPENSES 9a#e"$al %+*'&-0#$+* 9a*&4a%#&"$*5 e/0e*'e' Pe"'+*al e/0e*'e' Sell$*5 E/0e*'e' A.-$*$'#"a#$6e E/0e*'e' Ca0$#al$>e. E/0e*'e' C+'# +4 Sale' Re0+"#e. PBDIT O#7e" "e%&""$*5 $*%+-e A.?&'#e. PBDIT De0"e%$a#$+* O#7e" @"$#e +44' A.?&'#e. PBIT F$*a*%$al e/0e*'e' A.?&'#e. PBT Ta/ C7a"5e' A.?&'#e. PAT N+* "e%&""$*5A$#e-' O#7e" *+* %a'7 A.?&'#-e*#' Re0+"#e. PAT :!2;)22 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) :

<!!)28 1:22)<= 1!);2 =1:);= 2;:1)<8 =:!) ; 12) ! =<:)1< 1!;)21 !!8)=8 2 )2 !<8):8 !<);! 2!;)8! 82:):< 11 1);2

1R#P,2 <

2< 2 1< 1 <

I4 #7e E/%7a*5e "a#e181 I4 #7e E/%7a*5e "a#e1:=

<

= 11 1: 1< 1! 1= 21 2:

I"+/RPR/+#+I0"2 +his graph showing total revenues are alteration together' total revenues are decreased Rs!<<86!6> to <6E9!F>' and gross profit also decreased Rs!>@E!9C to >9F!87!simultaneously all these values are changing the net income! If the /%change rate had fi%ed R Rs!@6' the revenues would have been same!

,-.
DATA ANALYSIS

Table:: CURRENCY EXCHANGE BETWEEN TWO RATES PROFIT&LOSS A/C FOR THE YEAR ENDED JUNE 2 Pa"#$%&la"' (R')$* %"+"e', !

I*%+-e a*. E/0e*'e'1 2 3 4"+- 4+"e$5* (I* .+lla"', A6e"a5e E/%7a*5e "a#e 1R')81 I4 #7e E/%7a*5e "a#e181 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) : =)28 !<8)2! 1 2)=: ) 28!)!< 12):2 2:<):= 8<)<2 <;=);! 2<8) 1 ) ;8:);; I4 #7e E/%7a*5e "a#e182 2:12):2 ) :<8)!= ;12)= 1 )=< :!8)8! ) 1<<:)12 !2:)2 =);; !!:) ; 1 =)<8 ) 22:)<< 12)22 2< );= 82)2: 28!!8)!1 22 )21 ) ;28)82

INCO9E Ne# +0e"a#$*5 I*%+-e EXPENSES 9a#e"$al %+*'&-0#$+* 9a*&4a%#&"$*5 e/0e*'e' Pe"'+*al e/0e*'e' Sell$*5 E/0e*'e' A.-$*$'#"a#$6e E/0e*'e' Ca0$#al$>e. E/0e*'e' C+'# +4 Sale' Re0+"#e. PBDIT O#7e" "e%&""$*5 $*%+-e A.?&'#e. PBDIT De0"e%$a#$+* O#7e" @"$#e +44' A.?&'#e. PBIT F$*a*%$al e/0e*'e' A.?&'#e. PBT Ta/ C7a"5e' A.?&'#e. PAT N+* "e%&""$*5A$#e-' O#7e" *+* %a'7 A.?&'#-e*#' Re0+"#e. PAT :!2;)22 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) :

<!!)28 1:22)<= 1!);2 =1:);= 2;:1)<8 =:!) ; 12) ! =<:)1< 1!;)21 !!8)=8 2 )2 !<8):8 !<);! 2!;)8! 82:):< 11 1);2

1R#P,2 C

2< 2 1< 1 <

I4 #7e E/%7a*5e "a#e181 I4 #7e E/%7a*5e "a#e182

<

= 11 1: 1< 1! 1= 21 2:

I"+/RPR/+#+I0"2 +his graph showing total revenues are alteration together' total revenues are increased Rs!<<86!6> crores to <C68!C' and gross profit also decreased Rs!>@E!9C to >8C!<9!simultaneously all these values are changing the net income! If the /%change rate had fi%ed R Rs!@6' the revenues would have been same!

