A PROJECT REPORT ON

“A STUDY ON FOREIGN EXCHANGE AND ITS RISK

MANAGEMENT”

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS

FOR THE AWARD OF THE DEGREE OF
BACHLOR OF ACCOUNTIING & FINANCE (BAF)
UNIVERSITY OF MUMBAI

SUBMITTED BY
DIVYATA EKNATH SHINDE
BAF, SEMESTER VI
(ROLL NO. 23514)
ACADEMIC YEAR 2022-2023
UNDER THE GUIDENCE OF

ASST.PROF.MR.DESHMUKH PRASAD

KONARK IDEAL COLLEGE OF SCIENCE & COMMERCE KALYAN (E) DIST: THANE 421306
 CERTIFICATE

This is to certify that DIVYATA EKNATH SHINDE has worked and duly completed his project
work for the degree of Bachelor of Management Studies under the Faculty of Commerce in the
subject of Finance and his project is entitled, “A STUDY ON FOREIGN EXCHANGE AND ITS
RISK MANAGEMENT ” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that no
part of it has been submitted previously for any Degree of any University.

It is his own work and facts reported by his personal findings and investigations.

Project Guide Principal

Mr. Deshmukh Prasad Dr. Shirin Gonsalvez Thomas

External Examiner
 DECLARATION

I the undersigned DIVYATA EKNATH SHINDE here by, declare that the work embodied in
this project work title “A STUDY ON FOREIGN EXCHANGE AND ITS RISK MANAGEMENT
” forms my own contribution to the research work carried out under the guidance of Asst. Prof. Mr.
Deshmukh Prasad is a result of any bothers university for any other degree to this or any
other university.

Wherever reference has been made top previous works of others it has been clearly indicated as
such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct.

PLACE:

DATE

Student Signature

Divyata Eknath Shinde

 ACKNOWLEDGEMENT

It gives me great pleasure to submit this project to the University of Mumbai as a part of
curriculum of my BMS course. I take this opportunity with great pleasure to present before you
this project on DIVYATA EKNATH SHINDE which is a result of co-operation, hard work and
good wishes of many people.

No words can adequately express my sincere thanks to all those who have helped me in making
this project a success.

Also, I acknowledge my deep sense of gratitude towards my guide Asst. Professor. Mr. Deshmukh
Prasad
I am grateful Dr. SHIRIN GONSALVEZ THOMAS Principal of College & Asst. Prof. Mr.
Deshmukh prasad

My debt to those who have helped me in one way or the other is heavy indeed. I would like to appreciate
contribution of my family and friends who have extended their complete support in completion of this
project.

Last but not the least; I am thankful to the Almighty for giving me strength, courage and patience
to complete this project.

NAME OF THE STUDENT

Divyata Eknath Shinde

 TABLE OF CONTENTS
S.no Particulars page no
1 Objectives Of The Study 2
2 Research &Methodology 3
3 Limitations &Assumptions 4
4 Introdution To The Foreign Exchange Risk Management 5
5 Forgin Exchange Exposure
13
6 Need & Importance Of The Study 16
7 Industry Profile 17
8 Tool And Techniques For The Management Of Risk 19
9 The Ortical Concepts Introdustiion To Foregin Exchange 22
10 Findings Of The Study 43
11 Conclusions 44
12 References
46
13 Bibliography 46
50
44
44
LIST OF TABLES 46
s.no Particulars Page no
1 Table -1 42
2 Table -2 44
3 Table -3 46
4 Table -4 47

List of Figure
S.no Particulars Page no
1 Figure-1 13
2 Figure-2 15
3 Figure-3 16
4 Figure-4 33

1
 OBJECTIVES OF THE STUDY

 To study and understand the foreign exchange.

 To study and analyze the revenues of the company when the exchange rates
fluctuate.

 To analyze income statement and find out the revenues when the dollars
are converted into Indian rupees.

 To study the different types of foreign exchange exposure including risk

and risk management techniques which the company is used to
minimize the risk.

 To present the findings and conclusions of the company in respect of

foreign exchange risk management

2
 RESEARCH AND METHODOLOG

RESEARCH
SAMPLING SIZE
In this study the sample size is taken in the form of income statement of company for the
year march 2006-2007.

SOURCES OF DATA
The data has been collected from various secondary sources like books and internet.

The data has been collected inline with the objectives of the study.

The presentation of study of the IT company provide an insight in knowing the foreign
exchange risk policies adopted by them. This data has been collected from the 2006-2007
annual reports of the companies.

Conclusions have been drawn after the detailed study of the risk management policies of the
IT company as to know what are the most widely used hedging instruments for minimizing
foreign exchange risk.
METHODOLOGY

• The total revenues of the income statements are converted from USA $ to Indian
rupee.

• The revenues of the companies are divided into 40:60.

• The rates which are used for the study are taken as mid value i.e., is Rs.41 and it is
compared with minimum & maximum exchange rates.

3
 LIMITATIONS & ASSUMPTION

LIMITATION

• The study is confined just to the foreign exchange risk but not the total risk.

• The analysis of this study is mainly done on the income statements.

• This study is limited for the year 2006-2007.

• It does not take into consideration all Indian companies foreign exchange risk.

• The hedging techniques are studied only which the company adopted to minimize foreign
exchange risk.

ASSUMPTIONS

• The total revenues are assumed 40% as domestic & 60% as foreign revenues.

• The exchange rates are taken averagely.

• The information collected from various websites are assumed to be accurate and true.

• Risk management is an integral part of an organization policy and is inevitable

4
 INTRODUCTION TO THE FOREIGN EXCHANGE RISK MANAGEMENT

Risk:
Risk is the possibility that the actual result from an action will deviate from the expected
levels of result. The greater the magnitude of deviation and greater the probability of its
occurrence, the greater is the risk. A business has to take step to minimize the risk by adopting
appropriate technique or policies. Risk management focuses on identifying and implementing
these technique or policies, lest the business should be left exposed to uncertain outcomes.

Risk management:
Risk management is a process to identify loss exposure faced by an organization and to
select the most appropriate technique such exposures. Risk management tools measure potential
loss and potential gain. It enables us to stay with varying degree of certainty and confidence
levels, that our potential loss will not exceed a certain amount if we adopt a particular strategy.
Risk management enables us to confront uncertainty head on, acknowledge its existence, try to
measure its extent and finally control it.

INTRODUCTION TO HCL TECHNOLOGIES

Overview
HCL Enterprise is a leading Global Technology and IT enterprise that comprises two
companies listed in India-HCL Technologies & HCL Infosystems. The 3-decade-old
enterprise, founded in 1976, is one of India's original IT garage startups. Its range of offerings
span Product Engineering, Custom & Package Applications, BPO, IT Infrastructure Services,
IT Hardware, Systems Integration, and distribution of ICT products. The HCL team comprises
approximately 45,000 professionals of diverse nationalities, who operate from 17 countries
including 360 points of presence in India. HCL has global partnerships with several leading
Fortune 1000 firms, including leading IT and technology firms. HCL Technologies is one of
India's leading global IT Services companies, providing software led IT solutions, remote
infrastructure management services and BPO. Having made a foray into the global IT landscape
in 1999 after its IPO, HCL Technologies focuses on Transformational Outsourcing, working
with clients in areas that impact and re-define the core of their business. The company leverages
an extensive global offshore infrastructure and its global network of offices in 18 countries to
deliver solutions across select verticals including Financial Services, Retail & Consumer, Life
Sciences & Healthcare, Hi-Tech & Manufacturing, Telecom and Media & Entertainment
(M&E).

5
History of company
While HCL Enterprise has a 30-year history, HCL Technologies is a relatively young
company formed, nine years ago, in 1998. During this period, HCL has built unique strengths
in IT applications (custom applications for industry solutions and package implementation), IT
infrastructure management and business process outsourcing, while maintaining and extending
its leadership in product engineering. HCL has also built domain depth through a micro
verticalization strategy in industries such as Financial Services, Hi-tech and Manufacturing,
Retail, Media and Entertainment, Life Sciences, and Telecom.
HCL has created the ability to distribute value across the customer's IT landscape
through its well-distributed services portfolio, significant domain strengths, and locally relevant
geographic distribution. HCL has the widest service portfolio among Indian IT service
providers, with each of its services having attained critical mass.
Our five mature lines of business are R&D and Engineering, Custom Applications,
Enterprise Applications, IT Infrastructure Management, and BPO Services. In addition, HCL
has recently launched its Enterprise Transformation Service offerings comprising of Business,
Technology, Application and Data Transformation – the four broad needs of any enterprise. Our
ability to synergistically integrate these service lines across the entire IT landscape creates new
zones for value creation. Additionally, HCL has created unique service leadership in each of
these areas through best-of-breed unique propositions. HCL’s leadership in these service areas
has been recognized by several leading independent analysts.

