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    H.T.NO. 11-06-127

    Project submitted in partial fulfillment for the award of Degree of



    Osm!" U!"#$%s"&'( H')$%*) + ,00007

  • 8/10/2019 a study on risk management.doc



    I hereby declare that this Project Report titled A STUDY ON FOREIGN EXCHANGE

    AND ITS RISK MANAGEMENT submitted by me to the Department

    VIVEKANANDA SCHOOL OF G STUDIES is a bonafide work under taken by me

    and it is not submitted to any other ni!ersity 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


  • 8/10/2019 a study on risk management.doc



    I e'press my profound gratitude to (r# )# R%*+$%D+, -aculty (#B#% for his guidance

    and support all through the completion of the project#

    I also e'press my hurtful thanks to DR# P# )enkateswara Rao .Director/ of )I)01%$%$D%

    &2+334 3- P3&5 *R%D%50 &5DI0& for pro!iding !aluable suggestions in

    completions of the project#

    I take this opportunity to acknowledge unreser!ed support e'tended to me by the Project and

    5raining team of +24 502+$343*I0

    I am !ery much indebted to the dedicated and e'perienced staff of (B%#

    It is indeed a pleasant task and small effort to thank all the people especially some of my

    friends who ha!e 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#

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    % (ultinational company with high currency risk is likely to face financial difficulties

    which tend to ha!e a disrupting on the operating side of the business#

    % disrupted financial conditions are likely to6

    Result in the problem of ad!erse incenti!es#

    7eakens the commitment of !arious stake holders#

    -oreign e'change e'posure and risk are important concept in the study of international

    finance# It is the sensiti!ity of the home currency !alue of asset, liabilities, or operating

    incomes to unanticitpated changes in the e'change rates#0'posure e'ists if the home currency !alues on an a!erage in a particular manner# It also

    e'ists where numerous currencies are in!ol!ed#

    -oreign e'change risk is the !ariance of the home currency !alue of items arising on account

    of unanticipated changes in the e'change rates#

    5he deri!ati!e instruments like forwards, futures and options are used to hedge against the

    foreign e'change risk of the (ultinational companies#

    5he original deri!ati!es contract of International -inance is the 8-orward e'change contract9#

    -orward -oreign e'change is a traditional and popular risk management tool to obtain

    protection against ad!erse e'change rate mo!ements# 5he e'change rate is 8locked in9 for a

    specific date in future, which enables the person in!ol!ed in the contract to plan for and

    budget the business e'penses with more certainty#

    -orward e'change market, has since the :;

  • 8/10/2019 a study on risk management.doc


  • 8/10/2019 a study on risk management.doc



    S.!/ %&"%s 3$ !/.

    1 O*4$&"#$s /5 &$ s&)'

    2 R$s$% M$&/)//3'

    8 L"m"&&"/!s Assm9&"/!s

    : I!&%/)&"/! &/ /m9!'

    , N$$) "m9/%&!$ /5 &$ s&)'

    6 I!)s&%' 9%/5"$

    7 I!&%/)&"/! &/ 5/%$"3! $;!3$

    < T$ 5/%$"3! $;!3$ m%=$&

    > T$ 5/%$"3! $;!3$ &%!s&"/!s

    10 I!&%/)&"/! &/ 5/%$"3! $;!3$ %"s= m!3$m$!&

    11 T//s &$!"?$s 5/% &$ m!3$m$!& /5 %"s=

    12 F"!)"!3s /5 &$ s&)'

    18 C/!s"/!s

    1: B"*"/3%9'


    S.!/ %&"%s 3$ !/.

    1 T*$-1

    2 T*$-2

    8 T*$-8

    : T*$-:

  • 8/10/2019 a study on risk management.doc



  • 8/10/2019 a study on risk management.doc



    5o study and understand the foreign e'change#

    5o study and analy>e the re!enues of the company when the e'change rates fluctuate#

    5o analy>e income statement and find out the re!enues when the dollars are con!erted

    into Indian rupees#

    5o 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#

    5o present the findings and conclusions of the company in respect of foreign

    e'change risk management

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  • 8/10/2019 a study on risk management.doc




    In this study the sample si>e is taken in the form of income statement of company for the

    year march @==

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    5he total re!enues of the income statements are con!erted from &% C to Indianrupee#

    5he re!enues of the companies are di!ided into =6

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    5he study is confined just to the foreign e'change risk but not the total risk#

    5he analysis of this study is mainly done on the income statements#

    5his study is limited for the year @==

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  • 8/10/2019 a study on risk management.doc




    +24 0nterprise is a leading *lobal 5echnology and I5 enterprise that comprises two

    companies listed in India A +24 5echnologies E +24 Infosystems# 5he GAdecadeAold

    enterprise, founded in :;

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    built domain depth through a microA!erticali>ation strategy in industries such as

    -inancial &er!ices, +iAtech and (anufacturing, Retail, (edia and 0ntertainment, 4ife

    &ciences, and 5elecom#

    +24 has created the ability to distribute !alue across the customerHs I5 landscape

    through its wellAdistributed ser!ices portfolio, significant domain strengths, and

    locally rele!ant geographic distribution# +24 has the widest ser!ice portfolio among

    Indian I5 ser!ice pro!iders, with each of its ser!ices ha!ing attained critical mass#

    3ur fi!e mature lines of business are RED and 0ngineering, 2ustom %pplications,

    0nterprise %pplications, I5 Infrastructure (anagement, and BP3 &er!ices# In

    addition, +24 has recently launched its 0nterprise 5ransformation &er!ice offerings

    comprising of Business, 5echnology, %pplication and Data 5ransformation K the four

    broad needs of any enterprise# 3ur ability to synergistically integrate these ser!ice

    lines across the entire I5 landscape creates new >ones for !alue creation# %dditionally,