,-.
DATA ANALYSIS Table:8 CURRENCY EXCHANGE BETWEEN TWO RATES PROFIT&LOSS A/C FOR THE YEAR ENDED JUNE 2 Pa"#$%&la"' (R')$* %"+"e', !

I*%+-e a*. E/0e*'e'1 2 3 4"+4+"e$5* (I* .+lla"', I4 #7e E/%7a* A6e"a5e I4 #7e 5e E/%7a*5e "a#e E/%7a*5e "a#e18 1R')81 "a#e181 : 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) : 2221)1! ) :82):8 !=:)<< 1 )2= :2<)<< ) 1<12)18 !8<) : =)28 !<8)2! 1 2)=: ) 28!)!< 12):2 2:<):= 8<)<2 <;=);! 2<8) 1 ) ;8:);; 2:!1)8! ) :2:)2: ;:2)22 11)21 :;:):; ) 1<= )1 !;1):! 1 )11 !=1)8; 112)1< ) 2!=):< 12)=2 222):; 8!)!8 21;)28 222)8 ) ;;<) 8

INCO9E Ne# +0e"a#$*5 I*%+-e EXPENSES 9a#e"$al %+*'&-0#$+* 9a*&4a%#&"$*5 e/0e*'e' Pe"'+*al e/0e*'e' Sell$*5 E/0e*'e' A.-$*$'#"a#$6e E/0e*'e' Ca0$#al$>e. E/0e*'e' C+'# +4 Sale' Re0+"#e. PBDIT O#7e" "e%&""$*5 $*%+-e A.?&'#e. PBDIT De0"e%$a#$+* O#7e" @"$#e +44' A.?&'#e. PBIT F$*a*%$al e/0e*'e' A.?&'#e. PBT Ta/ C7a"5e' A.?&'#e. PAT N+* "e%&""$*5A$#e-' O#7e" *+* %a'7 A.?&'#-e*#' Re0+"#e. PAT :!2;)22

<!!)28 1:22)<= 1!);2 =1:);= 2;:1)<8 =:!) ; 12) ! =<:)1< 1!;)21 !!8)=8 2 )2 !<8):8 !<);! 2!;)8! 82:):< 11 1);2

1R#P,2 @

2< 2 1< 1 <

I4 #7e E/%7a*5e "a#e181 I4 #7e E/%7a*5e "a#e18:

<

= 11 1: 1< 1! 1= 21 2:

I"+/RPR/+#+I0"2 +his graph showing total revenues are alteration together' total revenues are increased Rs!<<86!6> crores to <C>6!@>' and gross profit also decreased Rs!>@E!9C to >F6!C>!simultaneously all these values are changing the net income! If the /%change rate had fi%ed R Rs!@6' the revenues would have been same!

T*$ r 1$$<+o!!ar E6c*an#$ rat$" o($r t*$ !a"t )i($ ,$ar"

Ra#e' 8= 8; 8! 82 8< 88 8: 82 81 8 1==; 2 2 2 2 8 2 2 2 ; Ra#e'

INTRODUCTION TO THE FOREIGN EXCHANGE RISK MANAGEMENT Ri"8A Risk is the possibility that the actual result from an action will deviate from the e%pected levels of result! +he greater the magnitude of deviation and greater the probability of its occurrence' the greater is the risk! # business has to take step to minimi:e the risk by adopting appropriate techni;ue or policies! Risk management focuses on identifying and implementing these techni;ue or policies' lest the business should be left e%posed to uncertain outcomes! Ri"8 0ana#$0$ntA Risk management is a process to identify loss e%posure faced by an organi:ation and to select the most appropriate techni;ue such e%posures! Risk management tools measure potential loss and potential gain! It enables us to stay with varying degree of certainty and confidence levels' that our potential loss will not e%ceed a certain amount if we adopt a particular strategy! Risk management enables us to confront uncertainty head on' acknowledge its e%istence' try to measure its e%tent and finally control it! Risk management makes sense for two reasons! 0ne' a business entity generally wishes to reduce risks to acceptable levels! +wo' a business entity is generally keen on avoiding particularly kind of risks' for it may be too great for the business to bear! (or each situation where one wishes to avoid a risk= a loss by fire' for e%ample= three is' perhaps' a counter party who may be willing such risk! (or risk reduction' a business entity can adopt the following methods! H$+#in#A

