A Study on Volatility Management In Forex Market:

An Investors Perspective

EXECUTIVE SUMMARY

Globalization and financial liberalization in India have brought about battery of changes in the
financial functioning of the economy, as a result of which, the resultant gain of the global
integration of domestic and foreign financial markets has thrown open new opportunities but at
the same time exposed the financial system to significant risks. Consequently, it is important to
understand the mutual relationship between the financial markets from the standpoint of financial
stability. Though the inception of the financial sector reforms has taken place initiated in the
beginning of the 1990s, particularly since 1997, there has been a dramatic change in the
functioning of the financial sector of the economy.

The recent emergence of new capital markets, the relaxation of foreign capital controls and the
adoption of more flexible exchange rate regimes have increased the interest of academics and
practitioners in studying the interactions between the stock and foreign exchange markets. The
gradual abolition of foreign exchange controls in emerging economies like India has opened the
possibility of international investment and portfolio diversification. At the same time, the
adoption of more flexible exchange rate regimes by these countries in the late 1980’s and early
1990’s has increased the volatility of foreign exchange markets and the risk associated with such
investments. The advent of floating exchange rates, opening up of current account, Liberalization
of capital account, reduction of customs duties, the development of 24-hour screen based global
trading, the increased use of national currencies outside the country of issue and innovations in
internationally traded financial products have led to the cross Country linkages of capital markets
and international integration of domestic economy.

Altogether, the whole gamut of institutional reforms, introduction of new instruments, change in
procedures, widening of network of participants, call for a reexamination of the relationship
between the stock market and the foreign sector of India. The process of economic liberalization
and thrust on reforms in the financial sector and the foreign exchange market in particular that
was initiated in India in early nineties has resulted into increasing integration of the Indian FX
market with that of the global markets. With a large number of foreign funds and foreign
institutional investors now actively participating in the Indian financial markets, the style of
A Study on Volatility Management In Forex Market:
An Investors Perspective

functioning of the market itself has undergone a lot of change and result of microstructure
changes are visible. Today the Indian FX market, which was insulated from outside impacts, has
been getting integrated with the world markets.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Chapter One

INTRODUCTION
A Study on Volatility Management In Forex Market:
An Investors Perspective

INTRODUCTION:

In the present scenario, interesting results are emerging particularly for the developing countries
where the markets are experiencing new relationships between money markets, forex markets,
capital markets, international events, oil prices, WTO agreements etc which were not perceived
earlier. The analysis on stock markets is important as it is considered as the most sensitive
segment of the economy and through this segment the country’s exposure to the outer world is
most readily felt. The impact of fluctuation in exchange rate on domestic companies, companies
importing or exporting and on multinational corporations with the degree of exposure is
increasing in each case respectively. The movements in exchange rate indirectly affect the value
and hence the stock prices of these companies. The value of the company is affected due to the
forex exposures namely Transaction exposures, translation exposure and economic exposure.

An exchange rate has two effects on stock prices, a direct effect through Multi National Firms
and an indirect effect through domestic firms. In case of Multi National Firms involved in
exports, a change in rate will change the demand of its product in the international market, which
ultimately reflects in its B/S as profit or loss. Once the profit or loss is declared, the stock price
will also change for a domestic firm. On the other hand, currency devaluation could either raise
or decrease a firm’s stock prices. This depends on the nature of the firm’s operations. A domestic
firm that exports part of its output will benefit directly from devaluation due to an increase in
demand for its output. As higher sales result in higher profits, local currency devaluation will
cause firm stock price to rise in general.

On the other hand, if the firm is a user of imported inputs, currency devaluation will raise cost
and lower profits. Thus, it will decrease the firm’s stock price. The foreign exchange volatility
has a direct effect on the macroeconomic factors. The macroeconomic factors such as the current
account deficit, the balance of trade, the forex reserves created by government, the stock market,
the profit margins of different sectors of industries, the interest rates, export import payments and
hedging all are affected by the fluctuation in the currency i.e. its volatility. In the case of
exchange rate risk, the increased awareness is firstly due to the tremendous increase in the
volume of cross border financial transactions and secondly due to the significant increase in the
degree of volatility in exchange rates.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Foreign exchange market:

The foreign exchange market exists wherever one currency is traded for another. It is by far the
largest market in the world, in terms of cash value traded, and includes trading between large
banks, central banks, currency speculators, multinational corporations, governments, and other
financial markets and institutions. The trade happening in the forex markets across the globe
currently exceeds US$1.9 trillion/day (on average). Retail traders (individuals) are currently a
very small part of this market and may only participate indirectly through brokers or banks.

The foreign exchange market provides the physical and institutional structure through which the
money of one country is exchanged for that of another country, the rate of exchange between
currencies is determined, and foreign exchange transactions are physically completed. The retail
market for foreign exchange deals with transactions involving travelers and tourists exchanging
one currency for another in the form of currency notes or travelers’ cheques. The wholesale
market often referred to as the interbank market is entirely different and the participants in this
market are commercial banks, corporations and central banks.

Global Currency Codes

 USD = US Dollar

 EUR = Euro

 JPY = Japanese Yen

 GBP = British Pound

 CAD = Canadian Dollar

 AUD = Australian Dollar

 NZD = New Zealand Dollar

A Study on Volatility Management In Forex Market:
An Investors Perspective

Factors affecting Exchange rates:

The prime factor that affects currency prices are supply and demand forces. The three factors
include:

Economic factors:

• Government budget deficits or surpluses

• Balance of trade levels and trends

• Inflation levels and trends

• Economic growth and health

Political conditions:

• Political upheaval and political instability

• Relation between two countries

Market psychology:

• Flights to quality

• Economic numbers

• Long-term trends
A Study on Volatility Management In Forex Market:
An Investors Perspective

Currency Exchange Rate:

The Exchange rate or FX rate is the rate between two currencies specifies how much one
currency is worth in terms of the other. For example an exchange rate of 33 Indian Rupees (IND,
Rs.) to the United States Dollar (USD, $) means that IND 33 is worth the same as USD 1. The
foreign exchange market is one of the largest markets in the world. By some estimates, about 2
trillion USD worth of currency changes hands every day.

The Spot exchange rate refers to the current exchange rate. The forward exchange rate refers to
an exchange rate that is quoted and traded today but for delivery and payment on a specific
future date.

Functions of foreign exchange market:

The foreign exchange market is the mechanism by which participants

• Transfer purchasing power between countries,

• Obtain or provide credit for international trade transactions, and

• Minimize exposure to the risks of exchange rate changes

Foreign Exchange Market participants:

The foreign exchange market consists of two tiers:

• the interbank or wholesale market and

• The client or retail market.

Five broad categories of participants operate within these two tiers:

 Bank and nonblank foreign exchange dealers:

Banks and a few nonblank foreign exchange dealers operate in both the interbank and client
markets. They profit from buying foreign exchange at a ‘bid’ price and reselling it at a slightly
A Study on Volatility Management In Forex Market:
An Investors Perspective

higher ‘ask’ price. Dealers in the foreign exchange departments of large international banks often
function as market makers.

