A Study on Foreign Exchange and Its Risk Management

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SUMMARY

A Multinational company with high currency risk is likely to face financial difficulties which tend to have a disrupting on the operating side of the business.

A disrupted financial conditions are likely to:

  • Result in the problem of adverse incentives.
  • Weakens the commitment of various stake holders.

Foreign exchange exposure and risk are important concept in the study of international finance. It is the sensitivity of the home currency value of asset, liabilities, or operating incomes to unanticitpated changes in the exchange rates.

Exposure exists if the home currency values on an average in a particular manner. It also exists where numerous currencies are involved.

Foreign exchange risk is the variance of the home currency value of items arising on account of unanticipated changes in the exchange rates.

The derivative instruments like forwards, futures and options are used to hedge against the foreign exchange risk of the Multinational companies.

The original derivatives contract of International Finance is the ‘Forward exchange contract’. Forward Foreign exchange is a traditional and popular risk management tool to obtain protection against adverse exchange rate movements. The exchange rate is ‘locked in’ for a specific date in future, which enables the person involved in the contract to plan for and budget the business expenses with more certainty.

Forward exchange market, has since the 1960s, played the role of linking international interest rates. Today, however, Forward contract have to share other instruments and markets for arbitrage and for hedging. These newer derivative instruments include Futures, Options and Swaps.

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.

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