,edging is a techni;ue that enables one party to minimi:e the effect of adverse outcomes' in a given situation! Parties come together to minimi:e the effect of which risk of one party gets cancelled by the risk of another! I+ is not that risk minimi:ation is the only strategy! #n entity may even choose to remain e%posed' in anticipation of reaping profits from its risk taking positions!

FOREIGN EXCHANGE EXPOSURE E61o" r$A /%posure is defined as the possibility of a change in the assets or liabilities or both of a company as a result in the e%change rate! (oreign e%change e%posure thus refers to the possibility of loss or gain to a company that arises due to e%change rate fluctuations! +he value of a firm5s assets' liabilities and operating income vary continually in response to changes in a myriad economic and financial variable such as e%change rates' interest rates' inflation rates' relative price and so forth! 3e can these uncertainties as macroeconomic environment risks! +hese risks affect all firms in the economy! ,owever' the e%tent and nature of impact of even macroeconomic risks crucially depend upon the nature of firm5s business! (or instance' fluctuations of e%change rate will affect net importers and e%porters ;uite differently! +he impact of interest rate fluctuations will be very different from that on a manufacturing firm! +he nature of macroeconomic uncertainty can be illustrated by a number of commonly encountered situations! #n appreciation of value of a foreign currencyGor e;uivalently' a depreciation of the domestic currencyH' increase the domestic currency value of a firm5s assets and liabilities denominated in the foreign currency=foreign currency receivables and payables' banks deposits and loans' etc! It ill also change domestic currency cash flows from e%ports and imports! #n increase in interest rates reduces the market value of a portfolio of fi%ed=rate in the rate of inflation may increase value of unsold stocks' the revenue from future sales as well as the future costs of production! +hus the firms e%posed to uncertain changes in a numbers of variable in its environment! +hese variables are sometimes called Risk (actors!

T*$ nat r$ o) E61o" r$ an+ Ri"8 /%posure are a measure of the sensitivity of the value of a financial items Gassets' liabilities or cash flowH to changes in the relevant risk factor while risk is a measurable of the variability of the item attributable to the risk factor! -orporate treasurers have become increasingly concerned about e%change rate and interest rate e%posure and risk during the last ten to fifteen years or so! In the case of e%change rate risk' +he increased awareness is firstly due to tremendous increase in the volume of cross border financial transactions Gwhich create e%posureH and secondly due to the significant increase in the degree of volatility in e%change ratesGwhich' given the e%posure' creates riskH C!a""i)ication o) )or$i#n $6c*an#$ $61o" r$ an+ ri"8 $ince the advent of floating e%change rates in 67>C' firms around the world have become acutely aware of the fact that fluctuations in e%change rates e%pose their revenues' costs' operating cash flows and thence their market value to substantial fluctuations! (irms which have cross=border transactions=e%ports and imports of goods and services' foreign borrowings and lending' foreign portfolio and direst investment etc' are directly e%posed2 but even purely domestic firms which have absolutely no cross border transactions are also e%posed because their customers' suppliers and competition are e%posed! -onsiderably effort has since been devoted to identifying and categori:ing currency e%posure and developing more and more sophisticated methods to ;uantify it! For$i#n $6c*an#$ $61o" r$ can &$ c!a""i)i$+ into t*r$$ &roa+ cat$#ori$"A +ransaction e%posure +ranslation e%posure 0perating e%posure

0f these' the first and third together are sometimes called -ash (low /%posure while the second is referred to as #ccounting /%posure or *alance sheet /%posure!