Currency trading is quite profitable for commercial and investment banks. Small to medium
sized banks are likely to participate but not as market makers in the interbank market. Instead of
maintaining significant inventory positions, they buy from and sell to large banks to offset retail
transactions with their own customers.

• Individuals and firms conducting commercial or investment Transactions:

Importers and exporters, international portfolio investors, Multi National Enterprises, tourists,
and others use the foreign exchange market to facilitate execution of commercial or investment
transactions. Some of these participants use the market to ‘hedge’ foreign exchange risk.

• Speculators and arbitragers:

Speculators and arbitragers seek to profit from trading in the market itself. They operate in their
own interest, without a need or obligation to serve clients or to ensure a continuous market. A
large proportion of speculation and arbitrage is conducted on behalf of major banks by traders
employed by those banks. Thus banks act both as exchange dealers and as speculators and
arbitrages.

• Central banks and treasuries:

Central bank and treasuries use the market to acquire or spend their country’s foreign exchange
reserves as well as to influence the price at which their own currency is traded. They may act to
support the value of their own currency because of policies adopted at the national level or
because of commitments entered into through membership in joint float agreements.

 Foreign exchange brokers:

Foreign exchange brokers are agents who facilitate trading between dealers. Brokers charge
small commission for the service provided to dealers. They maintain instant access to hundreds
of dealers world wide via open telephone lines.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Foreign exchange transactions

Transactions within the foreign exchange market are executed either on a spot basis, requiring
settlement two days after the transaction, or on a forward or swap basis, which requires
settlement at some designated future date.

To be successful in the foreign exchange markets, one has to anticipate price changes by keeping
a close eye on world events and currency fluctuations.

Many countries in this world have their own form of currency, but not all. there are the countries
that have the currency as dollar (The most widely used currency in the world.) There is also the
combined currency of the European nations named EURO formed in the year 1 Jan 2002. The
euro (sign: €; code: EUR) is the official currency of the euro zone: 17 of the 27 member states of
the European Union (EU). Fact Book lists 178 different forms of currency. Not all currencies
have equal value. For example, ten Japanese yen will not buy the same amount of goods as ten
British pounds. So how can we compare the two currencies? Another idea is: how much would
the same amount of goods cost in both British pounds and Japanese yen? This question is
important to individuals and businesses alike. When a person travels overseas or abroad, they
need to know how much their domestic currency will be worth abroad. Will it be cheaper or
more expensive to buy food, travel and accommodation comparable to what they would buy at
home? Businesses also must consider this concept when importing or exporting goods or
services to other countries, or when paying a salary to employees or executives abroad.

The foreign exchange market is an over–the-counter (OTC) market. This means that unlike a
stock exchange, there is no single market place or an organized exchange where traders meet and
execute trades. The traders sit in the offices (foreign exchange dealing rooms) of major
commercial banks around the world and communicate with each other through telephones,
telexes, computer terminals and other electronic means of communication.
The participants, primary price makers or professional dealers make a two-way market to each
other and to their client, i.e. on request they will quote a two-way price and be prepared to take
either ‘the buy’ or ‘the sell’ side. This group includes mainly commercial banks, but some large
investment dealers and a few large corporations have also assumed the role of primary dealers.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Primary price makers perform an important role in taking positions off the hands of another
dealer or corporate customer and then offsetting these by doing an opposite deal with another
entity which has a matching requirement. Thus, a primary dealer will sell USD against DEM to
one corporate customer, carry the position for a while and offset it by using USD against DEM
from another customer or professional dealer.
Among the primary price makers there is kind of tiering. A few giant multinational banks deal in
a large number of currencies, in large amounts and often deal directly with each other without
using brokers. These banks tend to dominate the market. For instance, in the very large markets
like London and New York, the top 10 banks account for about 50% of the total trading volume.
The degree of concentration is even higher in medium-sized markets such as France. The
transactions in the second tier are large banks that deal in smaller number of currencies and use
the services of brokers more often. Lastly, there are small local institutions which make market
in a very small number of major currencies against their home currency.
In the retail market, there are entities which make foreign exchange prices but do not make a
two-way market. They are secondary price makers. Restaurants, hotels and shops catering to
tourists buy foreign currency in payment of bills; some entities specialize in retail business for
travelers which buy and sell foreign currencies and traveler’s cheques. Typically their ‘bid-ask
spreads’ are much wider than those of primary price makers.

The exchange rate has a telling effect on the profit margin of certain companies of specific
sectors. For example if the rupee appreciates then the companies in the information technology
sector are most affected as their profit margin in terms of rupee decreases. The exchange rate
volatility has positive or negative effects on the earnings of different companies. It is due to the
difference in the exchange rates in the currencies of different countries, there have been the
businesses as, the outsourcing of jobs has been created. It is because of the difference in the
currencies that the IT industry is making the most of that difference. The volatility in the
exchange rate makes the Export and the Import profitable and at loss. The industries which thrive
on import get benefitted when the domestic currencies appreciates and the vice versa. Thus the
exchange rates have large influence on the macroeconomic factors.
So how do we determine the value of one currency against another? The price of one nation’s
currency in terms of another is called the exchange rate, also known as the foreign-exchange
A Study on Volatility Management In Forex Market:
An Investors Perspective

rate, forex rate, or FX rate. For example, an exchange rate of 115 Japanese yen (JPY, ¥) to one
USD dollar (USD, $) means that if you had 115 JPY you could exchange it for 1 USD. This is
not to be confused with the cost of goods, however. A popular example used is the cost of a Big
Mac in the United States versus abroad. In the United States a Big Mac costs an average of
$2.90. The cost of a Big Mac in Japan is not ¥2.90 (only 2.5 cents in USD), but rather the real
cost is ¥250. So if we had converted our $2.90 into yen and bought a Big Mac in Japan at ¥250
we would have ¥83.5($.73) left. [($2.90 x 115 = ¥333.5) - ¥250 = ¥83.5]. Since actual prices for
goods tend to be less in poorer countries, a dollar one place is worth more than a dollar
somewhere else. This concept is described by the theory of purchasing-power parity or PPP.
The top six most traded currencies (overall) are the United States dollar (USD, $), Japanese yen
(JPY, ¥), Euro (EUR, €), British pound sterling (GBP, £), Swiss franc (CHF, -), Canadian Dollar
(CAD, $) and the Australian dollar (AUD, $). These currencies account for 85% of all daily
transactions. Some of the most commonly traded pairs are EUR/USD, USD/JPY, GBP/USD,
USD/CAD, AUD/USD, USD/CHF and EUR/JPY.