    +24 has created uni?ue ser!ice leadership in each of these areas through bestAofA

    breed uni?ue propositions# +249s leadership in these ser!ice areas has been

    recogni>ed by se!eral leading independent analysts#

    In @==, +24 started ?uestioning the linearity of scaleAdri!en business models

    adopted by ser!ice pro!iders .largely in the I5 application business/# 5he ?uestioning

    led us to the belief that the market was rapidly approaching a point of inflection, that

    is a point where the !olume and !alue proportionality would change, opening up new

    opportunities for ser!ice pro!iders who aspire to focus on !alue# 7ith this reali>ation,

    +24 embarked on a transformational journey that focuses on !alue centricity in

    customer relationships and on le!eraging new market opportunities, while creating a

    uni?ue employee e'perience# +ence +24 entered a new phase of e!olution K

    transforming it from a !olumeAdri!en ser!ice pro!ider to !alueAcentric enterprise that

    turns technology into competiti!e ad!antage for all its customers across the globe#

    5oday +249s new way of doing business is being recogni>ed by +ar!ard, ID2,

    -ortune, -orbes, 0conomist, Business 7eek and the likes#

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  • 8/10/2019 a study on risk management.doc



    5he world nations are increasingly becoming more interrelated global trade, and global

    in!estment# 5hese international result in cross country flow of world nations# 2ountries hold

    currencies of other countries and that a market, dealing of foreign e'change results#

    -oreign e'change means reser!es of foreign currencies# (ore aptly, foreign e'change refers

    to claim to foreign money balances# -oreign e'change gi!es resident of one country a

    financial claim on other country or countries# %ll deposits, credits and balances payable in

    foreign currency and any drafts, tra!elers9 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# 5ransactions in currencies of countries, parties to these

    transactions, rates at which one currency is e'changed for other or others, ramificataion in

    these rates, deri!ati!es to the currencies and dealing in them and related aspects constitute the

    foreign e'change .in short, fore'/ market#

    -oreign e'change transactions take place whene!er a country imports goods and ser!ices,

    people of a country undertake !isits to other counties, citi>ens of a country remit money

    abroad for whate!er purpose, business units set up foreign subsidiaries and so on# In all these

    cases the nation concerned buys rele!ant and re?uired foreign e'change, in e'change of its

    currency, or draws from foreign e'change reser!es built# 3n the other hand, when a country

    e'ports goods and ser!ices to another country, when people of other countries !isit the

    country, when citi>ens of the country settled abroad remit money homewards, when foreign

    citi>ens, firms and institutions in!est in the country and when the country or its business

    community raises funds from abroad, the country9s currency is bought by others, gi!ing

    foreign e'change, in e'change#

    (ultinational firms operate in more than one country and their operations in!ol!e multiple

    foreign currencies# 5heir operations are influenced by politics and the laws of the counties

    where they operate# 5hus, 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

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    changes in interest rates, inflation rates and e'change rates on their decisions and minimi>e

    the foreign e'change risk#

    5he 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#

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    5he !ision of information 5echnology .I5/ policy is to use It as a tool for raising the li!ing

    standards of the common man and enriching their li!es# 5hough, urban India has a high

    internet density, the go!ernment also wants P2 and Internet penetration in the rural India#

    In Information technology .I5/, India has built up !aluable brand e?uity in the global

    markets# In I5Aenables ser!ices .I50&/, India has emerged asa the most preferred destination

    for business process outsourcing .BP3/,a key dri!er of growth for the software industry and

    the ser!ices sector#

    India9s most pri>ed resource in today9s knowledge economy is its readily a!ailable technical

    work force# India has the second largest 0nglish speaking scientific professionals in the

    world, second only to the #

    %ccording the data from ministry of communication and information technology, the I50&A

    BP3 industry has grown by per cent with e'port earnings of &C G#< billion during @==GA

    @==# 3utput of the Indian electronic and I5 industry is estimated to ha!e grown by :J#@

    percent to Rs#:,:,

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    0'ports markets continue to dominant the domestic segment# 5he si>e of the domestic market

    in software relati!e to the e'port market for Indian software, which was #@ percent in :;;JA

    ;;, after declining rapidly to @;#J percent in ==:A=@, fell only to @;#: percent and @#

    percent in the two subse?uent years#

    )alue of software and ser!ices e'port is estimated to ha!e increased by G= percent to

    &C:@# billion in @==GA=# 5he software technology parks of India ha!e reported software

    e'ports of RG:,J crore . &C

  • 8/10/2019 a study on risk management.doc


    In order to broaden the internet base, the Department of Information technology has also

    announced a programme to establish &tate 7ide %rea $et work .&7%$/ up to the block

    le!el to pro!ide connecti!ity for eAgo!ernance# 5he Department also set up community

    Information centers .2I2s/ in hilly, farAflung areas of the $orthA0ast and Lammu and

    1ashmir to facilitate the spread of benefit of information and communication technology# It is

    also proposed to set up 2I2s in other hilly, farAflang areas of the country like ttaranchal,

    %ndamanE$icobar and 4akshadweep#

    % number of steps ha!e taken to meet the challenge of >ero duty regime in @== under the

    Information 5echnology %greement .I5%A:/ 5ariffs on raw materials, parts, other inputs and

    capital goods ha!e been rationali>ed to make domestic manufacturing !iable and competiti!e#

  • 8/10/2019 a study on risk management.doc



  • 8/10/2019 a study on risk management.doc





    D$5"!"&"/! /5 I!&$%!&"/! T%)$6

    International trade refers to trade between the residents of two different countries# 0ach

    country functions as a so!ereign state with its own set of regulations and currency# 5he

    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 are6

    a/ Different countries ha!e different monetary unitsM

    b/ Restrictions imposed by counties on import and e'port of goods6

    c/ Restrictions imposed by nations on payments from and into their countriesM

    d/ Different in legal practices in different countries#

    5he e'isting of national monetary units poses a problem in the settlement of international

    transactions# 5he e'porter would like to get the payment in the currency of own country#