In 2005, HCL started questioning the linearity of scale-driven business models

adopted by service providers (largely in the IT application business). The questioning led us to
the belief that the market was rapidly approaching a point of inflection, that is a point where the
volume and value proportionality would change, opening up new opportunities for service
providers who aspire to focus on value. With this realization, HCL embarked on a
transformational journey that focuses on value centricity in customer relationships and on
leveraging new market opportunities, while creating a unique employee experience. Hence HCL
entered a new phase of evolution – transforming it from a volume-driven service provider to
value-centric enterprise that turns technology into competitive advantage for all its customers
across the globe. Today HCL’s new way of doing business is being recognized by Harvard,
IDC, Fortune, Forbes, Economist, Business Week and the likes.

6
 Hedging:
Hedging is a technique that enables one party to minimize the effect of adverse
outcomes, in a given situation. Parties come together to minimize the effect of which risk of
one party gets cancelled by the risk of another. IT is not that risk minimization is the only
strategy. An entity may even choose to remain exposed, in anticipation of reaping profits from
its risk taking positions

CURRENCY RISK MANAGEMENT TECHNIQUES

A firm may choose any one or any set of combinations of the following techniques
Figure1: to manage foreign exchange rate risks.

i) Matching:- Cash inflows in one of the pairing currencies can be offset against cash
flows in the others. A firm can balance its receivables and payables in the same currency.
Firms may also deliberately influence the balance by arranging short or long term loans
or deposits.

ii) Multi-lateral Netting:- The netting can be done between inflows and outflows of
different currencies arising from cross-border transactions of the different entities in the
group. This, of course, requires a comprehensive information system concerning foreign
exchange dealings of the group companies.

7
iii) Leads and Lags:- Within the boundaries of the terms of the trading contracts or in
keeping with prevailing commercial practices and within the existing regulations, payments
to trading partners or foreign subsidiaries, in currencies whose values are expected to
appreciate or depreciate, can be accelerated or delayed.

iv) Invoicing and Currency Clauses:- Trading companies may, sometimes, have options
to invoice their cross-border sales or purchases, in domestic currency, so that the other
party absorbs exchange rate risk. Similar choices of invoicing in third country currencies
may also be negotiated with trading partners. There are instances of invoicing in terms of
currency baskets, comprising a composite index of different national currencies that have
been allotted predetermined weights. Judiciously employed, this can help in reducing the
impact of volatility of exchange rates.

v) Forward Currency Transactions:- This involves an agreement between two parties, a

buyer and a seller, to buy/sell a currency at a later date at a fixed price. Forward currency
contracts can be easily arranged with banks, which are ADs in foreign exchange. A forward
contract has the advantage of locking in the exchange rate at an agreed level, protecting from
adverse movement in exchange rates.

vi) Currency Futures:- This involves an agreement between two parties, a buyer and a seller,
to purchase/sell a currency at a later date at a fixed price, and that it trades on the futures
exchange and is subject to a daily settlement procedure to guarantee each party that claims
against the other party will be paid. In India, we are yet to have a futures exchange and
clearing house for financial futures.

vii) Currency Options:- Currency options offer the holder the right, but not the obligation,
to buy or sell foreign currency at an agreed price, within a specified period of time.
Generally, on most exchanges, options are not constructed on the underlying market, but
rather convey the right to buy or sell the futures contract. There can be exchange-traded
options as also OTC options.

viii) Currency Swaps:- A financial swap is a transaction in which two parties agree to an
exchange of payments over a specified time period. It is ordinarily marked by an exchange
of principals, which may be actual or notional. In a cross currency swap, the counterparties
exchange principals in different currencies at an exchange rate that is usually the current spot
rate and reverse the exchange at a later date, usually at the same exchange rate.

ix) Money Market Hedging:- Companies that have need to raise medium term foreign
currency loans should explore the possibility of reducing currency risk by raising them in
currencies in which they have medium term exposure in terms of receivables and assets in
these currencies.

Description of hedging

To reduce foreign exchange risk companies can use hedging. However, hedging
is not only used to protect oneself against foreign exchange risk, it can be used in all investment
situations (Sooran, 2009).
8
 To get an understanding of how hedging works, companies have to be familiar with the
basic facts of the technique and realize why companies tend to use it. A hedge can be seen as
an insurance against future fluctuations in for example stocks, prices of commodities, and
exchange rates. The technique is used to reduce a company’s exposure to risk, although it is
more complicated than just paying insurance (Sooran, 2009).

A company is able to hedge the foreign exchange risk attached to an investment by

taking another offsetting position, and by doing so, protecting itself from a potential loss. The
reason why companies hedge is not to make profits, but to insure the company from losing
money, and the cost from the hedge cannot be avoided (Sooran, 2009).

Below you can see figure 1, done by Custom House (2009) at Western Union, which
explains the steps a company should consider when trying to find the right set of hedges.

Figure 2: Procedure of picking the right set of hedges.

The list of different hedging techniques is long, and we will mainly focus on futures,
forward contracts, and options. These techniques derive their value from an underlying asset

9
 and are therefore viewed as derivative contracts, though there are some differences of how
they are composed (Damodaran, 2002).

The main difference between a future and an option is that an option holder has the right
to buy the underlying asset while the future holder is obligated to fulfil the terms of the contract
(Hurt & Wisner, 2002).

Hedging with forwards is the simplest technique among the financial hedging strategies.
However, it is not said it is the best strategy to use in all situations (Dhanini, 2003). By using
forwards a company can protect itself from differences and fluctuations in currencies. A
forward is all about the beliefs of future prices and works in a way as a tool to mitigate loss
(Meera, 2006).

A hedge is shown in figure 2. This is an illustration of how a hedge is placed with

forwards. Let us pretend that a Swedish company wants to buy a machine in Germany for one
million EUR. The future spot price of EUR is 1.23, as shown by the blue line. The Swedish
company wants to have a worst case rate, meaning that if there is a large fluctuation in EUR
the company will not make a loss. In this scenario the worst case rate is 1.2. Let say, for
illustrative reasons, that the company only invests 500 000 EUR in forwards.

Now, the two different scenarios that can happen to this investment is that the EUR will
either rise or fall below the worst case rate. If the price of EUR at maturity are 1.15, the
company is obligated to buy EUR for 500 000 at 1.2. Thus, if the EUR ends up at 1.4 the
company is still obligated to buy 500 000 EUR at 1.2 but the other 500 000 at 1.4, giving the
company an average rate of 1.3.
Figure 3. Illustration of a hedge.

10
 Advantages of hedging

A positive aspect of the future contract is that an investment in the future can be
hedged by another made today, which means that the investment in the future is hedged by an
offsetting position. Futures can be very flexible in their timing and are very useful to use when
the future date of cash transferral is uncertain (Readhead, 2001).

Forward hedges are made using an inter -bank or through an inter -dealer market. This
facilitates the hedger’s desire regarding the size and timing of the hedge. The advantage in
terms of increased flexibil ity however can only be exploited by larger firms. The reason is
because the intermediary has to take on the risk in a situation where the hedger is not able to
go through with its payments (Walsh, 1995).

Hedging with the use of options brings the advant age of protecting the value of cash
flows from potential losses if the exchange rate fluctuates in a non -desired direction, as well
as giving the possibility to make use of desired fluctuations (Maurer & Valiani, 2007).
However, this flexibility comes at a price.

A premium has to be paid whether the option is exercised or not. The company has to
determine if that cost is worth the additional flexibility. The complexity of this hedging
technique combined with the fact that the hedger must pay a premium, ofte n makes hedgers
choose other simpler, cheaper, hedging techniques instead (Zigler, 2003).

It enhances liquidity by allowing investors to invest in a variety of asset classes. It also

saves time since the long-term trader does not have to monitor/adjust his portfolio in response to
daily market volatility.

Hedging using options provide the trader an opportunity to practice complex options
trading strategies to maximize his return provides the trader protection against commodity price
changes, currency exchange rate changes, interest rate changes, inflation, etc. Hedging can also
save a lot of time as the long term trader is not required to monitor his portfolio with daily
market volatility.

