Professional Documents
Culture Documents
Forex PJCT
Forex PJCT
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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 23 4"+- 4+"e$5*
(I* .+lla"',
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INCO9E
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EXPENSES
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9a*&4a%#&"$*5 e/0e*'e' <!!)28 :82):8 :82):8 :2=)8<
Pe"'+*al e/0e*'e' 1:22)<= !=:)<< !=:)<< !<8);8
Sell$*5 E/0e*'e' 1!);2 1)2= 1)2= 1)1!
A.-$*$'#"a#$6e E/0e*'e' =1:);= :2<)<< :2<)<< :8!)!2
Ca0$#al$>e. E/0e*'e' ) ) )
C+'# +4 Sale' 2;:1)<8 1<12)18 1<12)18 18;8)==
Re0+"#e. PBDIT =:!); !8<): !8<): !;)2=
O#7e" "e%&""$*5 $*%+-e 12)! =)28 =)1!
A.?&'#e. PBDIT =<:)1< !<8)2! !1!);2
De0"e%$a#$+* 1!;)21 12)=: 11)!1
O#7e" @"$#e +44' ) )
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F$*a*%$al e/0e*'e' 2)2 12):2 11)!2
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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 23 4"+- 4+"e$5*
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EXPENSES
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9a*&4a%#&"$*5 e/0e*'e' <!!)28 :82):8 :82):8 :<8)!=
Pe"'+*al e/0e*'e' 1:22)<= !=:)<< !=:)<< ;12)=
Sell$*5 E/0e*'e' 1!);2 1)2= 1)2= 1)=<
A.-$*$'#"a#$6e E/0e*'e' =1:);= :2<)<< :2<)<< :!8)8!
Ca0$#al$>e. E/0e*'e' ) ) )
C+'# +4 Sale' 2;:1)<8 1<12)18 1<12)18 1<<:)12
Re0+"#e. PBDIT =:!); !8<): !8<): !2:)2
O#7e" "e%&""$*5 $*%+-e 12)! =)28 =);;
A.?&'#e. PBDIT =<:)1< !<8)2! !!:);
De0"e%$a#$+* 1!;)21 12)=: 1=)<8
O#7e" @"$#e +44' ) )
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F$*a*%$al e/0e*'e' 2)2 12):2 12)22
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Ta/ C7a"5e' !<);! 8<)<2 82)2:
A.?&'#e. PAT 2!;)8! <;=);! 28!!8)!1
N+* "e%&""$*5A$#e-' 82:):< 2<8)1 22)21
O#7e" *+* %a'7 A.?&'#-e*#' ) )
Re0+"#e. PAT 111);2 ;8:);; ;28)82
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I4 #7e E/%7a*5e "a#e181
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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 23 4"+-
4+"e$5* (I* .+lla"',
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EXPENSES
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9a*&4a%#&"$*5 e/0e*'e' <!!)28 :82):8 :82):8 :2:)2:
Pe"'+*al e/0e*'e' 1:22)<= !=:)<< !=:)<< ;:2)22
Sell$*5 E/0e*'e' 1!);2 1)2= 1)2= 11)21
A.-$*$'#"a#$6e E/0e*'e' =1:);= :2<)<< :2<)<< :;:):;
Ca0$#al$>e. E/0e*'e' ) ) )
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Re0+"#e. PBDIT =:!); !8<): !8<): !;1):!
O#7e" "e%&""$*5 $*%+-e 12)! =)28 1)11
A.?&'#e. PBDIT =<:)1< !<8)2! !=1)8;
De0"e%$a#$+* 1!;)21 12)=: 112)1<
O#7e" @"$#e +44' ) )
A.?&'#e. PBIT !!8)=8 28!)!< 2!=):<
F$*a*%$al e/0e*'e' 2)2 12):2 12)=2
A.?&'#e. PBT !<8):8 2:<):= 222):;
Ta/ C7a"5e' !<);! 8<)<2 8!)!8
A.?&'#e. PAT 2!;)8! <;=);! 21;)28
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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*$ r1$$<+o!!ar E6c*an#$ rat$" o($r t*$ !a"t )i($ ,$ar"
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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*$ natr$ 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 andor 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;$"
Internal techni;ues of e%posure management help to resolve e%posure risks through
regulating the firms financial position! +hereby' they ensure that the firm is not
endangered through e%posures! +he fundamental stress minimi:ing of not complete
elimination of e%change losses that are likely to accrue as a result of e%posure!
+hey use methods of e%posure management which are a part of a firm5s regulatory
financial management and do not resort to special contractual relationship outside the
group of companies concerned! +hey aim at reducing e%posed position or preventing
them from arising! +hey embrace netting' matching' leading and lagging' pricing
policies and asstliability management!
Internal techni;ues of e%posure management do not rely on C
rd
party contracts to
manage e%posed positions! Rather' it depends on internal financial management!
E6t$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 E
th
)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 6
s
to C9
th
"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