    -or instance, if %merican e'porter of $ew York e'port machinery to Indian rupee will

    not ser!e their purpose because Indian rupee cannot be used as currency inn rupees# 5hus

    the e'porter re?uires payment in the importer9s country# % need, therefore, arises for

    con!ersion of the currency of the importer9s country into that of the e'porters country#

    F/%$"3! $;!3$ -oreign e'change is the mechanism by which the currency of one

    country gets con!erted into the currency of another country# 5he con!ersion is done by

    banks who deal in foreign e'change# 5hese banks maintain stocks of foreign currencies in

    the form of balances with banks abroad# -or instance, Indian Bank may maintain an

    account with Bank of %merica, new York, in which dollar are held# In the earlier

    e'ample, if Indian importers pay the e?ui!alent rupee to Indian bank, it would arrange to

    pay %merican e'port at $ew York in dolor from the dollar balances held by it with Bank

    of %merica#

    E;!3$ %&$

  • 8/10/2019 a study on risk management.doc


    5he rate at which one currency is con!erted into another currency is the rate of e'change

    between the currencies concerned# 5he 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#= a dollar, the

    e'change rate between rupee and dollar can be e'pressed as

    &D :NRs#=#

    5he 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, !i>#, 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 !iolently too#

    S/m$ /5 &$ "m9/%&!& 5&/%s " 55$& $;!3$ %&$s %$

    Balance of payments


    Interest rates

    (oney &upply

    $ational Income

    Resource Disco!eries

    2apital (o!ements

    Political -actors

    Psychological -actors and &peculation

    5echnical and (arket -actors

    B!$ /5 9'm$!& It represents the demand for and supply of foreign e'change which

    ultimately determine the !alue of the currency# 0'porters from the country demand for the

    currency of the country in the fore' market# 5he e'porters would offer to the market the

  • 8/10/2019 a study on risk management.doc


    foreign currencies ha!e ac?uired and demand in e'change the local currency# 2on!ersely,

    imports into the country will increase the supply of currency of the country in the fore'

    market# 7hen the B3P of a country is continuously at deficit, it implies that demand for the

    currency of the country is lesser than the supply# 5herefore, its !alue in the market declines#

    If the BP3 is surplus, continuously, it shows the demand for the currency is higher than its

    supply and therefore the currency gains in !alue#

    I!5&"/! inflation in the country would increase the domestic prices of the commodities#

    7ith increase in pri>es e'ports may dwindle because the price may not be competiti!e# 7ith

    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 !alue of the currency# It should be noted that it is the relati!e

    rate of inflation in the two counties that cause changes in the e'change rates#

    I!&$%$s& %&$s5he interest rate has a great influence on the shortAterm mo!ement of capital#

    7hen the interest rate at a center rises, it attracts short term funds from other centers# 5his

    would increase the demand for the currency at the center and hence its !alue# Rising of

    interest rate may be adopted by a country due to money conditions or as a deliberate attempt

    to attract foreign in!estment#

    M/!$' s99'%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#

    N&"/! "!/m$%n increase in national income reflects increase in the income of the

    residents of the country# 5he 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# 5here is a change for growth in e'ports too# 7here 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# 5he result is similar to

    that of inflation !i>#, and decline in the !alue of the currency# 5hus an increase in national

    income will lead to an increase in in!estment or in the consumption, and accordingly, its

    effect on the e'change rate will change#

    R$s/%$ )"s/#$%"$s7hen the country is able to disco!er key resources, its currency gains

    in !alue#

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    C9"& M/#$m$!&s 5here are many factors that influence mo!ement of capital from one

    country to another# &hort term mo!ement 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 shortAterm funds into the country and the e'change rate of

    the country will rise# Reser!es will happen in case of fall in interest rates#

    Bright in!estment climate and political stability may encourage portfolio in!estment in the

    country# 5his leads to higher demand for the currency and upward trend in its rate# Poor

    economic outlook may mean repatriation of the in!estments leading to decreased demand and

    lower e'change !alue for the currency of the country#

    (o!ement of capital is also caused by e'ternal borrowings and assistance# 4argeAscale

    e'ternal borrowings will increase the supply of foreign e'change in the market# 5his will

    ha!e a fa!orable effect on the e'change rate of the currency of the country# 7hen a

    repatriation of principal and interest starts the rata may be ad!ersely affected#

    3ther factors include political factors, Psychological factors and &peculation, 5echnical and

    (arket factors#


    5he 2entral *o!ernment has been empowered under &ection < of the -oreign 0'change

    (anagement %ct to make rules to carry out the pro!isions of the %ct# &imilarly, &ection

  • 8/10/2019 a study on risk management.doc


    empowers the Reser!e Bank to make regulations to carry out the pro!isions of the %ct and

    the rules made there under#

    5he -oreign 2ontribution .Regulation/ %ct, :;< is to regulate the acceptance and utili>ation

    of foreign contribution" donation or foreign hospitality by certain persons or associations ,

    with a !iew to ensuring that Parliamentary institutions, political associations and academic

    and other !oluntary organi>ations as well as indi!iduals working in the important areas of

    national life may function in a manner consistent with the !alues of a so!ereign democratic


    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

    India9s interests#

    5he -oreign 0'change (anagement %ct .-0(%/ is a law to replace the draconian -oreign

    0'change Regulation %ct, :;G# %ny offense under -0R% was a criminal offense liable to

    imprisonment, 7hereas -0(% seeks to make offenses relating to foreign e'change ci!il

    offenses# nlike other laws where e!erything is permitted unless specifically prohibited,

    under -0R% nothing was permitted unless specifically permitted# +ence the tenor and tone of

    the %ct was !ery drastic# It pro!ided for imprisonment of e!en a !ery minor offense# nder