The rates in the currencies changes because of the factors like the inflow of the capital from
abroad the export, import and different other factors. The exchange rate will change whenever
there is a change in the value of either one of the currencies involved the currency pair. The
foreign exchange market is basically governed by the laws of supply and demand. Whenever
demand for a currency is less than its available supply, the value of the currency will tend to go
up. When demand is less than the current available supply, the currency value goes down.
There are a variety of factors that affect the supply and demand for a particular currency. An
increased demand for a currency can be because of either an increased transaction demand for
money or an increased speculative demand for money. If a particular country has high interest
rates, investors will buy that country’s currency because the return will be high. Thus the higher
the interest rates the higher the demand for the currency. Anything which increases price
stability such as low inflation rates and monetary policy aimed at price stability increases
demand for a currency. If there is political or military unrest in other countries, countries with a
stable political system are quite favorable and thus the demand for their currency increases.
Other factors which contribute to the demand for a particular currency include (but are not
limited to): a domestic trade surplus relative to other countries, a large and consistent
A Study on Volatility Management In Forex Market:
An Investors Perspective

government deficit which crowds out domestic borrowing, a strong domestic financial market
and domestic economy relative to foreign economies, and no record of default on government
debt.
Similarly, there are certain factors that are associated with a lack of demand for currencies. Most
are simply the opposite of what causes demand for a currency. Low interest rates relative to other
countries, higher rates of inflation, a domestic trade deficit, a consistent government surplus,
relative political/military stability in other countries, a collapsing domestic financial market, a
weak domestic economy and strong foreign economies, frequent or recent default on government
debt, and monetary policy that frequently changes objectives all negatively affect the demand for
a country’s currency.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Chapter Two
LITERATURE REVIEW
A Study on Volatility Management In Forex Market:
An Investors Perspective

Literature review:

Integration between Foreign Exchange and Capital Markets in India: An empirical

exploration- by Golka C Nath and G P Samanta, the ICFAI Journal of Applied Finance
vol. 9 No. 6, Pg. 29 to 40

To examine the dynamic linkages between the foreign exchange and stock markets for India,
Nath and Samanta (2003) employed the Granger causality test on daily data during the period
March 1993 to December 2002. The empirical findings of the study suggest that these two
markets did not have any causal relationship. When the study extended its analysis to verify if
liberalization in both the markets brought them together, it found no significant causal
relationship between the exchange rate and stock price movements, except for the years 1993,
2001 and 2002 during when a unidirectional causal influence from stock index return to return in
forex market is detected and a very mild causal influence in the reverse direction is found in
some years such as 1997 and 2002.

CAPITAL FLOW VOLATILITY AND EXCHANGE RATES: THE CASE OF

INDIA –by Dua Pami and Sen Partha, Delhi School of Economics University of Delhi,
made a study on topic, August 2006

The research has tried to show the relationship between the capital flow fluctuations and how
that has affected the volatility in the exchange rate in India. The project has tried to establish the
relation in between the volatility in the exchange market and the macroeconomic factors being
affected by that. The generalized variance decompositions show that determinants of the real
exchange rate, in descending order of importance include net capital inflows and their volatility
(jointly), government expenditure, current account surplus and the money supply. This paper
finds that the real effective exchange rate is co-integrated with the level of capital flows,
volatility of the flows, high-powered money, current account surplus and government
expenditure. This relationship is statistically significant and each of the above determinants
Granger causes the real effective exchange rate.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Apte (2001) investigated the relationship between the volatility of the stock market and the
nominal exchange rate of India by using the EGARCH specifications on the daily closing
USD/INR exchange rate, BSE 30 (Sensex) and NIFTY-50 over the period 1991 to 2000. The
study suggests that there appears to be a spillover from the foreign exchange market to the stock
market but not the reverse.

Bhattacharya and Mukharjee (2002) studied the nature of causal relation between the stock
market, exchange rate, foreign exchange reserves and value of trade balance in India from 1990
to 2001 by applying the co-integration and long-run Granger Non-causality tests. The study
suggests that there is no causal linkage between stock prices and the three variables under
consideration.

Yamini Karmarkar and G Kawadia tried to investigate the relationship between RS/$
exchange rate and Indian stock markets. Five composite indices and five sectoral indices were
studied over the period of one year: 2000. the results indicated that exchange rate has high
correlation with the movement of stock markets.

Agnes M. Yap and Cristeta B. Bagsic(Center for Monetary and Financial Policy ) made a
study on ADJUSTMENTS IN THE FACE OF PESO VOLATILITY: PERSPECTIVE
FROM THE PAST AND POLICY DIRECTIONS.
The study assesses the impact of volatility in peso on the profitability of a sample of listed
Philippine banks and corporate firms. The data is showing the impact of the volatility on the
profitably of the firms thus trying to show how the macroeconomic factors are effected by the
foreign exchange fluctuations. Even the Risk Management policies adopted by different
companies across different sectors are also quite hertogeneous and cannot be adopted as one. At
one time one industry is benefitted by the fluctuation and at the same time the other industry is
adversely being affected. The study has also described about the financial market improvement
in the last years and that has established the volatility to a great extent. This development
likewise reflects the improvement in risk management practices in recent years, which have
made the financial and corporate sectors, better equipped now to mitigate the undesirable effects
of large foreign exchange volatility. Thus this study is trying to show the adverse and the
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An Investors Perspective

positive effect of the volatility in the exchange market on the macroeconomic factors of the
country.

MONETARY AUTHORITIES AND EXCHANGE RATE VOLATILITY: TURKEY AND

OTHER CASES- by Harald Schmidbauer and Ece Demirel (Last compiled: October 27,
2010)
In this report there has been made the cooperative study of dollar with respect to the currencies
as the Canadian dollar, the British pound, the New Zealand dollar and Turkish lira under the
influence of interest rate announcements made in certain period. It is found that announcements
made by the US Federal Reserve Bank (FED) affect the volatility of three (except USD/TRY)
exchange rates significantly, particularly prior to the announcement. However, no similar) affect
was found for announcements made by local central banks. This study aims to detect the impact
of interest rate announcements on foreign exchange volatility measured on the basis of a
GARCH with dummy variables affected to daily return data. We found that FED interest rate
announcements have significant impact on the volatility of USD/GBP, USD/CAD, as well as
USD/NZD, before the announcement, while local monetary authorities interest rate
announcements have no significant impact. . Apart from the care taken by monetary authorities
to avoid surprising markets, monetary authorities were mostly in a phase of decreasing interest
rates during the time period considered in our study, thus enabling market expectations to be in
line with the content of announcements. On the other hand, this finding is in line with those
studies which and the pre-announcement.

Benavides Guillermo, (Central Bank of Mexico) made on the topic “PREDICTIVE

ACCURACY OF FUTURES OPTIONS IMPLIED VOLATILITY: THE CASE OF THE
EXCHANGE RATE FUTURES MEXICAN PESO – U.S. DOLLAR”
There has been substantial research effort aimed to forecast futures price return volatilities of
financial assets and so far it hasn’t been a simple task. A significant part of the literature shows
that volatility forecast accuracy is not easy to estimate regardless of the forecasting model
applied. Some part of this research focuses on the performance of time-series models (in
particular ARCH models) versus option implied volatility models. This paper examines the
volatility accuracy of several volatility forecast models for the case of the Mexican peso-USD
exchange rate futures returns. . The objective is to find the most accurate model (historical,
A Study on Volatility Management In Forex Market:
An Investors Perspective

option implied or combined) to forecast price return volatility for specific assets. Albeit part of
the literature advocates the use of option implied volatilities as the most accurate alternative to
forecast price returns volatilities there are still no conclusive answers in terms of finding one
superior model. This is because the coefficients of determination are usually relatively low for all
models.