11
 Disadvantages of hedging

The negative aspect about hedging with futures is that they are not flexible in their size
(Walsh, 1995). This means that hedgers will experience difficulties in finding futures with a
certain desired size, thus resulting in unnecessary exposures versus extra costs if taking on a
hedge that is smaller versus larger than required. This inflexibility of size is a result of the
liquidity limitation. The hedger may encounter this complication when a large number of
contracts are desired, or the hedge has a long maturity.

The advantage of forwards, of its flexibility for large firms, becomes a disadvantage for
the smaller firms. For the same reason, smaller firms will not be able to take advantage of the
flexibility regarding the expiry date of this hedging type which extends for approximately a
year (Walsh, 1995). Maurer and Valiani (2007) argue that a forward hedge in most cases
performs better than any put option. Attfield, Glod and James (2001) bring another view to the
aspect. They argue that when the difference between future rate and spot rate is favourable one
should always use forwards, but when it is not favourable one should exercise options. The
fact that the company has to find this balance, of which tool to use, proves as a disadvantage
for both techniques.

Research done by Khazeh and Winder (2006) shows that if one aggregates the world’s
major currencies in the market and does a comparison between specific time periods, money
market hedges generally outperform option hedges in terms of payables. However, in terms of
receivables, the comparison between the two results in an equal effectiveness. The conclusion
made is that medium- and large-sized companies will benefit more if using money market
hedges, compared to option hedges. Though a negative aspect about a money market hedge is
that money are locked in, since the company needs to act and use the money right away. It
results in that the company is unable to use that money during the time period between the
deal and the transferral of the money.

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 FOREIGN EXCHANGE EXPOSURE

Exposure:
Exposure is defined as the possibility of a change in the assets or liabilities or both of a
company as a result in the exchange rate. Foreign exchange exposure thus refers to the
possibility of loss or gain to a company that arises due to exchange rate fluctuations.

The value of a firm’s assets, liabilities and operating income vary continually in response
to changes in a myriad economic and financial variable such as exchange rates, interest rates,
inflation rates, relative price and so forth. We can these uncertainties as macroeconomic
environment risks. These risks affect all firms in the economy. However, the extent and nature
of impact of even macroeconomic risks crucially depend upon the nature of firm’s business.
For instance, fluctuations of exchange rate will affect net importers and exporters quite
differently. The impact of interest rate fluctuations will be very different from that on a
manufacturing firm.

The nature of macroeconomic uncertainty can be illustrated by a number of commonly

encountered situations. An appreciation of value of a foreign currency (or equivalently, a
depreciation of the domestic currency), increase the domestic currency value of a firm’s assets
and liabilities denominated in the foreign currency-foreign currency receivables and payables,
banks deposits and loans, etc. It will also change domestic currency cash flows from exports
and imports. An increase in interest rates reduces the market value of a portfolio of fixed-rate
in the rate of inflation may increase value of unsold stocks, the revenue from future sales as
well as the future costs of production. Thus the firms exposed to uncertain changes in a
numbers of variable in its environment. These variables are sometimes called Risk Factors.

The nature of Exposure and Risk

Exposure are a measure of the sensitivity of the value of a financial items (assets,
liabilities or cash flow) to changes in the relevant risk factor while risk is a measurable of the
variability of the item attributable to the risk factor.

Corporate treasurers have become increasingly concerned about exchange rate and
interest rate exposure and risk during the last ten to fifteen years or so. In the case of exchange

13
 rate risk, The increased awareness is firstly due to tremendous increase in the volume of cross
border financial transactions (which create exposure) and secondly due to the significant
increase in the degree of volatility in exchange rates (which, given the exposure, creates risk)

Classification of foreign exchange exposure and risk

Since the advent of floating exchange rates in 1973, firms around the world have become
acutely aware of the fact that fluctuations in exchange rates expose their revenues, costs,
operating cash flows and thence their market value to substantial fluctuations. Firms which
have cross-border transactions exports and imports of goods and services, foreign
borrowings and lending, foreign portfolio and direst investment etc, are directly exposed: but
even purely domestic firms which have absolutely no cross border transactions are also
exposed because their customers, suppliers and competition are exposed. Considerably effort
has since been devoted to identifying and categorizing currency exposure and developing
more and more sophisticated methods to quantify it.

Foreign exchange exposure can be classified into three broad categories:

• Transaction exposure

• Translation exposure

• Operating exposure

Of these, the first and third together are sometimes called “Cash Flow Exposure” while
the second is referred to as “Accounting Exposure” or Balance sheet Exposure”.

Transaction exposure:

When a firm has a payable or receivable denominated in a foreign currency, a change in

the exchange rate will alter the amount of local currency receivable or paid. Such a risk or
exposure is referred to as transaction exposure.

Translation exposure:

Many multinational companies require that their accounts of foreign subsidiaries and
branches get consolidated with those of it. For such consolidation, assets and liabilities
expressed in foreign currencies have to be translated into domestic currencies at the exchange
14
rate prevailing on the consolidation dates. If the values of foreign currencies change between
a two or successive consolidation dates, translation exposure will arise.

Operating exposure:

Operating exposure, like translation exposure involve an actual or potential gain or loss.
While the former is specific to the transaction, the latter relates to entire investment. The
essence of this operating exposure is that exchange rate changes significantly and alter the
cost of firm’s inputs along with price of it output and thereby influence its competitive position
substantially.

Graph 1: Foreign exchange exposure

Transaction

Translation

Operating

15
 NEED AND IMPORTANCE OF THE STUDY

The world nations are increasingly becoming more interrelated global trade, and global
investment. These international result in cross country flow of world nations. Countries hold
currencies of other countries and that a market, dealing of foreign exchange results.

Foreign exchange means reserves of foreign currencies. More aptly, foreign exchange
refers to claim to foreign money balances. Foreign exchange gives resident of one country a
financial claim on other country or countries. All deposits, credits and balances payable in
foreign currency and any drafts, travelers’ cheques, letters of credit and bills of exchange payable
in foreign currency constitute foreign exchange. Foreign exchange market is the market where
money denominated in one currency is bought and sold with money denominated in another
currency. Transactions in currencies of countries, parties to these transactions, rates at which one
currency is exchanged for other or others, ramificataion in these rates, derivatives to the
currencies and dealing in them and related aspects constitute the foreign exchange (in short,
forex) market.

Foreign exchange transactions take place whenever a country imports goods and services,
people of a country undertake visits to other counties, citizens of a country remit money abroad
for whatever purpose, business units set up foreign subsidiaries and so on. In all these cases the
nation concerned buys relevant and required foreign exchange, in exchange of its currency, or
draws from foreign exchange reserves built.

On the other hand, when a country exports goods and services to another country, when
people of other countries visit the country, when citizens of the country settled abroad remit
money homewards, when foreign citizens, firms and institutions invest in the country and
when the country or its business community raises funds from abroad, the country’s currency is
bought by others, giving foreign exchange, in exchange.

Multinational firms operate in more than one country and their operations involve multiple
foreign currencies. Their operations are influenced by politics and the laws of the counties where
they operate. Thus, they face higher degree of risk as compared to domestic firms.

16
 INDUSTRY PROFILE

The vision of information Technology (IT) policy is to use It as a tool for raising the living
standards of the common man and enriching their lives. Though, urban India has a high internet
density, the government also wants PC and Internet penetration in the rural India.

In Information technology (IT), India has built up valuable brand equity in the global
markets. In IT-enables services (ITES), India has emerged asa the most preferred destination for
business process outsourcing (BPO), a key driver of growth for the software industry and the
services sector.

India’s most prized resource in today’s knowledge economy is its readily available
technical work force. India has the second largest English speaking scientific professionals in
the world, second only to the U.S.

According the data from ministry of communication and information technology, the
ITESBPO industry has grown by 54 per cent with export earnings of US$ 3.6 billion during
20032004. Output of the Indian electronic and IT industry is estimated to have grown by 18.2
percent to Rs.1,14,650 crore in 2003-2004. The share of hardware and non-software services in
the IT sector has declined consistently every year in the recent past. The share of software
services in electronic and IT sector has gone up from 38.7 per cent in 1998-99 to 61.8 percent in
2003-04.