    -0R%, a person is presumed innocent unless he is pro!en guilty# 7ith liberali>ation, a need

    was felt to remo!e the drastic measure of -0R% and replace them by a set of liberal foreign

    e'change management regulations# 5herefore -0(% was enacted to replace -0R%#

    -0(% e'tends to the whole of India# It applies to all Branches, offences and agencies outside

    India owned or controlled by a person resident in India and also to any contra!ention there

    under committed outside India by any person to whom this %ct applies#

    -0(% contains definitions of certain terms which ha!e been used throughout the %ct# 5he

    meaning of these terms may differ under other laws or common language# But for the

    purpose of -0(%, the terms will signify the meaning as defined there under#

    A&/%"$) 9$%s/!s

  • 8/10/2019 a study on risk management.doc


    7ith the Reser!e Bank 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 recei!ed or re?uired by a large

    number of e'ports and imports in the country spread o!er a !ast geographical area# It would

    be impossible for the reser!e Bank to deal with them indi!idually# 5herefore, pro!isions has

    been made in the %ct, enabling the Reser!e Bank 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 offA shore banking unit or any other manner as it deems fit#

    A&/%"$) )$$%s

    % major portion of actual dealing in foreign e'change from the customers .importers,

    e'porters and others recei!ing or making personal remittance/ is dealt with by such of the

    banks in India which ha!e been authori>ed by Reser!e

    Bank to deal in foreign e'change# &uch of the banks and selected financial institutions who

    ha!e been authori>ed Dealer#


    20$5R%4 *3)0R$(0$5

    R0&0R)0 B%$1 3- I$DI%

    %5+3RI&0D P0R&3$&

    -3R0I*$ 0O2+%$*0 D0%40R

    %&&32I%5I3$ 3- I$DI%

    %5+3RI&0D (3$0Y %5+3RI&0D D0%40R&


    -3R0I*$ 0O2+%$*0 (%$%*0(0$5 %25

  • 8/10/2019 a study on risk management.doc


    -44 -40D*0 R0&5RI250D



    -0D%I was establishing in :;J as an association of all authori>ed dealers in India# 5he

    principal functions of -0D%I are6

    5o frame rules for the conduct of foreign e'change business in India# 5hese rules co!er

    !arious aspects like hours of business, charges for foreign e'change transactions, ?uotation of

    rates to customer, inter bank dealings, etc# %ll authori>ed dealers ha!e gi!en undertaking to

    the Reser!e Bank to abide these rules#

    5o coordinate with Reser!e Bank of India in Proper administration of e'change control#

    5o control information likely to be of interest to its members#

    5hus, -0D%I pro!ides a !ital link in the administrati!e setAup of foreign e'change in India#


    5o pro!ide facilities for encashment of foreign currency for tourists, etc#, Reser!e Bank has

    granted limited licenses to certain established firms, hotels and other organi>ations permitting

    them to deal in foreign currency notes, coins and tra!elers9 che?ues subject to directions

    issued to them from time to time# 5hese firms and organi>ations are called 8%uthori>ed

    (oney 2hangers9# %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 tra!elers9 che?ues subject to the condition that

    all such collections are surrendered by him in turn to authori>ed dealer in foreign e'change#

    5he current thinking of the Reser!e Bank is to authori>e more establishments as authori>ed

    money changers in order to facilitate easy con!ersion facilities#

  • 8/10/2019 a study on risk management.doc



    5he -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 con!ersion of one currency to another for !arious

    purposes like trade, payment for ser!ices, de!elopment projects, speculation etc# &ince the

    number of participants in the market s has increased o!er the years ha!e become highly

    competiti!e and efficient#

    7ith impro!ement in trade between countries, there was a pressing need to ha!e some

    mechanism to facilitate easy con!ersion of currencies# 5his has been made possible by the

    foreign e'change markets#

    2onsidering international trade, a country would prefer to import goods for which it does not

    ha!e a competiti!e ad!antage, while e'porting goods for which it has a competiti!e

    ad!antage o!er others#

    5hus 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 deli!ery# $o

    supplier would be willing to wait until actual deli!ery for recei!ing payments# +ence, credit

    is !ery important at e!ery stage of the transaction# 5he much needed credit ser!icing and

    con!ersion of the currency is facilitated by the foreign e'change market#

    %lso the e'change rates are subject to wide fluctuations# 5here is therefore, a constant risk

    associated e'change markets co!er 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 o!er phone#

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    -oreign e'change transactions taking place in foreign e'change markets can be broadly

    classified into Inter bank transactions and (erchant transactions# 5he foreign e'change

    transactions taking place among banks are known as inter bank transactions and the rates

    ?uoted are known as inter bank rates# 5he foreign e'change transactions that take place

    between a bank and its customer known as9 (erchant transactions9 and the rates ?uoted are

    known as merchant rates#

    (erchant transactions take place when as e'porter approaches his bank to con!ert his sale

    proceeds to home currency or when an importer approaches his banker to con!ert domestic

    currency into foreign currency to pay his dues on import or when a resident approaches his

    bank to con!ert foreign currency recei!ed by him into home currency or !ice !ersa# 7hen 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$ m/)$s /5 5/%$"3! $;!3$ %$m"&&!$s

    -oreign e'change transactions in!ol!e 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# 5he former is

    known as inward remittance and the latter is known as outward remittance#

    Remittance could take place through !arious modes# &ome of them are6

    Demand draft

    (ail transfer

  • 8/10/2019 a study on risk management.doc


    5elegraphic transfer

    Personal che?ues

    T'9$s /5 *'"!3 %&$s

    55 buying rate and

    Bill buying rate

    55 buying rate is the rate applied when the transaction does not in!ol!e 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 ha!e been credited# 5his rate is calculated by deducting from the inter

    bank buying rate the e'change margin as determined by the bank#

    B" *'"!3 %&$5his is the rate to be applied when foreign bill is purchased# 7hen a bill is

    purchased, the rupee e?ui!alent of the bill !alues is paid to the e'porter immediately#+owe!er, the proceeds will be reali>ed by the bank after the bill is presented at the o!erseas