Galati Gabriele (Bank for international settlements Monetary and economic Department)
made study on “TRADING VOLUMES VOLATILITY AND SPREAD IN FOREIGN
EXCHANGE MARKETS”
The finding of study is to mainly show the relationship between the trading volumes and the
volatility in the currency market. Both are having the positive correlation between them. They
both react to the new information coming to the market. The study is also giving the idea on how
these factors are affecting the liquidity in the market. A market can be considered to be liquid
when there is large volume executed with the small change in the price. The data looks at the
dollar exchange rates for seven currencies of the emerging markets as the Indonesian rupiah,
Indian rupee, Mexican peso, Brazilian real, The Columbian peso and the South African rand.
During the period of the study the exchange rates of these currencies depreciated against dollar.
The unexpected trading volumes and volatility are positively correlated as both respond
positively to the new information this is the finding of the research done.

[BIS Annual Report V. 2006] made a study on “FOREIGN EXCHANGE MARKETS”

Here there has been made the comparative study of the dollar with Euro and the downward trend
that has been shown by the yen. In early December 2005, however, the upward trend of the US
dollar continued. The three influencing economic factors that affected the volatility were interest
rate differentials, the current account deficit and rising net international liabilities of the United
States, and continuing reserve accumulation in China limiting the dollar's depreciation against
the renmbi. In other emerging market countries in Asia the reserves grew sharply and that started
having bearing on the fluctuations especially in terms of dollar. United States typically reported a
positive net income balance, despite a deteriorating net foreign asset position. That was partly
because a higher proportion of its assets were in high-yielding asset classes, such as foreign
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An Investors Perspective

direct investment, and partly because USA earned a higher yield on its direct investment abroad
than foreigners earned on their direct investment in the United States.

[BIS Annual Report V. 2007] made a study on “FOREIGN EXCHANGE MARKETS”

The 77th Annual report from the bank for international settlement states about the relative study
of the currencies named US dollar, Euro, Yen, Swedish Sterling and the important currencies of
Asian countries. The focus of report hinges around the exchange rate volatility implied volatility
and the reason/ causes because of which the volatility is arising. The exceptional show of the
currency as Swiss franc and Thai Baht (Asia) have shown huge depreciation as well as
appreciation respectively and this trend was accentuated. According to the Report overall market
remained moderate in volatility except two phases of higher volatility in (1) May and June (2)
End of Feb. The Causes which have affected the exchange rate mostly has been cited as
microeconomic factor such as monetary policy and Interest rate differential. In the Asian market
the Trend of creating foreign exchange reserves created pressure in the upward movement of
currency. The concluding section explores about reserve management practices which have great
implication over foreign exchange market. Thus huge amount of forex reserve have been created
by certain countries. Reports also state about the advancement in financial technology and the
development of financial market in certain countries and challenge posed by these changes. Thus
the Report is quite informative revealing real time facts of the period given. Reports also gives
the information about the volatility situation as well as reasons behind the directions the market
has taken in that period.

[BIS Annual Report V. 2008] made a study on “FOREIGN EXCHANGE MARKETS”

The report is about the relative study of the dollar with Euro, Yen and Swiss franc. The report is
about the relative decline of the dollar in the later half of the year 2007 and the reason for that
has been cited as carry trades becoming less attractive and expected growth differentials became
more of a focal point for market sentiment. While exchange rate policies continued to shape the
behavior of some emerging market currencies, developments in commodity prices and specific
trends in capital flows also exerted a considerable influence on exchange rates. In spite of the
hiccups in the foreign exchange market the foreign exchange spot markets generally continued to
function smoothly throughout the period of higher volatility. As per the prediction in longer-term
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perspective, there was predicted a number of notable developments that did potentially have a
bearing on the resilience of foreign exchange markets. These included higher turnover, greater
diversity in foreign exchange market activity and improvements in the risk management
infrastructure.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Chapter Three
RESEARCH METHODOLOGY
A Study on Volatility Management In Forex Market:
An Investors Perspective

RESEARCH METHODOLOGY:

Problem Identified:
In the last two decades, globalization, interlinkages of the capital markets, gradual eradication of
capital inflow barriers and the implementation of more flexible exchange rate mechanism in
developed as well as transition economies, created a systematic interdependency between and
within the stock and foreign exchange markets. The individual have very vague idea about such
relationship between two markets. Thus, investigating the relationship between stock prices and
exchange rates has received unprecedented attention in the literature. A number of studies have
empirically examined the relationship between the stock and foreign exchange markets. This
study explores the evidence of relationship between exchange rates and stock prices and also
lead lag relationship between exchange rates and stock prices. We use correlation for examining
dynamic relationships between exchange rates and stock index.
There remains to be the volatility in the foreign exchange market. High degree of volatility
should not be there as it affects the economy adversely. The fluctuations to a certain extent are
tolerable. An increase in exchange-rate volatility would introduce additional uncertainty in
international transactions, thus reducing trade. The effect of exchange rate volatility on trade
value and volume is ambiguous.

Rational of the study:

The rationale of the study is to find the effect of the exchange rate volatility on the different
macroeconomic factors such as balance of trade the functioning of the stock market and the other
economic factors which may or may not be affected by the fluctuations in the currency rate. The
main aim is to establish the relationship and find out the reason and effect of the exchange rate
volatility on balance of trade and economy as a whole. Even the latest physical economic reasons
for the volatility in the exchange rate has been given and the measures taken by the RBI to
contain the excessive fluctuations. The whole of the study has been made keeping in view the
Indian economic conditions and so the INR has been taken as the basic currency in contrary to
which the other currencies(USD,JPY) have been taken to determine the exchange rate and then
the correlative study has been made after taking the hypothesis.
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Objectives of study:
 Investigating the relationship between the foreign exchange market and stock market in
India. To see that weather there is a significant relationship or dynamic linkage between
the two markets.

 To know the effect of volatility on financial market.

 To know about the impact of foreign exchange volatility on share market and balance of
trade.

Research Design:

The study type is Descriptive because this research helps to find out the meaning out of the
secondary data, but not the cause-and-effect (causal) linkages among its different elements.

Scope of Study:

 This study would reveal the variations in the foreign exchange and thus would help in
analyzing the trade.

 The study will also provide an understanding of the various factors that create an impact
on stock market in the country (India)
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Data Collection:
 This study is primarily based upon the secondary data which will be collected from
various sources appended below-
 Journals
 Magazines & Newspapers
 Internet
 Govt. agencies reports

Statically tools applied:

To have a meaningful analysis and interpretation of various data collected, the following tool
was made for this study.

 CORRELATION

Definition: - Correlation is a statistical measurement of the relationship between two variables.