However, there has been some welcome acceleration in the hardware sector with a sharp
deceleration in the rate of decline of hardware’s share in electronic and IT industry. Output of
computers in value terms, for example, increased by 36.0, 19.7 and57.6 percent in 2000-01,
2002-03, and 2003-04, respectively. All the sub-sectors of the non- software components of
electronic and It industry grew at over 8 percent in 2003-04, but this was far below the rate of
growth of software services. Overall, after declining precipitously from 61.4 percent in 199899
to 40.9 percent in 2001-02, the share of hardware in this important industry declined only
marginally to 38.2 percent in the two subsequent years.

Exports markets continue to dominant the domestic segment. The size of the domestic
market in software relative to the export market for Indian software, which was 45.2 percent in

17
199899, after declining rapidly to 29.8 percent in 001-02, fell only to 29.1 percent and 27.7
percent in the two subsequent years. Value of software and services export is estimated to have
increased by 30 percent to US$12.5 billion in 2003-04. The software technology parks of India
have reported software exports of RS.31,578 crore ( US$6,947 million) during April-December
2004-2005 as against Rs.22,678 crore (US$4,913) during the corresponding period last year.
The annual growth rate of India’s software exports has been consistently over 50 percent since
1991. No other Indian industry has performed so well against the global competition.

According to a NASCOM-McKinsey report, annual revenue projections for India’s It

industry in 2008 area US$ 87 billion and market openings are emerging across four broad
sectors, IT services, software products, IT enabled services, IN addition to the export market, all
of these segments have a domestic market competition as well. The IT- enabled services industry
in India began to evolve in the early nineties when companies such as America Express, British
Airways, GE and Swissair set up their offshore operations in India. Today a large number of
foreign affiliates operate IT- enabled services in India. The different services lines of IT enabled
services offshored to India include customer care, finance, human resources, billing and payment
services, administration and content development.

MAJOR STEPS TAKEN FOR PROMOTION OF IT INDUSTRY

With the formation of a ministry for IT, Government of India has taken a major step
towards promoting the domestic industry and achieving the full potential of he Indian IT
entrepreneurs. Constraints have been comprehensively identified and steps taken to overcome
them and also to provide incentives.
In order to broaden the internet base, the Department of Information technology has also
announced a programme to establish State Wide Area Net work (SWAN) up to the block
level to provide connectivity for e-governance. The Department also set up community
Information centers (CICs) in hilly, far-flung areas of the North-East and Jammu and Kashmir
to facilitate the spread of benefit of information and communication technology. It is also
proposed to set up CICs in other hilly, far-flang areas of the country like Uttaranchal,
Andaman&Nicobar and Lakshadweep.
A number of steps have taken to meet the challenge of zero duty regime in 2005 under the
Information Technology Agreement (ITA-1) Tariffs on raw materials, parts, other inputs
and capital goods have been rationalized to make domestic manufacturing viable and
competitive

18
TOOLS AND TECHNIQUES FOR THE MANAGEMENT OF RISK

FOREIGN EXCHANGE RISK

Hedging exposures, sometimes called risk management, is widely resorted to by financial
directors, corporate treasurers and portfolio managers.
The practice of covering exposure is designed to reduce the volatility of a firm’s profits
and/or cash management and it presumably follows that this will reduce the volatility of
the value of the firm. There are a wide range of methods available to minimize foreign
exchange risks which are classified as internal and external techniques of exposure
management.

INTERNAL TECHNIQUES
Internal techniques of exposure management help to resolve exposure risks through
regulating the firm’s financial position. Thereby, they ensure that the firm is not endangered
through exposures. The fundamental stresses minimizing of not complete elimination of
exchange losses those are likely to accrue as a result of exposure.
They use methods of exposure management which are a part of a firm’s regulatory
financial management and do not resort to special contractual relationship outside the group
of companies concerned. They aim at reducing exposed position or preventing them from
arising. They embrace netting, matching, leading and lagging, pricing policies and
asset/liability management.
Internal techniques of exposure management do not rely on 3 rd party contracts to manage
exposed positions. Rather, it depends on internal financial management.

EXTERNAL TECHNIQUES
These refer to the use of contractual relationship outside the group of companies so as
to minimize the risk of foreign exchange losses. They insure against the possibility the
exchange losses will result from an exposed position which internal measures have not been
able to eliminate. They include forward contracts, borrowing short term, discounting bills
receivable, factoring, and government exchange risk guarantees currency options.
External techniques of foreign exchange exposure management use contractual
relationships outside the group to reduce risk of exchange rate changes. Several external
techniques are available for foreign exchange management. The firm can make a choice of
that technique which is most suitable to it.

19
 TOOLS FOR FOREIGN EXCHANGE RISK MANAGEMNT

FORWARD EXCHANGE CONTRACT

A forward exchange contract is a mechanism by which one can ensure the value of one
currency against another by fixing the rate of exchange in advance for a transaction expected to
take place at a future date.

Forward exchange rate is a tool to protect the exporters and importers against exchange
risk under foreign exchange contract, two parties’ one being a banker compulsorily in India,
enter into a contract to buy or sell a fixed amount of foreign currency on a specific future date
or future period at a predetermined rate. The forward exchange contracts are entered into
between a banker and a customer or between two bankers.

Indian exporter, 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. He agrees to
sell foreign exchange of specified amount and currency at a specified future date. The banker
on his part agrees to buy this at a specified rate of exchange is thus assured of his price in the
local currency. For example, an exporter may enter into a forward contract with the bank for 3
months deliver at Rs.49.50. This rate, as on the date of contract, is known as 3 month forward
rate. When the exporter submits his bill under the contract, the banker would purchase it at the
rate of Rs.49.50 irrespective of the spot rate then prevailing.

When rupee was devaluated by about 18% in July 1991, many importers found their
liabilities had increased overnight. The devaluation of the rupee had effect of appreciation of
foreign currency in terms of rupees. The importers who had booked forward contracts to cover
their imports were a happy lot.

DATE OF DELIVERY
According to Rule 7 of FEDAI, a forward contract is deliverable at a future date,
duration of the contract being computed from the spot value date of the transaction. Thus, if a
3 months forward contract is booked on 12th February, the period of two months should
commence from 14th February and contract will fall on 14th April.

20
 FIXED AND OPTION FORWARD CONTRACTS
The forward contract under which the delivery of foreign exchange should take place on
a specified future date is known as ‘Fixed Forward Contract’.

For instance, if on 5th March a customer enters into a three months forward contract with
his bank to sell GBP 10,000, it means the customer would be presenting a bill or any other
instrument on 7th June to the bank for GBP 10,000. He cannot deliver foreign exchange prior to
or later than the determined date.

Forward exchange is a device by which the customer tries to cover the exchange risk. The
purpose will be defeated if he is unable to deliver foreign exchange exactly on the due date. In
real situations, it is not possible for any exporter to determine in advance the precise date. On
which he is able to complete shipment and present document to the bank. At the most, the
exporter can only estimate the probably date around which he would able to complete his
commitment.
With a view to eliminate the difficulty in fixing the exact date of delivery of foreign exchange,
the customer may be given a choice of delivery the foreign exchange during a given period of
days.
An arrangement whereby the customer can sell or buy from the bank foreign exchange
on any day during a given period of time at a predetermined rate of exchange is known as
‘Option Forward Contract’. The rate at which the deal takes place is the option forward sale
contract with the bank with option over November. It means the customer can sell foreign
exchange to the bank on any day between 1s to 30th November is known as the ‘Option Period’.

Forward contract is an effective ad easily available tool for covering exchange risk. New
instruments like options, futures and swaps can also be used to cover exchange risks. These
instruments are called financial derivatives as their value is derived from the value of some other
financial contract or asset. When there instrument are bought or sold for covering exchange risk
they are used for ‘hedging’ the exchange risk. When they are dealt in with a view to derive profit
from unexpected movements in their prices or other changes in the exchange market, they are
being used for speculative purposes. The scope of using these instruments for speculative
purposes is very much limited in India. Some other Strategies may also be adapted to avoid
exchange risk. These consist in deciding on the currency of invoicing, maintaining in foreign
currency and deciding on the setting the debt.

21
 THE ORETICAL CONCEPTS INTRODUCTION TO FOREIGN
EXCHNGE AND ITS ADMINISTRATIVE FRAME WORK

Definition of International Trade:

International trade refers to trade between the residents of two different countries. Each
country functions as a sovereign state with its own set of regulations and currency. The
difference in the nationality of the export 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 are:

a) Different countries have different monetary units;
b) Restrictions imposed by counties on import and export of goods:
c) Restrictions imposed by nations on payments from and into their countries;
d) Different in legal practices in different countries.