    T'9$s /5 s$"!3 %&$s

    55 selling rates

    Bill selling rates

    TT S$"!3 %&$%ll sale transactions which do not handling documents are put through at

    55 selling rates#

    Bill &elling rates6 5his is the rate applied for all sale transactions with public which in!ol!e

    handling of documents by the bank#

  • 8/10/2019 a study on risk management.doc


    I!&$% B!= &%!s&"/!s

    5he e'change rates ?uoted by banks to their customer are based on the rates pre!alent in the

    Inter Bank market# 5he 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# 7hen

    a banker approaches the market maker, it would not re!eal its intention to buy or sell the

    currency# 5his is done in order to get a fair price from the market maker#

    T/ ' ?/&&"/!s

    5ypically, then ?uotation in the Inter Bank market is a twoA 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 & dollars as under#

    &D :N Rs#:#:@":

  • 8/10/2019 a study on risk management.doc


    5his type of ?uotation which gi!es the ?uality of foreign currency per unit of domestic

    currency is known as indirect ?uotation# In this case, the ?uoting bank will recei!e &D


  • 8/10/2019 a study on risk management.doc


    &pot rate of e'change is the rate for immediate deli!ery of foreign e'change# It is pre!ailing

    at a particular point of time# In a forward rate, the ?uoted is for deli!ery at a future date,

    which is usually G=, ed discount

    or premium in a forward ?uote, in relation to the spot rate, is computed by the following#

    -orward Premium N -orward rateAspot rate Q :@

    .discount / &pot rate $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#

    F/%%) m%3"!S9 9/"!&s

    -orward rate may be the same as the spot rate for the currency# 5hen it is said to be 8at par9

    with the spot rate# But this rarely happens# (ore often the forward rate for a currency may be

    costlier or cheaper than its spot rate# 5he difference between the forward rate and the spot

    rate is known as the 8-orward margin9 or 8&wap Points9# 5he 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 deli!ery than for spot deli!ery#

    nder direct ?uotation, premium is added to the spot rate to arri!e at the forward rate# 5his is

    done for both purchase and sale transactions# Discount is deducted from spot rate to arri!e at

    the forward rates#

    O&$% %&$s

    Buying 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# But in practices, the

    selling rate is higher than the buying rate# 5he 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 8buy and sell9 rates differences#

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    5ransactions in e'change market consist of purchases and sales of currencies between dealers

    and customers and between dealers and dealers# 5he dealers buy fore' in the form of bills,

    drafts and with foreign banks, from customer to enable them to recei!e payments from


    5he resulting accumulated currency balances with dealers are disposed of by selling

    instruments to customers who need fore' to make payment to foreigners# 5he selling price

    for a currency ?uoted by the dealer .a bank/ is slightly higher than the purchase price to gi!e

    the bank small profit in the business# 0ach dealer gi!es a twoAway ?uote in fore'#

    S"!3$ R&$ 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#

    F";$) %&$refers to that rate which is fi'ed in terms of gold or is pegged to another currency

    which has a fi'ed !alue in terms of gold# -le'ible rate keeps the e'change rate fi'ed o!er a

    short period, but allows the same to !ary in the long term in !iew of the changes and shifts in

    another as conditioned by the free of market forces# 5he rate is allowed to freely float at all


    C%%$!& %&$ 2urrent rate of e'change between two currencies fluctuate from day to day or

    e!en minute to minute, due to changes in demand and supply# But these mo!ements take

    place around a rate which may be called the 8normal rate9 or the par of e'change or the true

    rate# International payments are made by different instruments, which differ in their time to


    A T$$3%9" T%!s5$% TTis the ?uickest means of effecting payments# % 5#5 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"3& %&$sapplicable in the case of bill instrument with attending delay in maturity and

    possible loss of instrument in transit, are lower than most other rates#

  • 8/10/2019 a study on risk management.doc


    &imilarly, there are other clusters of rates, such as, one month9s rate, Gmonth9s rate# 4onger

    the duration, lower the price .of the foreign currency in terms of domestic/#

    5he e'change rate between two gi!en currencies may be obtained from the rates of these two

    currencies in terms of a third currency# 5he resulting rate is called the 2ross rate#

    A%*"&%3$ 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

    in!ol!es no risk as rates are known in ad!ance# -urther, there is no in!estment re?uired, as

    the purchase of one currency is financed by the sale of other currency# %rbitrageurs gain in

    the process of arbitraging#

  • 8/10/2019 a study on risk management.doc


    D%5% %$4%Y&I& %$D I$5R0PR05%5I3$

  • 8/10/2019 a study on risk management.doc






    Pa"#$%la"' (R')$* %"+"e', I*%+-e a*. E0e*'e' 3 4"+- 4+"e$5*(I* .+lla"',


    E%7a*5e "a#eR')81

    I4 #7eE%7a*5e"a#e81

    I4 #7eE%7a*5e"a#e8


    Ne# +0e"a#$*5 I*%+-e !;)2 221)1! 221)1! 22)2


    9a#e"$al %+*'-0#$+* ) ) )

    9a*4a%#"$*5 e0e*'e'

    Pe"'+*al e0e*'e' 122)

  • 8/10/2019 a study on risk management.doc


    *R%P+6 :

    I$50RPR05%5I3$6 5his graph showing total re!enues are alteration together, totalre!enues are decreased Rs#@@