Possible correlations range from +1 to –1. A zero correlation indicates that there is no
relationship between the variables. A correlation of –1 indicates a perfect negative correlation,
meaning that as one variable goes up, the other goes down. A correlation of +1 indicates a
perfect positive correlation, meaning that both variables move in the same direction together.

The Purpose of Correlational Studies:

Correlational studies are used to look for relationships between variables. There are three
possible results of a correlational study: a positive correlation, a negative correlation, and no
correlation. The correlation coefficient is a measure of correlation strength and can range from –
1.00 to +1.00.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Types of Correlation
1. Positive Correlations: Both variables increase or decrease at the same time. A correlation
coefficient close to +1.00 indicates a strong positive correlation.
2. Negative Correlations: Indicates that as the amount of one variable increases, the other
decreases (and vice versa). A correlation coefficient close to -1.00 indicates a strong
negative correlation.
3. No Correlation: Indicates no relationship between the two variables. A correlation
coefficient of 0 indicates no correlation.

Hypothesis
Ho: Forex market volatility has no effect on the stock market and balance of trade.

H1: Forex Market volatility has effect on the stock market fluctuations.
H2: Fluctuations in the Exchange rate affect on the balance of trade
A Study on Volatility Management In Forex Market:
An Investors Perspective

Chapter Four
DATA ANALYSIS & INTERPRETATION
A Study on Volatility Management In Forex Market:
An Investors Perspective

The correlation showed between the volatility in exchange rate (USD and INR) and the rate
of change of one of the most prominent index (SENSEX) used in Indian stock exchange
(BSE)

% Change in
% Change in yearly value of
Year rate INR/USD sensex
2010-2011 0.455 -14.684
2009-2010 5.594 14.844
2008-2009 -11.729 44.761
2007-2008 -4.870 -110.286
2006-2007 12.590 32.041
2005-2006 1.889 31.834
Table: 1
KARL PEARSON COEFFICIENT OF CORRELATION = 0.228368

Figure: 1

INTERPRETATION:
A Study on Volatility Management In Forex Market:
An Investors Perspective

The attempt done to find the correlation between the variables has given the result which is
tending to have zero correlation. Here we have taken two variables one as volatility in exchange
rate and the other as the rate of change in the index value (Sensex). Sensex is the standard index
maintained by Bombay stock exchange which gives the numerical value of the situation of the
market prevailing at a given time. Here we find (KARL PEARSON COEFFICIENT OF
CORRELATION) r = 0.228368 which is tending more towards zero means there is very less
correlation between the variables. Though the value is not zero but still the correlation is tending
towards zero means the different variables taken are independently behaving. There is no or very
little effect of the volatility in exchange rate over stock market volatility. The same is evident by
the figure as we are going to see the dots in the graph are quite scattered. So here as the
coefficient of correlations is coming to be 0.228368 i.e. r =0.228368 which is stating that the
correlation between the variables is not existing, is proving the null hypothesis H o to be true as”
The volatility in the forex market does not affect volatility in the Stock Market”. There is
somewhat correlation which is positive which would have happened since fluctuations in the
stock market might lure the speculators and in the process the FIIs invest or withdraw money
from the stock market which affects the currency exchange rate. Here we are going to find some
relation since the large inflow of the capital affects the supply and demand of the currency and
thus affects the exchange rate. The USD is a very dominant currency in the foreign exchange
market and here we have seen some high fluctuations in the dollar value from the year 2006 and
to the year 2011.
A Study on Volatility Management In Forex Market:
An Investors Perspective

The correlation showed between the volatility in exchange rate ( INR and JPY) and the
rate of change of one of the most prominent index(SENSEX) used in Indian stock
exchange(BSE)

% Change in rate % Change in yearly

Year INR/JPY value of sensex
2010-2011 -6.215 -14.684
2009-2010 -0.650 14.844
2008-2009 -23.902 44.761
2007-2008 -19.082 -110.286
2006-2007 11.646 32.041
2005-2006 1.189 31.834
Table: 2

KARL PEARSON COEFFICIENT OF CORRELATION= 0.395969

Figure: 2

INTERPRETATION:
A Study on Volatility Management In Forex Market:
An Investors Perspective

Here we have found out the correlation between the variables as Japanese yen and Indian Stock
Market index. The attempt has been done to find the correlation between the variables has given
the result which is tending to have zero correlation. Here the we have taken two variables one as
volatility in exchange rate and the other as the rate of change in the index value (Sensex). Sensex
is the standard index maintained by Bombay stock exchange which gives the numerical value of
the situation of the market prevailing at a given time. Here we find (KARL PEARSON
COEFFICIENT OF CO RELATION) r = 0.395969 which is tending more towards zero means
there is very less correlation between the variables. Though the value is not zero and positive but
still the correlation is tending towards zero means the different variables taken are independently
behaving. There is no or very little effect of the volatility in exchange rate over stock market
volatility. The same is evident by the figure as we are going to see the dots in the graph are quite
scattered. So here as the coefficient of correlations is coming to be 0.395969(r=0.395969) which
is stating that the correlation between the variables is not existing, is proving the null hypothesis
Ho to be true as” The volatility in the forex market does not affect volatility in the Stock Market”.
The Japanese currency is also one of the most prominent currencies of the world and there
happens a lot of trade with Japan which has its effect on the exchange rate values. There has
taken percentage change in the values from the year 2006 to 2011 to a great extent.

The correlation showed between the volatility in exchange rate (CHF and INR) and the
rate of change of one of the most prominent index (SENSEX) used in Indian stock
exchange (BSE)
A Study on Volatility Management In Forex Market:
An Investors Perspective

% Change in rate % Change in yearly

Year INR/CHF value of sensex
2010-2011 -10.266 -14.684
2009-2010 1.862 14.844
2008-2009 -11.272 44.761
2007-2008 -16.550 -110.286
2006-2007 9.639 32.041
2005-2006 1.048 31.834

Table: 3

KARL PEARSON COEFFICIENT OF CORRELATION= 0.639217

Figure: 3

INTERPRETATION:
The attempt done to find the correlation between the variables has given the result which is
tending to have reasonable correlation since the Karl Pearson’s coefficient value is more inclined
towards one . Here there have been taken two variables one as volatility in exchange rate and
the other as the rate of change in the index value (Sensex). Sensex is the standard index
A Study on Volatility Management In Forex Market:
An Investors Perspective

maintained by Bombay stock exchange which gives the numerical value of the situation of the
market prevailing at a given time. Here we find (KARL PEARSON COEFFICIENT OF
CORRELATION) r = 0.639217 which is tending more towards one which means there is
correlation existing between the variables. Though the value is not ‘one’, but still the correlation
is tending towards one means the different variables taken are not independently behaving. There
is effect of the volatility in exchange rate over stock market volatility. The same is evident by
the figure as we are going to see the dots in the graph are not scattered but moving in the same
direction. So here as the coefficient of correlations is coming to be 0.639217 i.e. r=0.639217
which is stating that the correlation between the variables is existing and is proving the null
hypothesis Ho to be wrong since the coefficient of correlation is more tending to one. The
hypothesis “H1: Forex market volatility has effect on the stock market fluctuations is correct”.
This hypothesis is specifically being found to be correct in the currency taken as CHF with
respect to INR.