The existing of national monetary units poses a problem in the settlement of international
transactions. The exporter would like to get the payment in the currency of own country. For
instance, if American exporter of New York export machinery to Indian rupee will not serve
their purpose because Indian rupee cannot be used as currency inn rupees. Thus the exporter
requires payment in the importer’s country. A need, therefore, arises for conversion of the
currency of the importer’s country into that of the exporters country.

Foreign exchange: Foreign exchange is the mechanism by which the currency of one
country gets converted into the currency of another country. The conversion is done by banks
who deal in foreign exchange. These banks maintain stocks of foreign currencies in the form
of balances with banks abroad. For instance, Indian Bank may maintain an account with Bank
of America, new York, in which dollar are held. In the earlier example, if Indian importers
pay the equivalent rupee to Indian bank, it would arrange to pay American export at New
York in dolor from the dollar balances held by it with Bank of America

Exchange rate: The rate at which one currency is converted into another currency is the rate
of exchange between the currencies concerned. The rate of exchange for a currency is known
from the quotation in the foreign exchange market.

22
 In the illustration, if Indian bank exchanged us for Indian rupee at Rs.40 a dollar, the
exchange rate between rupee and dollar can be expressed as

USD 1=Rs.40.

The banks operating at a financial center, and dealing in foreign exchange, constitute the
foreign exchange market. As in any commodity or market, the rates in the foreign exchange
market are determined by the interaction of the forces of demand and supply of the commodity
dealt, viz., foreign exchange. Since the demand and supply are affected by a number of
factors, both fundamental and transitory, the rates keep on changing frequently, and violently
too.

Some of the important factors which affect exchange rates are:

• Balance of payments
• Inflation
• Interest rates
• Money Supply
• National Income
• Resource Discoveries
• Capital Movements
• Political Factors
• Psychological Factors and Speculation
• Technical and Market Factors

Balance of payment: It represents the demand for and supply of foreign exchange which
ultimately determine the value of the currency. Exporters from the country demand for the
currency of the country in the forex market. The exporters would offer to the market the
foreign currencies have acquired and demand in exchange the local currency. Conversely,
imports into the country will increase the supply of currency of the country in the forex
market. When the BOP of a country is continuously at deficit, it implies that demand for the
currency of the country is lesser than the supply. Therefore, its value in the market declines.
If the BPO is surplus, continuously, it shows the demand for the currency is higher than its
supply and therefore the currency gains in value.

23
 Inflation: inflation in the country would increase the domestic prices of the commodities.
With increase in prizes exports may dwindle because the price may not be competitive. With
the decrease in export the demand for the currency would also decline; this it in turn would
result in the decline of external value of the currency. It should be noted that it is the relative
rate of inflation in the two counties that cause changes in the exchange rates.

Interest rates: The interest rate has a great influence on the short-term movement of
capital. When the interest rate at a center rises, it attracts short term funds from other centers.
This would increase the demand for the currency at the center and hence its value. Rising of
interest rate may be adopted by a country due to money conditions or as a deliberate attempt
to attract foreign investment.

Money supply: An increase in money supply in the country will affect the exchange rates
through causing inflation in the country. It can also affect the exchange rate directly.

National income: An increase in national income reflects increase in the income of the
residents of the country. The increase in the income increases the demand for goods in the
country. If there is underutilized production capacity in the country, this would lead to
increase in production. There is a change for growth in exports too. Where 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 exchange market. The result is similar to
that of inflation viz., and decline in the value of the currency. Thus an increase in national
income will lead to an increase in investment or in the consumption, and accordingly, its
effect on the exchange rate will change.

Resource discoveries: When the country is able to discover key resources, its currency
gains in value.

Capital Movements: There are many factors that influence movement of capital from one
country to another. Short term movement of capital may be influenced by the offer of higher
interest in a country. If interest rate in a country rises due to increase in bank rate or otherwise,
there will be a flow of short-term funds into the country and the exchange rate of the country
will rise. Reserves will happen in case of fall in interest rates.

24
 Bright investment climate and political stability may encourage portfolio investment in the
country. This leads to higher demand for the currency and upward trend in its rate. Poor
economic outlook may mean repatriation of the investments leading to decreased demand and
lower exchange value for the currency of the country.

Movement of capital is also caused by external borrowings and assistance. Large-scale

external borrowings will increase the supply of foreign exchange in the market. This will have
a favorable effect on the exchange rate of the currency of the country. When a repatriation of
principal and interest starts the rata may be adversely affected.

Other factors include political factors, Psychological factors and Speculation, Technical
and Market factors
ADMINISTRATION FRAME WORK FOR FOREIGN EXCHANGE IN INDIA
The Central Government has been empowered under Section 46 of the Foreign Exchange
Management Act to make rules to carry out the provisions of the Act. Similarly, Section 47
empowers the Reserve Bank to make regulations to carry out the provisions of the Act and
the rules made there under.

The Foreign Contribution (Regulation) Act, 1976 is to regulate the acceptance and
utilization of foreign contribution/ donation or foreign hospitality by certain persons or
associations , with a view to ensuring that Parliamentary institutions, political associations
and academic and other voluntary organizations as well as individuals working in the
important areas of national life may function in a manner consistent with the values of a
sovereign democratic republic.

It is basically an act to ensure that the integrity of Indian institutions and persons is
maintained and that they are not unduly influenced by foreign donations to the prejudice of
India’s interests.

The Foreign Exchange Management Act (FEMA) is a law to replace the draconian Foreign
Exchange Regulation Act, 1973. Any offense under FERA was a criminal offense liable to
imprisonment, Whereas FEMA seeks to make offenses relating to foreign exchange civil
offenses. Unlike other laws where everything is permitted unless specifically prohibited,
under FERA nothing was permitted unless specifically permitted. Hence the tenor and tone

25
of the Act was very drastic. It provided for imprisonment of even a very minor offense. Under
FERA, a person is presumed innocent unless he is proven guilty. With liberalization, a need
was felt to remove the drastic measure of FERA and replace them by a set of liberal foreign
exchange management regulations. There fore FEMA was enacted to replace FERA.

FEMA extends 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 contravention
there under committed outside India by any person to whom this Act applies.

FEMA contains definitions of certain terms which have been used throughout the Act. The
meaning of these terms may differ under other laws or common language. But for the purpose
of FEMA, the terms will signify the meaning as defined there under.

Authorized persons:
With the Reserve Bank has the authority to administer foreign exchange in India, it is
recognized that it cannot do so by itself. Foreign exchange is received or required by a large
number of exports and imports in the country spread over a vast geographical area. It would
be impossible for the reserve Bank to deal with them individually. Therefore, provisions has
been made in the Act, enabling the Reserve Bank to authority any person to be known as
authority person to deal in the foreign exchange or foreign securities, as an authorized dealer,
money changer or off- shore banking unit or any other manner as it deems fit.

Authorized dealers:
A major portion of actual dealing in foreign exchange from the customers (importers,
exporters and others receiving or making personal remittance) is dealt with by such of the
banks in India which have been authorized by Reserve
Bank to deal in foreign exchange. Such of the banks and selected financial institutions who
have been authorized Dealer.

26
 Figure 4: ADMINISTRATION OF FOREIGN EXCHANGE IN INDIA

FOREIGN EXCHANGE MANAGEMENT ACT

CENTRAL GOVERNMENT

RESERVE BANK OF INDIA

AUTHORISED PERSONS

FOREIGN EXCHANGE DEALER

ASSOCIATION OF INDIA

AUTHORISED MONEY ATHORISED DEALERS

CHANGERS

FULL FLEDGE RESTRICTED

FOREIGN EXCHANGE DEALER’S ASSOCIATION OF INDIA

(FEDAI)
FEDAI was establishing in 1958 as an association of all authorized dealers in India. The
principal functions of FEDAI are:

To frame rules for the conduct of foreign exchange business in India. These rules cover
various aspects like hours of business, charges for foreign exchange transactions, quotation
of rates to customer, inter bank dealings, etc. All authorized dealers have given undertaking
to the Reserve Bank to abide these rules.

To coordinate with Reserve Bank of India in Proper administration of exchange control.

To control information likely to be of interest to its members.