  • 8/10/2019 a study on risk management.doc






    Pa"#$%la"' (R')$* %"+"e', I*%+-e a*. E0e*'e' 3 4"+- 4+"e$5*(I* .+lla"',


    E%7a*5e "a#eR')81

    I4 #7eE%7a*5e"a#e81

    I4 #7eE%7a*5e"a#e=


    Ne# +0e"a#$*5 I*%+-e !;)2 221)1! 221)1! 21Pe"'+*al e0e*'e' 122)

  • 8/10/2019 a study on risk management.doc


    *R%P+6 @

    I$50RPR05%5I3$6 5his graph showing total re!enues are alteration together, totalre!enues are decreased Rs#@@

  • 8/10/2019 a study on risk management.doc






    Pa"#$%la"' (R')$* %"+"e', I*%+-e a*. E0e*'e' 3 4"+- 4+"e$5*(I* .+lla"',


    E%7a*5e "a#eR')81

    I4 #7eE%7a*5e"a#e81

    I4 #7eE%7a*5e"a#e82


    Ne# +0e"a#$*5 I*%+-e !;)2 221)1! 221)1! 21)2


    9a#e"$al %+*'-0#$+* ) ) )

    9a*4a%#"$*5 e0e*'e'

    Pe"'+*al e0e*'e' 122)

  • 8/10/2019 a study on risk management.doc


    *R%P+6 G

    I$50RPR05%5I3$6 5his graph showing total re!enues are alteration together, total

    re!enues are increased Rs#@@

  • 8/10/2019 a study on risk management.doc






    Pa"#$%la"' (R')$* %"+"e', I*%+-e a*. E0e*'e' 3 4"+-4+"e$5* (I* .+lla"',

    A6e"a5eE%7a*5e "a#e


    I4 #7eE%7a*5e"a#e81

    I4 #7eE%7a*



    Ne# +0e"a#$*5 I*%+-e !;)2 221)1! 221)1! 2!1)8!


    9a#e"$al %+*'-0#$+* ) ) )

    9a*4a%#"$*5 e0e*'e'

    Pe"'+*al e0e*'e' 122)

  • 8/10/2019 a study on risk management.doc



    I$50RPR05%5I3$6 5his graph showing total re!enues are alteration together, totalre!enues are increased Rs#@@

  • 8/10/2019 a study on risk management.doc


    T$ %9$$-)/% E;!3$ %&$s /#$% &$ s& 5"#$ '$%s

  • 8/10/2019 a study on risk management.doc




    Risk is the possibility that the actual result from an action will de!iate from the e'pected

    le!els of result# 5he greater the magnitude of de!iation 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#

    R"s= m!3$m$!&

    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

    !arying degree of certainty and confidence le!els, 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


    Risk management makes sense for two reasons# 3ne, a business entity generally wishes to

    reduce risks to acceptable le!els# 5wo, a business entity is generally keen on a!oiding

    particularly kind of risks, for it may be too great for the business to bear# -or each situation

    where one wishes to a!oid a riskA a loss by fire, for e'ampleA three is, perhaps, a counter

    party who may be willing such risk# -or risk reduction, a business entity can adopt the

    following methods#


    +edging is a techni?ue that enables one party to minimi>e the effect of ad!erse outcomes, in

    a gi!en situation# Parties come together to minimi>e the effect of which risk of one party gets

    cancelled by the risk of another# I5 is not that risk minimi>ation is the only strategy# %n entity

    may e!en choose to remain e'posed, in anticipation of reaping profits from its risk taking


  • 8/10/2019 a study on risk management.doc




    0'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#

    5he !alue of a firm9s assets, liabilities and operating income !ary continually in response to

    changes in a myriad economic and financial !ariable such as e'change rates, interest rates,

    inflation rates, relati!e price and so forth# 7e can these uncertainties as macroeconomic

    en!ironment risks# 5hese risks affect all firms in the economy# +owe!er, the e'tent and

    nature of impact of e!en macroeconomic risks crucially depend upon the nature of firm9s

    business# -or instance, fluctuations of e'change rate will

    affect net importers and e'porters ?uite differently# 5he impact of interest rate fluctuations

    will be !ery different from that on a manufacturing firm#

    5he nature of macroeconomic uncertainty can be illustrated by a number of commonly

    encountered situations# %n appreciation of !alue of a foreign currency.or e?ui!alently, a

    depreciation of the domestic currency/, increase the domestic currency !alue of a firm9s

    assets and liabilities denominated in the foreign currencyAforeign currency recei!ables 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 !alue of a portfolio of

    fi'edArate in the rate of inflation may increase !alue of unsold stocks, the re!enue from future

    sales as well as the future costs of production# 5hus the firms e'posed to uncertain changes in

    a numbers of !ariable in its en!ironment# 5hese !ariables are sometimes called Risk -actors#

    T$ !&%$ /5 E;9/s%$ !) R"s=

    0'posure are a measure of the sensiti!ity of the !alue of a financial items .assets, liabilities

    or cash flow/ to changes in the rele!ant risk factor while risk is a measurable of the

    !ariability of the item attributable to the risk factor#

    2orporate treasurers ha!e 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, 5he increased awareness is firstly due to tremendous increase in the !olume of cross

  • 8/10/2019 a study on risk management.doc


    border financial transactions .which create e'posure/ and secondly due to the significant

    increase in the degree of !olatility in e'change rates.which, gi!en the e'posure, creates risk/