The correlation showed between the volatility in exchange rate (EUR and INR) and the
rate of change of one of the most prominent index (SENSEX) used in Indian stock
exchange (BSE)
A Study on Volatility Management In Forex Market:
An Investors Perspective

% Change in rate % Change in yearly

Year INR/EUR value of sensex
2010-2011 -2.484 -14.684
2009-2010 10.152 14.844
2008-2009 -5.902 44.761
2007-2008 -12.739 -110.286
2006-2007 1.695 32.041
2005-2006 5.460 31.834

Table: 4
KARL PEARSON COEFFICIENT OF CORRELATION= 0.657038

Figure: 4

INTERPRETATION:
The attempt done to find the correlation between the variables has given the result which is
tending to have reasonable correlation since the Karl Pearson’s coefficient value is more inclined
towards one. Here there have been taken two variables one as volatility in exchange rate and the
other as the rate of change in the index value (Sensex). Sensex is the standard index maintained
A Study on Volatility Management In Forex Market:
An Investors Perspective

by Bombay stock exchange which gives the numerical value of the situation of the market
prevailing at a given time. Here we find (KARL PEARSON COEFFICIENT OF
CORRELATION) r = 0.657038 which is tending more towards one which means there is
correlation existing between the variables. Though the value is not ‘one’, but still the correlation
is tending towards one means the different variables taken are not independently behaving. There
is effect of the volatility in exchange rate over stock market volatility. The same is evident by
the figure as we are going to see the dots in the graph are not scattered but moving in the same
direction. So here as the coefficient of correlations is coming to be 0.657038 i.e. r=0.657038
which is stating that the correlation between the variables is existing and is proving the null
hypothesis Ho to be wrong since the coefficient of correlation is more tending to one. The
hypothesis “H1: Forex market volatility has effect on the stock market fluctuations is correct”.
This hypothesis is specifically being found to be correct in the currency taken as EUR with
respect to INR.

The correlation showed between the volatility in exchange rate ( GBP and INR) and the
rate of change of one of the most prominent index(SENSEX) used in Indian stock
exchange(BSE)
A Study on Volatility Management In Forex Market:
An Investors Perspective

% Change in rate % Change in yearly

Year INR/GBP value of sensex
2010-2011 -3.467 -14.684
2009-2010 6.526 14.844
2008-2009 5.849 44.761
2007-2008 3.006 -110.286
2006-2007 2.273 32.041
2005-2006 -3.594 31.834
Table: 5
KARL PEARSON COEFFICIENT OF CORRELATION= 0.030735

Figure: 5

INTERPRETATION:
The attempt done to find the correlation between the variables has given the result which is
tending to have zero correlation. Here we have taken two variables one as volatility in exchange
rate and the other as the rate of change in the index value (Sensex). Sensex is the standard index
maintained by Bombay stock exchange which gives the numerical value of the situation of the
A Study on Volatility Management In Forex Market:
An Investors Perspective

market prevailing at a given time. Here we find (KARL PEARSON COEFFICIENT OF

CORRELATION) r = 0.030735 which is tending more towards zero means there is very less
correlation between the variables. Though the value is not zero but still the correlation is tending
towards zero means the different variables taken are independently behaving. There is no or very
little effect of the volatility in exchange rate over stock market volatility. The same is evident by
the figure as we are going to see the dots in the graph are quite scattered. So here as the
coefficient of correlations is coming to be 0.030735 i.e. r=0.030735 which is stating that the
correlation between the variables is not existing, is proving the null hypothesis H o to be true as,
“The volatility in the forex market does not affect volatility in the Stock Market”. There is
somewhat correlation which is positive which would have happened since fluctuations in the
stock market might lure the speculators and in the process the FIIs invest or withdraw money
from the stock market which affects the currency exchange rate. Here we are going to find some
relation since the large inflow of the capital affects the supply and demand of the currency and
thus affects the exchange rate.

The relative study of the volatility in the exchange rate (INR /USD) and the percentage
change in the BALANCE OF TRADE.

% Change in yearly
% Change in rate value of balance of
Year INR/USD trade
2009-2010 5.594 24.65986395
2008-2009 -11.729 -49.43566591
2007-2008 -4.870 40.03021148
2006-2007 12.590 30.98236776
2005-2006 1.889 9.124087591
A Study on Volatility Management In Forex Market:
An Investors Perspective

Table:6

KARL PEARSON COEFFICIENT OF CORRELATION =0.666274

Figure: 6

INTERPRETATION:
There has been taken the correlation between two variables in which one of the variables has
been taken as the percentage change in balance of trade and the other variable is the variance in
the exchange rate between the currencies INR and USD. The data has been taken from year 2005
A Study on Volatility Management In Forex Market:
An Investors Perspective

to 2011 and the variance has been studied. According to the findings here the coefficient of
correlation has been found to be 0.666274 which is denoted by ‘r’. This is more than five and so
we can have the conclusion that there is positive correlation between the variables since the
coefficient is more close to the positive value of one, though not very close. There is the effect
being seen by the recession in the year 2008 which is making the variance in the balance of trade
to be visible to a great extent. So here we are going to find that the null hypothesis taken has
been proved wrong and the hypothesis taken as “H 2: Fluctuations in the exchange rate affect on
the balance of trade “has been proved right. It is a different finding from whatever the NULL
hypothesis has been taken. The year 2008 saw the great decrease in export from India and that
saw the balance of trade giving huge negative figures. The USD became weak and because of
that there was positive impact on the imports since the imports became cheaper but still due to
very less export the overall economy was taking a heavy beating. The current account deficit
widened to an alarming level. The later years saw the gap to get a bit lessen and the recovery
started.

The relative study of the volatility in the exchange rate (INR /JPY) and the percentage
change in the BALANCE OF TRADE.
A Study on Volatility Management In Forex Market:
An Investors Perspective

% Change in
% Change in
Year yearly value of
rate INR/JPY
balance of trade
2009-2010 -0.650 24.65986
2008-2009 -23.902 -49.4357
2007-2008 -19.082 40.03021
2006-2007 11.646 30.98237
2005-2006 1.189 9.124088

Table: 7

KARL PEARSON COEFFICIENT OF CORRELATION = 0.525871

Figure: 7

INTERPRETATION:
There has been taken the correlation between two variables in which one of the variables has
been taken as the percentage change in balance of trade and the other variable is the variance in
A Study on Volatility Management In Forex Market:
An Investors Perspective

the exchange rate between the currencies INR and JPY. The data has been taken from year 2005
to 2011 and the variance has been studied. According to the findings here the coefficient of
correlation has been found to be 0.525871 which is denoted by ‘r’. This is more than five and so
we can have the conclusion that there is positive correlation between the variables since the
coefficient is more close to the positive value of one, though not very close. There is the effect
being seen by the recession in the year 2008 which is making the variance in the balance of trade
to be visible to a great extent. So here we are going to find that the null hypothesis taken has
been proved wrong and the hypothesis taken as “H 2: Fluctuations in the exchange rate affect on
the balance of trade “has been proved right. It is a different finding from whatever the NULL
hypothesis has been taken. The year 2008 saw the great decrease in export from India and that
saw the balance of trade giving huge negative figures. The JPY became weak and because of that
there was positive impact on the imports since the imports became cheaper but still due to very
less export the overall economy was taking a heavy beating. The current account deficit widened
to an alarming level. The later years saw the gap to get a bit lessen and the recovery started.