Tran"action $61o" r$ 3hen a firm has a payable or receivable denominated in a foreign currency' a change in the e%change rate will alter the amount of local currency receivable or paid! $uch a risk or e%posure is referred to as transaction e%posure! (or e%ample ' if an Indian e%porter has a receivable of ?699'699 due three months hence and if in the meanwhile the dollar depreciates relative to the rupee a cash loss occurs! -onversely' if the dollar appreciates relative to the rupee' a cash gain occurs! In the case of payable' the outcome is of an opposite kind2 a depreciation of the dollar relative to the rupee results in a gain' where as an appreciation of the dollar relative to the rupee result in a loss!

Tran"!ation $61o" r$ )any multinational companies re;uire that their accounts of foreign subsidiaries and branches get consolidated with those of it! (or such consolidation' assets and liabilities e%pressed in foreign currencies have to be translated into domestic currencies at the e%change rate prevailing on the consolidation dates! If the values of foreign currencies change between a two or successive consolidation dates' translation e%posure will arise! O1$ratin# $61o" r$ 0perating e%posure' like translation e%posure involve an actual or potential gain or loss! 3hile the former is specific to the transaction' the latter relates to entire investment! +he essence of this operating e%posure is that e%change rate changes significantly and alter the cost of firm5s inputs along with price of it output and thereby influence its competitive position substantially! /g2 Jolkwagon had ahighly successful e%port market for its 4beetle5 model in the U$ before 67>9! 3ith the breakdown of *retten=woods of fi%es e%changed rates' the deuschemark appreciated significantly against the dollar! +his created problem for Jolkswagan as its e%penses were mainly in deuschemark but its revenue in dollars!

,owever' in a highly price=sensitive U$ market' such an action caused a sharp decreased in sales volume=from 899'999 vehicles in 678F to <99'999 in 67>8! GIncidentally' Jolkswagen5s 67>C losses were the highest' as of that year' suffered by any company anywhere in the world!H

TOOLS AND TECHNIGUES FOR THE MANAGEMENT OF FOREIGN EXCHANGE RISK ,edging e%posures' sometimes called risk management' is widely resorted to by financial directors' corporate treasurers and portfolio managers! +he practice of covering e%posure is designed to reduce the volatility of a firm5s profits and or cash management and it presumably follows that this will reduce the volatility of the value of the firm! +here are a wide range of methods available to minimi:e foreign e%change risk which are classified as internal and e%ternal techni;ues of e%posure management! Int$rna! t$c*ni; $"

Internal techni;ues of e%posure management help to resolve e%posure risks through regulating the firms financial position! +hereby' they ensure that the firm is not endangered through e%posures! +he fundamental stress minimi:ing of not complete elimination of e%change losses that are likely to accrue as a result of e%posure! +hey use methods of e%posure management which are a part of a firm5s regulatory financial management and do not resort to special contractual relationship outside the group of companies concerned! +hey aim at reducing e%posed position or preventing them from arising! +hey embrace netting' matching' leading and lagging' pricing policies and asst liability management! Internal techni;ues of e%posure management do not rely on C rd party contracts to manage e%posed positions! Rather' it depends on internal financial management! E6t$rna! t$c*ni; $" +hese refer to the use of contractual relationship outside the group of companies so as to minimi:e the risk of foreign e%change losses! +hey insure against the possibility the e%change losses will result from an e%posed position which internal measures have not been able to eliminate! +hey include forward contracts' borrowing short term' discounting bills receivable' factoring' government e%change risk guarantees currency options! /%ternal techni;ues of foreign e%change e%posure management use contractual relationships outside the group to reduce risk of e%change rate changes! $everal e%ternal techni;ues are available fore foreign e%change management! +he firm can make a choice of that techni;ue which is most suitable to it!