27
 Thus, FEDAI provides a vital link in the administrative set-up of foreign exchange in India.

AUTHORIZED MONEY CHANGERS

To provide facilities for encashment of foreign currency for tourists, etc., Reserve Bank
has granted limited licenses to certain established firms, hotels and other organizations
permitting them to deal in foreign currency notes, coins and travelers’ cheques subject to
directions issued to them from time to time. These firms and organizations are called
‘Authorized Money Changers’. An authorized money changer may be a full fledged money
changer or a restricted money changer. A full fledged money changer is authorized to
undertake both purchase and sale transactions with the public. A restricted money changer is
authorized only to purchase foreign currency notes, coins and travelers’ cheques subject to
the condition that all such collections are surrendered by him in turn to authorized dealer in
foreign exchange. The current thinking of the Reserve Bank is to authorize more
establishments as authorized money changers in order to facilitate easy conversion facilities.

THE FOREIGN EXCHANGE MARKET

The Foreign exchange 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.

Foreign exchange market facilitate the conversion of one currency to another for various
purposes like trade, payment for services, development projects, speculation etc. Since the
number of participants in the markets has increased over the years have become highly
competitive and efficient.

With improvement in trade between countries, there was a pressing need to have some
mechanism to facilitate easy conversion of currencies. This has been made possible by the
foreign exchange markets.

Considering international trade, a country would prefer to import goods for which it does
not have a competitive advantage, while exporting goods for which it has a competitive
advantage over others.
Thus trade between countries is important for common good but nations are separated by
distance, which that there is a lot of time between placing an order and its actual delivery. No
supplier would be willing to wait until actual delivery for receiving payments. Hence, credit

28
is very important at every stage of the transaction. The much needed credit servicing and
conversion of the currency is facilitated by the foreign exchange market.

Also the exchange rates are subject to wide fluctuations. There is therefore, a constant risk
associated exchange markets cover the arising out of the fluctuations in exchange rates
through “hedging”.
Forex market is not exactly a place and that there is no physical meeting but meeting is
affected by mail or over phone.

FOREIGN EXHANGE TRANSACTIONS

Foreign exchange transactions taking place in foreign exchange markets can be broadly
classified into Inter bank transactions and Merchant transactions. The foreign exchange
transactions taking place among banks are known as inter bank transactions and the rates
quoted are known as inter bank rates. The foreign exchange transactions that take place
between a bank and its customer known as’ Merchant transactions’ and the rates quoted are
known as merchant rates.

Merchant transactions take place when as exporter approaches his bank to convert his sale
proceeds to home currency or when an importer approaches his banker to convert domestic
currency into foreign currency to pay his dues on import or when a resident approaches his
bank to convert foreign currency received by him into home currency or vice versa. When a
bank buys foreign exchange from a customer it sells the same in the inter bank market at a
higher rate and books profit. Similarly, when a bank sells foreign exchange to a customer, it
buys from the inter bank market, loads its margin and thus makes a profit in the deal.

The modes of foreign exchange remittances

Foreign exchange transactions involve flow of foreign exchange into the country or out of
the country depending upon the nature of transactions. A purchase transaction results in
inflow of foreign exchange while a sale transaction result in inflow of foreign exchange. The
former is known as inward remittance and the latter is known as outward remittance.
Remittance could take place through various modes. Some of them are:

• Demand draft

29
 • Mail transfer

• Telegraphic transfer

• Personal cheques

Types of buying rates:

• TT buying rate and

• Bill buying rate

TT buying rate is the rate applied when the transaction does not involve any delay in the
realization of the foreign exchange by the bank. In other words, the Nastro account of the
bank would already have been credited. This rate is calculated by deducting from the inter
bank buying rate the exchange margin as determined by the bank.

Bill buying rate: This is the rate to be applied when foreign bill is purchased. When a bill
is purchased, the rupee equivalent of the bill values is paid to the exporter immediately.
However, the proceeds will be realized by the bank after the bill is presented at the overseas
centre.

Types of selling rates:

• TT selling rates

• Bill selling rates

TT Selling rate: All sale transactions which do not handling documents are put through
at TT selling rates.

Bill Selling rates: This is the rate applied for all sale transactions with public which involve
handling of documents by the bank.

30
 Inter Bank transactions
The exchange rates quoted by banks to their customer are based on the rates prevalent in
the Inter Bank market. The big banks in the market are known as market makers, as they are
willing to pay or sell foreign currencies at the rates quoted by them up to any extent.
Depending upon its resources, a bank may be a market in one or few major currencies. When
a banker approaches the market maker, it would not reveal its intention to buy or sell the
currency. This is done in order to get a fair price from the market maker.

Two way quotations

Typically, then quotation in the Inter Bank market is a two- way quotation. It means, the
rate quoted 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. For example,
a Mumbai bank may quote its rate for US dollars as under.

USD 1= Rs.41.15255/1650

More often, the rate would be quoted as 1525/1650 since the players in the market are
expected to know the ‘big number’ i.e., Rs.41. in the above quotation, once rate us Rs.41.1525
per dollar and the other rate is Rs.41.1650 per dollar.

Direct quotation
It will be obvious that the quotation bank will be to buy dollars at 41.1525 and sell dollars
at Rs41.1650. if once dollar bought and sold, the bank makes a profit of 0.0125.
In a foreign exchange quotation, the foreign currency is the commodity that is being bought
and sold. The exchange quotation which gives the price for the foreign v\currency in term of
the domestic currency is known as direct quotation. In a direct quotation, the quoting bank
will apply the rule: “buy low’ sell high”.

Indirect quotation
There is another way of quoting in the foreign exchange market. The Mumbai bank quote
the rate for dollar as:

Rs.100=USD 2.4762/4767

31
 This type of quotation which gives the quality of foreign currency per unit of domestic
currency is known as indirect quotation. In this case, the quoting bank will receive USD
2.4767 per Rs.100 while buying dollars and give away USD 2.4762 per Rs.100 while selling
dollars In other words, “Buy high, sell low” is applied.

This buying rate is also known as the ‘bid’ rate and the selling rate as the ‘offer’ rate. The
difference between these rates is the gross profit for the bank and known as the ‘Spread’.

Spot and forward transactions

The transactions in the Inter Bank market May place for settlement-
• On the same day; or
• Two days later;
• Some day late; say after a month

Where the agreement to buy and sell is agreed upon and executed on the same date, the
transaction is known as cash or ready transaction. It is also known as value today.

The transaction where the exchange of currencies takes place after the date of contract is
known as the Spot Transaction. For instance if the contract is made on Monday, the delivery
should take place on Wednesday. If Wednesday is a holiday, the delivery will take place on
the next day, i.e., Thursday. Rupee payment is also made on the same day the foreign
exchange is received.

The transaction in which the exchange of currencies takes place at a specified future date,
subsequent to the spot rate, is known as a forward transaction. The forwards transaction can
be for delivery one month or two months or three months, etc. A forward contract for delivery
one month means the exchange of currencies will take place after one month from the date of
contract. A forwards contract for delivery two months means the exchange of currencies will
take place after two months and so on.

Spot and Forwards rates

Spot rate of exchange is the rate for immediate delivery of foreign exchange. It is
prevailing at a particular point of time. In a forward rate, the quoted is for delivery at a future
date, which is usually 30, 60, 90 or 180 days later. The forward rate may be at premium or
discount to the spot rate, Premium rate, i.e., forward rate is higher than the spot rate, implies
that the foreign currency is to appreciate its value in tae future. May be due to larger demand

32
for goods and services of the country of that currency. The percentage of annualized discount
or premium in a forward quote, in relation to the spot rate, is computed by the following.

Forward Premium = Forward rate-spot rate * 12

(discount ) Spot rate No. 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.

Forward margin/Swap points

Forward rate may be the same as the spot rate for the currency. Then it is said to be ‘at par’
with the spot rate. But this rarely happens. More often the forward rate for a currency may be
costlier or cheaper than its spot rate. The difference between the forward rate and the spot rate
is known as the ‘Forward margin’ or ‘Swap Points’. The forward margin may be at a premium
or at discount. If the forward margin is at premium, the foreign currency will be costlier under
forward rate than under the spot rate. If the forward margin is at discount, the foreign currency
will be cheaper for forward delivery than for spot delivery.

Under direct quotation, premium is added to the spot rate to arrive at the forward rate. This
is done for both purchase and sale transactions. Discount is deducted from spot rate to arrive
at the forward rates.