The relative study of the volatility in the exchange rate (INR /CHF) and the percentage
change in the BALANCE OF TRADE.
A Study on Volatility Management In Forex Market:
An Investors Perspective

% Change in
% Change in
Year yearly value of
rate INR/CHF
balance of trade

2009-2010 1.862 24.65986

2008-2009 -11.272 -49.4357
2007-2008 -16.550 40.03021
2006-2007 9.639 30.98237
2005-2006 1.048 9.124088

Table: 8

KARL PEARSON COEFFICIENT OF CORRELATION =0.275787

Figure: 8

INTERPRETATION:
Here the coefficient of correlation is 0.275787 which is close to the value zero so we can say that
there is very less correlation between the variables and this is even proving the null hypothesis to
be right. The attempt done to find the correlation between the variables has given the result
A Study on Volatility Management In Forex Market:
An Investors Perspective

which is tending to have zero correlation. Here we have taken two variables one as volatility in
exchange rate and the other as the rate of change in the balance of trade. Here we find (KARL
PEARSON COEFFICIENT OF CORRELATION) r = 0.275787which is tending more towards
zero means there is very less correlation between the variables. Though the value is not zero but
still the correlation is tending towards zero means the different variables taken are independently
behaving. There is no or very little effect of the volatility in exchange rate over the blance of
trade in India . The same is evident by the figure as we are going to see the dots in the graph are
quite scattered. So here as the coefficient of correlations is coming to be 0.275787i.e. r
=0.275787which is stating that the correlation between the variables is not existing and is
proving the null hypothesis Ho to be true as” The volatility in the forex market does not affect the
variations in the balance of trade. Both go independently.

The relative study of the volatility in the exchange rate (INR /EUR) and the percentage
change in the BALANCE OF TRADE.
A Study on Volatility Management In Forex Market:
An Investors Perspective

% Change in
% Change in
Year yearly value of
rate INR/EUR
balance of trade

2009-2010 10.152 24.65986

2008-2009 -5.902 -49.4357
2007-2008 -12.739 40.03021
2006-2007 1.695 30.98237
2005-2006 5.460 9.124088
Table: 9

KARL PEARSON COEFFICIENT OF CORRELATION =0.114812

Figure: 9

INTERPRETATION:
A Study on Volatility Management In Forex Market:
An Investors Perspective

Here the coefficient of correlation is 0.114812 which is close to the value zero so we can say that
there is very less correlation between the variables and this is even proving the null hypothesis to
be right. The attempt done to find the correlation between the variables has given the result
which is tending to have zero correlation. Here we have taken two variables one as volatility in
exchange rate and the other as the rate of change in the balance of trade. Here we find (KARL
PEARSON COEFFICIENT OF CORRELATION) r = 0.114812 which is tending more towards
zero means there is very less correlation between the variables. Though the value is not zero but
still the correlation is tending towards zero means the different variables taken are independently
behaving. There is no or very little effect of the volatility in exchange rate over the balance of
trade in India . The same is evident by the figure as we are going to see the dots in the graph are
quite scattered. So here as the coefficient of correlations is coming to be 0.114812 i.e. r
=0.114812 which is stating that the correlation between the variables is not existing and is
proving the null hypothesis Ho to be true as” The volatility in the forex market does not affect the
variations in the balance of trade. Both go independently.

The relative study of the volatility in the exchange rate (INR /GBP) and the percentage
change in the BALANCE OF TRADE.
A Study on Volatility Management In Forex Market:
An Investors Perspective

% Change in
% Change in
Year yearly value of
rate INR/GBP
balance of trade

2009-2010 6.526 24.65986

2008-2009 5.849 -49.4357
2007-2008 3.006 40.03021
2006-2007 2.273 30.98237
2005-2006 -3.594 9.124088
Table: 10

KARL PEARSON COEFFICIENT OF CORRELATION = -0.22013

Figure: 10

INTERPRETATION:
A Study on Volatility Management In Forex Market:
An Investors Perspective

Here the coefficient of correlation is -0.22013 which is close to the value zero but still it is
having the negative correlation as the value is negative so we can say that when the value of one
variable increases the value of the other variable decreases but still since the value is tending to
zero so there is more emphasis on the correlation not existing between the variables and this is
even proving the null hypothesis to be right. Here we have taken two variables one as volatility
in exchange rate and the other as the rate of change in the balance of trade. Here we find (KARL
PEARSON COEFFICIENT OF CORRELATION) r = -0.22013 which is tending more towards
zero means there is very less correlation between the variables. Though the value is not zero but
still the correlation is tending towards zero means the different variables taken are independently
behaving. There is no or very little effect of the volatility in exchange rate over the balance of
trade in India. The same is evident by the figure as we are going to see the dots in the graph are
quite scattered. So here as the coefficient of correlations is coming to be -0.22013 i.e. r
=0.275787which is stating that the correlation between the variables is not existing and is
proving the null hypothesis Ho to be true as” The volatility in the forex market does not affect the
variations in the balance of trade. Both go independently.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Chapter Five
FINDINGS

Findings:
A Study on Volatility Management In Forex Market:
An Investors Perspective

Theory says that exchange rates should have a direct impact on the companies with heavy import
or export activities and thus affecting the profitability and hence the stock prices. An exchange
rate has two effects on stock prices, a direct effect through Multi National Firms and an indirect
effect through domestic firms. Detailed study about the topic has been done and the results that
have been found out on the basis of the research done where the tool used was Correlation and
this was used to prove the hypothesis .According to that we can conclude that –

1)In reality, stock prices and exchange rate are affected by a myriad of factors such as fiscal and
monetary policy, interest rates, inflation, money supply, political factors, international events,
fundamental performance, forex reserves, BOP, exchange control, etc.

2) There is little or very less relation between the volatility in the exchange rate and the volatility
in the stock market.
3) The non-existence of relationship may also be because of Indian markets not yet being highly
integrated or sensitive to the new information. Also the Indian companies comparatively may not
be exposed to a lot of forex exposure, like companies in developed countries.
4) The fluctuations in the stock market are more or less driven by the forces of the demand and
supply of the particular stock.
5) Another very important reason can be that Indian stocks are highly sentiment driven and
stocks of certain companies may start soaring for no reason. There are few qualitative factors that
influence stock prices like speculation and investor confidence level. Here the effect of the
volatility in the exchange rate is not having the direct bearing on the fluctuations in the stock
market performance but has little effect in the case when the rupee appreciates and thus the
international investors can gain from that appreciation of the weak currency. They buy more
shares at the time when the rupee is weak and at the time when it appreciates they exit from the
market to have more dollars or other currency in return. So this is the situation where the
volatility in the exchange rate is affecting the fluctuation in the stock market.