TOOLS FOR FOREIGN EXCHANGE RISK MANAGEMNT For@ar+ $6c*an#$ contract # forward e%change contract is a mechanism by which one can ensure the value of one currency against another by fi%ing the rate of e%change in advance for a transaction e%pected to take place at a future date! (orward e%change rate is a tool to protect the e%porters and importers against e%change risk under foreign e%change contract' two parties one being a banker

compulsorily in India' enter into a contract to buy or sell a fi%ed amount of foreign currency on a specific future date or future period at a predetermined rate! +he forward e%change contracts are entered into between a banker and a customer or between two bankers! Indian e%porter' for instance instead of grouping in the dark or making a wild guess about what the future rate would be' enter into a contract with his banker immediately! ,e agrees to sell foreign e%change of specified amount and currency at a specified future date! +he banker on his part agrees to buy this at a specified rate of e%change is thus assured of his price in the local currency! (or e%ample' an e%porter may enter into a forward contract with the bank for C months deliver at Rs!@7!E9! +his rate' as on the date of contract' is known as C month forward rate! 3hen the e%porter submits his bill under the contract' the banker would purchase it at the rate of Rs!@7!E9 irrespective of the spot rate then prevailing!

3hen rupee was devaluated by about 6FB in Luly 6776' many importers found their liabilities had increased overnight! +he devaluation of the rupee had effect of appreciation of foreign currency in terms of rupees! +he importers who had booked forward contracts to cover their imports were a happy lot! Dat$ o) +$!i($r, #ccording to Rule > of (/D#I' a forward contract is deliverable at a future date' duration of the contract being computed from the spot value date of the transaction! +hus' if a C months forward contract is booked on 6< th (ebruary' the period of two months should commence from 6@th (ebruary and contract will fall on 6@th #pril! Fi6$+ an+ o1tion )or@ar+ contract" +he forward contract under which the delivery of foreign e%change should take place on a specified future date is known as 4(i%ed (orward -ontract5! (or instance' if on Eth )arch a customer enters into a three months forward contract with his bank to sell 1*P 69'999' it means the customer would be presenting a bill or any

other instrument on >th Lune to the bank for 1*P 69'999! ,e cannot deliver foreign e%change prior to or later than the determined date! (orward e%change is a device by which the customer tries to cover the e%change risk! +he purpose will be defeated if he is unable to deliver foreign e%change e%actly on the due date! In real situations' it is not possible for any e%porter to determine in advance the precise date! 0n which he is able to complete shipment and present document to the bank! #t the most' the e%porter can only estimate the probably date around which he would able to complete his commitment! 3ith a view to eliminate the difficulty in fi%ing the e%act date of delivery of foreign e%change' the customer may be given a choice of delivery the foreign e%change during a given period of days! #n arrangement whereby the customer can sell or buy from the bank foreign e%change on any day during a given period of time at a predetermined rate of e%change is known as 40ption (orward -ontract5! +he rate at which the deal takes place is the option forward sale contract with the bank with option over "ovember! It means the customer can sell foreign e%change to the bank on any day between 6s to C9th "ovember is known as the 40ption Period5! (orward contract is an effective ad easily available tool for covering e%change risk! "ew instruments like options' futures and swaps can also be used to cover e%change risks! +hese instruments are called financial derivatives as their value is derived from the value of some other financial contract or asset! 3hen there instrument are bought or sold for covering e%change risk they are used for 4hedging5 the e%change risk! 3hen they are dealt in with a view to derive profit from une%pected movements in their prices or other changes in the e%change market' they are being used for speculative purposes! +he scope of using these instruments for speculative purposes is very much limited in India!

$ome other $trategies may also be adapted to avoid e%change risk! +hese consist in deciding on the currency of invoicing' maintaining in foreign currency and deciding on the setting the debt!