    Css"5"&"/! /5 5/%$"3! $;!3$ $;9/s%$ !) %"s=

    &ince the ad!ent of floating e'change rates in :;G, firms around the world ha!e become

    acutely aware of the fact that fluctuations in e'change rates e'pose their re!enues, costs,

    operating cash flows and thence their market !alue to substantial fluctuations# -irms which

    ha!e crossAborder transactionsAe'ports and imports of goods and ser!ices, foreign borrowings

    and lending, foreign portfolio and direst in!estment etc, are directly e'posed6 but e!en purely

    domestic firms which ha!e absolutely no cross border transactions are also e'posed because

    their customers, suppliers and competition are e'posed# 2onsiderably effort has since been

    de!oted to identifying and categori>ing currency e'posure and de!eloping more and more

    sophisticated methods to ?uantify it#

    F/%$"3! $;!3$ $;9/s%$ ! *$ ss"5"$) "!&/ &%$$ *%/) &$3/%"$s

    5ransaction e'posure

    5ranslation e'posure

    3perating e'posure

    3f these, the first and third together are sometimes called 2ash -low 0'posure while the

    second is referred to as %ccounting 0'posure or Balance sheet 0'posure#

    T%!s&"/! $;9/s%$

    7hen a firm has a payable or recei!able denominated in a foreign currency, a change in the

    e'change rate will alter the amount of local currency recei!able 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 recei!able of C:==,:== due three months hence and

    if in the meanwhile the dollar depreciates relati!e to the rupee a cash loss occurs# 2on!ersely,

    if the dollar appreciates relati!e to the rupee, a cash gain occurs# In the case of payable, the

    outcome is of an opposite kind6 a depreciation of the dollar relati!e to the rupee results in a

    gain, where as an appreciation of the dollar relati!e to the rupee result in a loss#

  • 8/10/2019 a study on risk management.doc


    T%!s&"/! $;9/s%$

    (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 ha!e to be translated into domestic currencies at the e'change

    rate pre!ailing on the consolidation dates# If the !alues of foreign currencies change between

    a two or successi!e consolidation dates, translation e'posure will arise#

    O9$%&"!3 $;9/s%$

    3perating e'posure, like translation e'posure in!ol!e an actual or potential gain or loss#

    7hile the former is specific to the transaction, the latter relates to entire in!estment# 5he

    essence of this operating e'posure is that e'change rate changes significantly and alter the

    cost of firm9s inputs along with price of it output and thereby influence its competiti!e

    position substantially#

    0g6 )olkwagon had ahighly successful e'port market for its 8beetle9 model in the & before

    :;=# 7ith the breakdown of BrettenAwoods of fi'es e'changed rates, the deuschemark

    appreciated significantly against the dollar# 5his created problem for )olkswagan as its

    e'penses were mainly in deuschemark but its re!enue in dollars# +owe!er, in a highly priceA

    sensiti!e & market, such an action caused a sharp decreased in sales !olumeAfrom

  • 8/10/2019 a study on risk management.doc




    +edging e'posures, sometimes called risk management, is widely resorted to by financial

    directors, corporate treasurers and portfolio managers#

    5he practice of co!ering e'posure is designed to reduce the !olatility of a firm9s profits

    and"or cash management and it presumably follows that this will reduce the !olatility of the

    !alue of the firm#

    5here are a wide range of methods a!ailable to minimi>e foreign e'change risk which are

    classified as internal and e'ternal techni?ues of e'posure management#

    I!&$%! &$!"?$s

    Internal techni?ues of e'posure management help to resol!e e'posure risks through

    regulating the firms financial position# 5hereby, they ensure that the firm is not endangered

    through e'posures# 5he fundamental stress minimi>ing of not complete elimination of

    e'change losses that are likely to accrue as a result of e'posure#

    5hey use methods of e'posure management which are a part of a firm9s regulatory

    financial management and do not resort to special contractual relationship outside the group

    of companies concerned# 5hey aim at reducing e'posed position or pre!enting them from

    arising# 5hey embrace netting, matching, leading and lagging, pricing policies and

    asst"liability management#

    Internal techni?ues of e'posure management do not rely on Grdparty contracts to manage

    e'posed positions# Rather, it depends on internal financial management#

    E;&$%! &$!"?$s

    5hese refer to the use of contractual relationship outside the group of companies so as to

    minimi>e the risk of foreign e'change losses# 5hey insure against the possibility the

    e'change losses will result from an e'posed position which internal measures ha!e not been

  • 8/10/2019 a study on risk management.doc


    able to eliminate# 5hey include forward contracts, borrowing short term, discounting bills

    recei!able, factoring, go!ernment e'change risk guarantees currency options#

    0'ternal techni?ues of foreign e'change e'posure management use contractual

    relationships outside the group to reduce risk of e'change rate changes# &e!eral e'ternal

    techni?ues are a!ailable fore foreign e'change management# 5he firm can make a choice of

    that techni?ue which is most suitable to it#

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    F/%%) $;!3$ /!&%&

    % forward e'change contract is a mechanism by which one can ensure the !alue of

    one currency against another by fi'ing the rate of e'change in ad!ance 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# 5he 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#

    5he 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 G months deli!er at Rs#;#=# 5his rate, as on the date of contract, is known as G

    month forward rate# 7hen the e'porter submits his bill under the contract, the banker would

    purchase it at the rate of Rs#;#= irrespecti!e of the spot rate then pre!ailing#

    7hen rupee was de!aluated by about :JF in Luly :;;:, many importers found their

    liabilities had increased o!ernight# 5he de!aluation of the rupee had effect of appreciation of

    foreign currency in terms of rupees# 5he importers who had booked forward contracts to

    co!er their imports were a happy lot#

    D&$ /5 )$"#$%'

    %ccording to Rule of -0D%I, a forward contract is deli!erable at a future date,

    duration of the contract being computed from the spot !alue date of the transaction# 5hus, if a

  • 8/10/2019 a study on risk management.doc


    G months forward contract is booked on :@th-ebruary, the period of two months should

    commence from :th-ebruary and contract will fall on :th%pril#

    F";$) !) /9&"/! 5/%%) /!&%&s

    5he forward contract under which the deli!ery of foreign e'change should take place

    on a specified future date is known as 8-i'ed -orward 2ontract9#

    -or instance, if on th(arch a customer enters into a three months forward contract with his

    bank to sell *BP :=,===, it means the customer would be presenting a bill or any other

    instrument on thLune to the bank for *BP :=,===# +e cannot deli!er foreign e'change prior

    to or later than the determined date#

    -orward e'change is a de!ice by which the customer tries to co!er the e'change risk#