6) In the year 2008 was the year which saw recession in the US market and because of that the
data taken in that year are highly fluctuating and that (especially of the stock market ) has
affected the research to a great extent. That has affected the result in the end too. Not only the
stock market took a beating but even the balanced of trade was affected hugely. The data related
A Study on Volatility Management In Forex Market:
An Investors Perspective

with the balance of trade have fluctuated negatively to a great extent. This has even proved the
correlation between the variables to be nonexistent.
A Study on Volatility Management In Forex Market:
An Investors Perspective

Chapter Six
CONCLUSIONS AND RECOMMENDATIONS

Conclusions and Recommendations:

A Study on Volatility Management In Forex Market:
An Investors Perspective

In conclusion, in the era of increasing integration in financial markets one should take sufficient
care while implementing exchange rate policies. By using correlation, as a statistical tool we
have examined the relationship between stock prices and exchange rates in India. Our main
concerns were to examine whether these links were affected by the existence of foreign exchange
controls, floating rates and raising value of Rupee and raising indices in India.

The following conclusions have been derived from the analysis:

• There is no significant cause and effect relationship between the forex market and stock
exchange. As the relationship occurred between the variables during different periods is
because of chance factor and not because of cause factor.

• Thus the results provide the evidence for the presence goods market or portfolio
approach.

The effects of the volatility in rupee on the balance of trade and the way the different other
factors of the economy has been effected by the volatility in rupee.

1) Volatility can have contagion effects, therefore it should be taken care of in the exchange rate
market since .The recovery and the inflation in the later half also affected the data in the years to
come.
2) As per the data seen we are going to find that in most of the cases we are having the
coefficient of correlation coming close to one means having our null hypothesis to be true and
thus the variables taken for the study were not having the relative correlation with each other. In
some of the cases however the re was the positive correlation existing but that was relatively
very less. In the year 2010 there was even the negative correlation between the balance of trade
and volatility in the currency rate which means the variables were oppositevely correlated with
each other. While one was increasing the other was decreasing.
3) Exports decline as result of rupee emerging stronger but according to estimates the stronger
rupee brought in rich dividends for Indian Inc and increased its profit margins in long run as
exporters brought in new technologies with cheaper imports for expanding their existing
A Study on Volatility Management In Forex Market:
An Investors Perspective

capacities. Thus, this will bring the cost down and the profit margin will increase. Thus reduced
costs of imports and encouraged domestic manufacturing with technological up gradation. As a
result, capacities expansions of Indian Inc are moving on faster speed which will make Indian
exports much more competitive for developing economies. 
4) The volatility of the Rupee has remained to be matter of concern though the recent Rupee
depreciation in the year late 2010 vis-a-vis the US dollar benefitted the selected industries like IT
and other outsourcing business.
5) At the time of the recovery of the economy the world wide, the rupee depreciated heavily and
on speculation refiners stepped up dollar buying to pay for costlier crude imports. India imports
almost 75 per cent of the crude it uses and the depreciating rupee caused problems to the
importers since they need to pay more for the same quantity of crude. Here we are finding the
adverse effect of the volatility in the rupee for the importers on the other hand this comes handy
and profitable for the industries like BPO and IT.
6)At the time when the recession was at it peak the dollar depreciated the most and even the
demand for the crude and other products in the market decreased. This made it easy for the
importers to buy products at the cheaper price and even the depreciated dollar helped their cause.
This was even true in the case of the Japanese Yen since the country was also in the grip of
heavy recession. So these years for which the basic data has been taken for the study has
remained to be the years of turbulence and so the data has shown much fluctuations and the
result has also remained affected.
7) The world economies injected a lot of money in the system and made flow of the capital from
the developed economy to the rising economy like India in the early days of the recession and at
the time of the recovery (late 2010) the back flow of money took place. This affected both the
volatility in the exchange rate and even the volatility in the stock market. This affected both the
volatilities in the positive sense since there happens increase in volatility at both the ends. The
rupee became strong when the capital came in and so the stock market. And the opposite
happened when the money was flowing back in the years 2010 and 2011.
A Study on Volatility Management In Forex Market:
An Investors Perspective

In conclusion, in the era of increasing integration in financial markets one should take sufficient
care while implementing exchange rate policies. Furthermore, indications are that the existence
of foreign exchange restrictions does not isolate the domestic capital markets. The general
increase in international trade and the resultant increase in economic integration have also
increased financial integration and reduced the benefit of international diversification.
A Study on Volatility Management In Forex Market:
An Investors Perspective

REFERENCES:

BOOKS:
Apte, Prakash G. (2000) Global Business Finance (1st Ed.), Tata McGraw-Hill Publishing
company Limited.

Kothari, CR. (2008) Research Methodology, New Age International Publication. New Delhi India

Rao, Subba P. (2006) International Business, Himalaya publishing House. New Delhi India

Gordon and Natrajan, Financial markets and services (Second Edition) Himalaya publishing
House. New Delhi India

JOURNALS:

• Integration between Foreign Exchange and Capital Markets in India: An empirical

exploration- by Golka C Nath and G P Samanta, the ICFAI Journal of Applied Finance
vol. 9 No. 6, Pg. 29 to 40

• CAPITAL FLOW VOLATILITY AND EXCHANGE RATES: THE CASE OF

INDIA –by Dua Pami and Sen Partha, Delhi School of Economics University of Delhi,
August 2006

• ADJUSTMENTS IN THE FACE OF PESO VOLATILITY: PERSPECTIVE FROM

THE PAST AND POLICY DIRECTIONS- by Agnes M. Yap and Cristeta B.
Bagsic(Center for Monetary and Financial Policy )

• MONETARY AUTHORITIES AND EXCHANGE RATE VOLATILITY: TURKEY

AND OTHER CASES- by Harald Schmidbauer and Ece Demirel (Last compiled:
October 27, 2010)
A Study on Volatility Management In Forex Market:
An Investors Perspective

• PREDICTIVE ACCURACY OF FUTURES OPTIONS IMPLIED VOLATILITY: THE

CASE OF THE EXCHANGE RATE FUTURES MEXICAN PESO – U.S. DOLLAR- by
Benavides Guillermo, (Central Bank of Mexico)

• Stock Prices and Exchange Rates interlinkages in emerging financial markets: the Indian
perspective- by Alok Kumar Mishra the ICFAI Journal of Applied Finance vol.11
No.4,Pg. 31 to 48

• TRADING VOLUMES VOLATILITY AND SPREAD IN FOREIGN EXCHANGE

MARKETS- by Galati Gabriele (Bank for international settlements Monetary and
economic Department)

• BIS Annual Report 2006/07/08

A Study on Volatility Management In Forex Market:
An Investors Perspective

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