Other rates
Buying rate and selling refers to the rate at which a dealer in forex is willing to buy the
forex and sell the forex. In theory, there should not be difference in these rates. But in
practices, the selling rate is higher than the buying rate. The forex dealer, while buying the
forex pay less rupees, but gets more when he sells the forex. After adjusting for operating
expenses, the dealer books a profit through the ‘buy and sell’ rates differences.
Transactions in exchange market consist of purchases and sales of currencies between
dealers and customers and between dealers and dealers. The dealers buy forex in the form of
bills, drafts and with foreign banks, from customer to enable them to receive payments from
abroad.

33
The resulting accumulated currency balances with dealers are disposed of by selling
instruments to customers who need forex to make payment to foreigners. The selling price
for a currency quoted by the dealer (a bank) is slightly higher than the purchase price to give
the bank small profit in the business. Each dealer gives a two-way quote in forex.

Single Rate: refers to the practices of adopting just rate between the two currencies. A
rate for exports, other for imports, other for transaction with preferred area, etc, if adopted
by a country, that situation is known as multiple rates.

Fixed rate: refers to that rate which is fixed in terms of gold or is pegged to another
currency which has a fixed value in terms of gold. Flexible rate keeps the exchange rate fixed
over a short period, but allows the same to vary in the long term in view of the changes and
shifts in another as conditioned by the free of market forces. The rate is allowed to freely float
at all times.
Current rate: Current rate of exchange between two currencies fluctuate from day to day
or even minute to minute, due to changes in demand and supply. But these movements take
place around a rate which may be called the ‘normal rate’ or the par of exchange or the true
rate. International payments are made by different instruments, which differ in their time to
maturity.
A Telegraphic Transfer (TT): is the quickest means of effecting payments. A T.T rate
is therefore, higher than that of any other kind of bill. A sum can be transferred from a bank
in one country to a bank in another part of the world by cable or telex. It is thus, the quickest
method of transmitting funds from one center to another.
Slight rates applicable in the case of bill instrument with attending delay in maturity and
possible loss of instrument in transit, are lower than most other rates. Similarly, there are
other clusters of rates, such as, one month’s rate, 3month’s rate. Longer the duration, lower
the price (of the foreign currency in terms of domestic). The exchange rate between two
given currencies may be obtained from the rates of these two currencies in terms of a third
currency. The resulting rate is called the Cross rate.
Arbitrage in the foreign exchange 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.
Arbitrage involves no risk as rates are known in advance. Further, there is no investment
required, as the purchase of one currency is financed by the sale of other currency.
Arbitrageurs gain in the process of arbitraging.

34
 DATA ANLAYSIS AND INTREPRETATION

HCL
DATA ANALYSIS
Table:1 CURRENCY EXCHANGE BETWEEN TWO RATES
PROFIT&LOSS A/C FOR THE YEAR ENDED JUNE 2007
(RS.in Income and expenses @ 60% from foreign
Particulars
crores) (In dollars)
Average If the If the
exchange Exchange Exchange
rate rate @41 rate @40
@Rs.41
INCOME

Net operating income 3768.62 2261.17 2261.17 2206.02

EXPENSES

Material consumption 0 0.00 0.00 0.00

Manufacturing 577.24 346.34 346.34 337.89
expenses
Personal expenses 1322.59 793.55 793.55 774.20
Selling Expenses 17.82 10.69 10.69 10.43
Administrative 913.89 365.55 365.55 356.63
Expenses
Capitalized Expenses 0 0.00 0.00 0.00
Cost of Sales 2831.54 1516.14 1516.14 1479.16
Reported PBDIT 937.08 745.03 745.03 726.86

Other recurring 16.07 9.64 9.40

income
Adjusted PBDIT 953.15 754.67 736.26
Depreciation 178.21 106.93 104.31
Other write offs 0 0.00 0.00
Adjusted PBIT 774.94 647.75 631.95
Financial expenses 20.6 12.36 12.06
Adjusted PBT 754.34 635.39 619.89
Tax Charges 75.87 45.52 44.41
Adjusted PAT 678.47 589.87 584.26
Non recurring-items 423.35 254.01 247.81
Other non cash 0 0.00 0.00
Adjustments
Reported PAT 1101.82 843.88 823.30

35
 GRAPH:1

INTERPRETATION:
This graph showing total revenues are alteration together, total revenues are decreased
Rs.2261.17 crores to 2206.02, and gross profit also decreased Rs.745.03 to 726.86 .simultaneously
all these values are changing the net income. If the Exchange rate had fixed @ Rs.41, the revenues
would have been same.

36
 HCL
DATA ANALYSIS
Table:2 CURRENCY EXCHANGE BETWEEN TWO RATES
PROFIT&LOSS A/C FOR THE YEAR ENDED JUNE 2007
(RS.in Income and expenses @ 60% from foreign
Particulars
crores) (In dollars)
Average If the If the
exchange Exchange Exchange
rate rate @41 rate @39
@Rs.41
INCOME

Net operating income 3768.62 2261.17 2261.17 2206.02

EXPENSES

Material consumption 0 0.00 0.00 0.00

Manufacturing 577.24 346.34 346.34 329.45
expenses
Personal expenses 1322.59 793.55 793.55 754.84
Selling Expenses 17.82 10.69 10.69 10.17
Administrative 913.89 365.55 365.55 347.72
Expenses
Capitalized Expenses 0 0.00 0.00 0.00
Cost of Sales 2831.54 1516.14 1516.14 1484.99
Reported PBDIT 937.08 745.03 745.03 708.69

Other recurring 16.07 9.64 9.17

income
Adjusted PBDIT 953.15 754.67 717.86
Depreciation 178.21 106.93 101.71
Other write offs 0 0.00 0.00
Adjusted PBIT 774.94 647.75 616.15
Financial expenses 20.6 12.36 11.76
Adjusted PBT 754.34 635.39 604.40
Tax Charges 75.87 45.52 43.30
Adjusted PAT 678.47 589.87 561.10
Non recurring-items 423.35 254.01 241.62
Other non cash 0 0.00 0.00
Adjustments
Reported PAT 1101.82 843.88 802.72

37
 GRAPH :2

INTERPRETATION:
This graph showing total revenues are alteration together, total revenues are decreased Rs.2261.1
7to 2150.87, and gross profit also decreased Rs.745.03 to
708.69.simultaneously all these values are changing the net income. If the Exchange rate had fixed
@ Rs.41, the revenues would have been same.

38
 HCL
DATA ANALYSIS
Table:3 CURRENCY EXCHANGE BETWEEN TWO RATES
PROFIT&LOSS A/C FOR THE YEAR ENDED JUNE 2007
(RS.in Income and expenses @ 60% from foreign
Particulars
crores) (In dollars)
Average If the If the
exchange Exchange Exchange
rate rate @41 rate @42
@Rs.41
INCOME

Net operating income 3768.62 2261.17 2261.17 2136.32

EXPENSES

Material 0 0.00 0.00 0.00

consumption
Manufacturing 577.24 346.34 346.34 354.79
expenses
Personal expenses 1322.59 793.55 793.55 812.90
Selling Expenses 17.82 10.69 10.69 10.95
Administrative 913.89 365.55 365.55 374.47
Expenses
Capitalized Expenses 0 0.00 0.00 0.00
Cost of Sales 2831.54 1516.14 1516.14 1553.12
Reported PBDIT 937.08 745.03 745.03 763.20

Other recurring 16.07 9.64 9.88

income
Adjusted PBDIT 953.15 754.67 773.08
Depreciation 178.21 106.93 109.54
Other write offs 0 0.00 0.00
Adjusted PBIT 774.94 647.75 663.55
Financial expenses 20.6 12.36 12.66
Adjusted PBT 754.34 635.39 650.89
Tax Charges 75.87 45.52 46.63
Adjusted PAT 678.47 589.87 24774.71
Non recurring-items 423.35 254.01 260.21
Other non cash 0 0.00 0.00
Adjustments
Reported PAT 1101.82 843.88 864.46

39
 GRAPH:3

INTERPRETATION:
This graph showing total revenues are alteration together, total revenues are decreased
Rs.2261.17 crores to 2316.3, and gross profit also decreased Rs.745.03 to
763.20.simultaneously all these values are changing the net income. If the Exchange rate had fixed
@ Rs.41, the revenues would have been same.