    5he purpose will be defeated if he is unable to deli!er foreign e'change e'actly on the due

    date# In real situations, it is not possible for any e'porter to determine in ad!ance the precise

    date# 3n 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#

    7ith a !iew to eliminate the difficulty in fi'ing the e'act date of deli!ery of foreign

    e'change, the customer may be gi!en a choice of deli!ery the foreign e'change during a

    gi!en period of days#

    %n arrangement whereby the customer can sell or buy from the bank foreign

    e'change on any day during a gi!en period of time at a predetermined rate of e'change is

    known as 83ption -orward 2ontract9# 5he rate at which the deal takes place is the option

    forward sale contract with the bank with option o!er $o!ember# It means the customer can

    sell foreign e'change to the bank on any day between : sto G=th$o!ember is known as the

    83ption Period9#

    -orward contract is an effecti!e ad easily a!ailable tool for co!ering e'change risk#

    $ew instruments like options, futures and swaps can also be used to co!er e'change risks#

    5hese instruments are called financial deri!ati!es as their !alue is deri!ed from the !alue of

    some other financial contract or asset# 7hen there instrument are bought or sold for co!ering

    e'change risk they are used for 8hedging9 the e'change risk# 7hen they are dealt in with a

  • 8/10/2019 a study on risk management.doc


    !iew to deri!e profit from une'pected mo!ements in their prices or other changes in the

    e'change market, they are being used for speculati!e purposes# 5he scope of using these

    instruments for speculati!e purposes is !ery much limited in India#

    &ome other &trategies may also be adapted to a!oid e'change risk# 5hese consist in

    deciding on the currency of in!oicing, maintaining in foreign currency and deciding on the

    setting the debt#


  • 8/10/2019 a study on risk management.doc



    5he company has to hammer out its approach to risk management taking into account its

    specific circumstances#

    +ere is brief description of company in India ha!e fashioned its strategy towards 5/%$"3!

    $;!3$ %"s= m!3$m$!


    +24 5echnologies is one of IndiaHs leading global I5 &er!ices companies, pro!iding

    softwareAled I5 solutions, remote infrastructure management ser!ices and BP3# +a!ing made

    a foray into the global I5 landscape in :;;; after its IP3, +24 5echnologies focuses on

    5ransformational 3utsourcing, working with clients in areas that impact and reAdefine the

    core of their business# 5he company le!erages an e'tensi!e global offshore infrastructure and

    its global network of offices in :J countries to deli!er solutions across select !erticals

    including -inancial &er!ices, Retail E 2onsumer, 4ife &ciences E +ealthcare, +iA5ech E

    (anufacturing, 5elecom and (edia E 0ntertainment .(E0/# -or the ?uarter ended G=th

    &eptember @==, +24 5echnologies, along with its subsidiaries had last twel!e months

    .45(/ re!enue of & C :# billion .Rs#

  • 8/10/2019 a study on risk management.doc


    5he abo!e description of risk management in +24 is based on the information

    pro!ided in the annual report of +24 for the year @==#


  • 8/10/2019 a study on risk management.doc



    Despite market e'pansion the profit generation is still a ?uestion mark, so companies

    ha!e to search for areas of ne't generation like !alue added ser!ices, software

    enhancement and de!elopment other than just BP3 ser!ices to sur!i!e 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 impro!e their responsi!eness

    to the changing scenarios#

    2ompanies ha!e to de!elop their ser!ices to the bench mark le!el or global standards

    so that they can ha!e acceptance all o!er the world#

    5he troubles of many e'porters are not a result of the !olatility of the rupee but the

    unfa!ourably highAcost structure# 0'porters are !iable only when foreign e'change

    earnings get con!erted into more and more rupees# 5o impro!e rupee !iability and

    preser!e profits, e'porters need to be efficient and producti!e and bring down

    aggregate rupee cost#

    Poor !iability will not be resol!ed by hedging# 2onsidering an inefficient e'porter, it

    re?uires a breake!en e'change rate of Rs# dollar to show profit# It will da>>le at a

    rate abo!e Rs## It will fi>>le at any e'change rate below Rs##

    In case of forward contract# 5he forward contract locks in the e'porter con!ersion of

    dollar re!enues to rupee re!enues at Rs#:, the market forward price per dollar# 5he

    market will surely not buy the e'porters dollars at Rs#: will be wholly ineffecti!e

    e'porters will be in serious trouble despite the perfect hedge#

  • 8/10/2019 a study on risk management.doc


    5he problem of !iability will be sol!ed only when the e'porters breake!en mo!es

    down to Rs#: per dollar# By contrast, an inefficient e'porter that is !iable at Rs#:

    peer dollar can take ad!antage of the hedge#

    5he implicit dollar method will significantly preser!e the dollar profitability

    e'porters# 5he employees and managers of e'porting firms will be paid implicitly in

    dollars# 5he cost to the company will be in dollars# But the payout will be in rupees

    and at the pre!ailing e'change rates# If the dollar weakens, the dollar costs of

    employees and managers will be paid out in rupees at say, RG;, if the dollar

    strengthens the cost of employees and managers will be paid out in rupees at say,


    5o o!ercome these problems e'porters should make good go!ernance by making

    a!ailable superior human, social and business infrastructure e!en if the ta' rates are

    high# *ood go!ernance lower the costs of operations and lowers the aggregate costs

    of doing business#

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    :# -oreign 0'change %rithmeticA(#jee!anandam

    @# International financial managementAPrasanna 2handra

    G# International financial managementAP#*#%pte

    $07& P%R0R&

    5he 0conomic 5imes

    Business 4ine