FINDINGS OF THE STUDY

FINDINGS +he company has to hammer out its approach to risk management taking into account its specific circumstances! ,ere is brief description of company in India have fashioned its strategy towards )or$i#n $6c*an#$ ri"8 0ana#$0$nt! HCL THCHNOLOGIES ,-. +echnologies is one of IndiaDs leading global I+ $ervices companies' providing software=led I+ solutions' remote infrastructure management services and *P0! ,aving made a foray into the global I+ landscape in 6777 after its IP0' ,-. +echnologies focuses on +ransformational 0utsourcing' working with clients in areas that impact and re=define the core of their business! +he company leverages an e%tensive global offshore infrastructure and its global network of offices in 6F countries to deliver solutions across select verticals including (inancial $ervices' Retail A -onsumer' .ife $ciences A ,ealthcare' ,i=+ech A )anufacturing' +elecom and )edia A /ntertainment G)A/H! (or the ;uarter ended C9th $eptember <99>' ,-. +echnologies' along with its subsidiaries had last twelve months G.+)H revenue of U$ ? 6!E billion GRs! 8C8C croresH and employed @E'8<< professionals! #s its operations in many countries' the company is e%posed to currency risk! ,ere is the description2 6! +hey transact a major portion of their business in U$D and the lesser e%tent other currencies and is thus e%posed to currency risk' +he company manages risk on account of foreign currency fluctuations through treasury operations! <! +o mitigate the risk of changes in foreign e%change rates on cash flows denominated in U$D' ,-. technologies purchases foreign e%change forward contracts and the company does not speculate the currency e%change!

C! (oreign e%change transactions of their revenues were generally in U$D! +he average e%change rate of I"R to U$D in fiscal <99> was Rs!@6 against Rs!@@ in fiscal <998! +he above description of risk management in ,-. is based on the information provided in the annual report of ,-. for the year <99>!

CONCLUSIONS

CONCLUSIONS Despite market e%pansion the profit generation is still a ;uestion mark' so companies have to search for areas of ne%t generation like value added services' software enhancement and development other than just *P0 services to survive in the market! In the present day economies are globali:ed and the stabilities of them is really at stake' the only rescue for the software companies is to improve their responsiveness to the changing scenarios! -ompanies have to develop their services to the bench mark level or global standards so that they can have acceptance all over the world! +he troubles of many e%porters are not a result of the volatility of the rupee but the unfavourably high=cost structure! /%porters are viable only when foreign e%change earnings get converted into more and more rupees! +o improve rupee viability and preserve profits' e%porters need to be efficient and productive and bring down aggregate rupee cost! Poor viability will not be resolved by hedging! -onsidering an inefficient e%porter' it re;uires a breakeven e%change rate of Rs!@E dollar to show profit! It will da::le at a rate above Rs!@E! It will fi::le at any e%change rate below Rs!@E!

In case of forward contract! +he forward contract locks in the e%porter conversion of dollar revenues to rupee revenues at Rs!@6' the market forward price per dollar! +he market will surely not buy the e%porters dollars at Rs!@6 will be wholly ineffective e%porters will be in serious trouble despite the perfect hedge!

+he problem of viability will be solved only when the e%porters breakeven moves down to Rs!@6 per dollar! *y contrast' an inefficient e%porter that is viable at Rs!@6 peer dollar can take advantage of the hedge!

+he implicit dollar method will significantly preserve the dollar profitability e%porters! +he employees and managers of e%porting firms will be paid implicitly in dollars! +he cost to the company will be in dollars! *ut the payout will be in rupees and at the prevailing e%change rates! If the dollar weakens' the dollar costs of employees and managers will be paid out in rupees at say' R$!C7' if the dollar strengthens the cost of employees and managers will be paid out in rupees at say' Rs!@C!

+o overcome these problems e%porters should make good governance by making available superior human' social and business infrastructure even if the ta% rates are high! 1ood governance lower the costs of operations and lowers the aggregate costs of doing business!

BIBLIOGRAPHY 3ebsites www!google!com www!mecklai!com www!wipro!com www!infosys!com www!hcltechnologies!com *00K$ 6! (oreign /%change #rithmetic=)!jeevanandam <! International financial management=Prasanna -handra C! International financial management=P!1!#pte "/3$ P#R/R$

+he /conomic +imes *usiness .ine