40
 HCL
DATA ANALYSIS
Table:4 CURRENCY EXCHANGE BETWEEN TWO RATES

PROFIT&LOSS A/C FOR THE FINANCIAL YEAR ENDED 2017-18

(Rs.in Income and Expenses@ 60% from foreign

Particulars
crores) (In dollars)
Average If the If the
Exchange rate Exchange Exchange
@Rs.41 rate@41 rate@43
INCOME
Net operating
3768.62 2261.17 2261.17 2371.47
Income
EXPENSES
Material 0 0.00 0.00 0.00
consumption
Manufacturing 577.24 346.34 346.34 363.23
expenses
Personal expenses 1322.59 793.55 793.55 832.26
Selling Expenses 17.82 10.69 10.69 11.21
Administrative 913.89 365.55 365.55 383.38
Expenses
Capitalized 0 0.00 0.00 0.00
Expenses
Cost of Sales 2831.54 1516.14 1516.14 1590.10
Reported PBDIT 937.08 745.03 745.03 781.37
Other recurring 16.07 9.64 10.11
income
Adjusted PBDIT 953.15 754.67 791.48
Depreciation 178.21 106.93 112.15
Other write offs 0 0.00 0.00
Adjusted PBIT 774.94 647.75 679.35
Financial expenses 20.6 12.36 12.96
Adjusted PBT 754.34 635.39 666.38
Tax Charges 75.87 45.52 47.74
Adjusted PAT 678.47 589.87 618.64
Non recurring-items 423.35 254.01 266.40
Other non cash 0 0.00 0.00
Adjustments
Reported PAT 1101.82 843.88 885.04

41
 GRAPH:4

INTERPRETATION:
This graph showing total revenues are alteration together, total revenues are decreased
Rs.2261.17 crores to 2371.47, and gross profit also decreased Rs.745.03 to
781.37. simultaneously all these values are changing the net income. If the Exchange rate had fixed
@ Rs.41, the revenues would have been same.

The rupee-dollar Exchange rates over the last five

42
 FINDINGS OF THE STUDY

FINDINGS
The company has to hammer out its approach to risk management taking into account its specific
circumstances. Here is brief description of company in India have fashioned its strategy towards
foreign exchange risk management.

HCL THCHNOLOGIES
HCL Technologies is one of India's leading global IT Services companies, providing software-led
IT solutions, remote infrastructure management services and BPO. Having made a foray into the
global IT landscape in 1999 after its IPO, HCL Technologies focuses on Transformational
Outsourcing, working with clients in areas that impact and re-define the core of their business. The
company leverages an extensive global offshore infrastructure and its global network of offices in
18 countries to deliver solutions across select verticals including Financial Services, Retail &
Consumer, Life Sciences & Healthcare, Hi-Tech & Manufacturing, Telecom and Media &
Entertainment (M&E). For the quarter ended 30th September 2007, HCL Technologies, along with
its subsidiaries had last twelve months (LTM) revenue of US $ 1.5 billion (Rs. 6363 crores) and
employed 45,622 professionals.
As its operations in many countries, the company is exposed to currency risk. Here is the
description:

1. They transact a major portion of their business in USD and the lesser extent other currencies
and is thus exposed to currency risk, The company manages risk on account of foreign
currency fluctuations through treasury operations.
2. To mitigate the risk of changes in foreign exchange rates on cash flows denominated in USD,
HCL technologies purchases foreign exchange forward contracts and the company does not
speculate the currency exchange.
3. Foreign exchange transactions of their revenues were generally in USD. The average exchange
rate of INR to USD in fiscal 2007 was Rs.41 against Rs.44 in fiscal 2006.

The above description of risk management in HCL is based on the information provided in the
annual report of HCL for the year 2007.

43
 CONCLUSIONS

CONCLUSIONS

• Despite market expansion the profit generation is still a question mark, so companies have to
search for areas of next generation like value added services, software enhancement and
development other than just BPO services to survive in the market.

• In the present day economies are globalized and the stabilities of them is really at stake, the
only rescue for the software companies is to improve their responsiveness to the changing scenarios.

• Companies have to develop their services to the bench mark level or global standards so that
they can have acceptance all over the world.

• The troubles of many exporters are not a result of the volatility of the rupee but the
unfavourably high-cost structure. Exporters are viable only when foreign exchange earnings get
converted into more and more rupees. To improve rupee viability and preserve profits, exporters
need to be efficient and productive and bring down aggregate rupee cost.

• Poor viability will not be resolved by hedging. Considering an inefficient exporter, it requires
a breakeven exchange rate of Rs.45 dollar to show profit. It will dazzle at a rate above Rs.45. It will
fizzle at any exchange rate below Rs.45.

• In case of forward contract. The forward contract locks in the exporter conversion of dollar
revenues to rupee revenues at Rs.41, the market forward price per dollar. The market will surely
not buy the exporters dollars at Rs.41 will be wholly ineffective exporters will be in serious trouble
despite the perfect hedge.

• The problem of viability will be solved only when the exporters breakeven moves down to
Rs.41 per dollar. By contrast, an inefficient exporter that is viable at Rs.41 peer dollar can take
advantage of the hedge.

44
 • The implicit dollar method will significantly preserve the dollar profitability exporters. The
employees and managers of exporting firms will be paid implicitly in dollars. The cost to the
company will be in dollars. But the payout will be in rupees and at the prevailing exchange rates. If
the dollar weakens, the dollar costs of employees and managers will be paid out in rupees at say,
RS.39, if the dollar strengthens the cost of employees and managers will be paid out in rupees at
say, Rs.43.

• To overcome these problems exporters should make good governance by making available
superior human, social and business infrastructure even if the tax rates are high. Good governance
lower the costs of operations and lowers the aggregate costs of doing business.

45
 REFERENCES

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Marketing Management, 29(6), 507-520.

Attfield, C. Glod, M. & James, J. (2001) Options and forwards compete for best hedge.
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multinationals: An empirical investigation. Accounting and Business Research, 21(81), 3-13.

Bennet, S. (1996) Finansieringsarbetet i företaget, från likviditetsstyrnings till riskhantering,

Industrilitteraturer, Göteborg

Bicksler, J., & Chen, A.H. (1986). An Economic Analysis of Interest Rate Swaps. Journal of
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mid

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 Bowe, M., & Saltvedt, T. M. (2004). Currency invoicing practices, exchange rate volatility and
pricing-to-market: evidence from product level data. International Business Review, 13(3), 281-
308.

Carlfors Bruk. (2009). Retrieved November 14, 2009, from http://www.carlfors.se/

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Forwards, Swaps, and Hedging (p.295-320). New York, USA: Mc-Graw Hill.

Corbett, F., Healy, M., & Poudrier, K. (2007). Processing swaps: controls, challenges, and
considerations. Journal of Investment Compliance, 8(2), 17-25.

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47
 ANNEXURE

Interview Formula
1. How well aware and informed are customers seeking your advice generally, when
it comes to currency risk?

2. How great is the customers’ knowledge about the different methods that are
available to regulate exchange risk when they come to you?

3. Which method do you most frequently recommend?

4. Why do you choose this specific method?

5. What are your recommendations based on? How is the procedure?

6. How is the “currency table” in Linköping operating? How do you use it?

7. Is there any method you usually do not recommend?

8. (If so-) Why do you not think it is a good method?

9. Is there any method the customers are reluctant to use? (If so-) What is the reason?

10. Which method is most expensive/inexpensive to use?

11. How often are accounts for cash pooling used by companies?

12. What do you regard as positive/negative with the following methods? -Swaps
-Invoice currency (choice of currency with export- and import transactions abroad) -Hedging
-Leading and lagging (timing of disbursements/payments depending on expected future
exchange rates)

13. How are you customers generally allocating the methods? Are several methods used
at the same time or just a few?

14. During how long time frame do companies use the same method/mix of methods?

15. Are the companies generally satisfied with the outcome of their investments? Do
they perceive less risk than before?

16. Do you perceive if there are any tendencies and trends in the choice of method to
manage exchange risk?

48
 17. Have you noticed an increase in the number of companies seeking advice about
managing exchange risk since the financial crisis?

18. Do you know approximately, how many companies that are managing exchange
rate risk internally resp. turn to the bank for help?

19. How often do you keep in touch with the companies and discuss foreign exchange
risk management?

20. Who/which person(s) in the companies do you discuss currencies with?

21. Do you know if there is a difference in the choice of methods most preferred in
Sweden resp. internationally?

49
 BIBLIOGRAPHY

Websites
www.google.com

www.mecklai.com

www.wipro.com

www.infosys.com

www.hcltechnologies.com

BOOKS
1. Foreign Exchange Arithmetic-M.jeevanandam

2. International financial management-Prasanna Chandra

3. International financial management-P.G.Apte

NEWS PARERS
The Economic Times
Business Line

50