Megha Kapoor

12BSPHH010547
MBA
(2012-2014)
Understanding
Exchange Risk
Management
Summer Internship Program

Company Guide:
Lokesh Agarwal, DGM (Finance)
Project Advisors:
Raj Kumar Phogat, Accounts Officer
Amit Kumar Upadhyay, Accounts Officer

F O R E I G N

.
2014)
IBS HYDERABAD
Understanding
Foreign
Exchange Risk
Management
Summer Internship Program-Interim Report
Faculty Guide:
Dr. Aruna M
Raj Kumar Phogat, Accounts Officer
Officer
E X C H A N G E R I S K MA N A G E ME N T

IBS HYDERABAD
2013
Understanding
Foreign
Exchange Risk
Management
Interim Report

Faculty Guide:
Dr. Aruna M
MA N A G E ME N T



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INTERIM REPORT INTERIM REPORT INTERIM REPORT INTERIM REPORT
ON ON ON ON
UNDERSTANDING THE FOREIGN EXCHANGE UNDERSTANDING THE FOREIGN EXCHANGE UNDERSTANDING THE FOREIGN EXCHANGE UNDERSTANDING THE FOREIGN EXCHANGE
RISK MANAGEMENT RISK MANAGEMENT RISK MANAGEMENT RISK MANAGEMENT




A REPORT SUBMITTED IN PARTIAL FULFILLMENT FOR THE MASTERS IN A REPORT SUBMITTED IN PARTIAL FULFILLMENT FOR THE MASTERS IN A REPORT SUBMITTED IN PARTIAL FULFILLMENT FOR THE MASTERS IN A REPORT SUBMITTED IN PARTIAL FULFILLMENT FOR THE MASTERS IN
BUSINESS ADMINISTRATION (MBA) PROGRAM OF IBS BUSINESS BUSINESS ADMINISTRATION (MBA) PROGRAM OF IBS BUSINESS BUSINESS ADMINISTRATION (MBA) PROGRAM OF IBS BUSINESS BUSINESS ADMINISTRATION (MBA) PROGRAM OF IBS BUSINESS SCHOOL, SCHOOL, SCHOOL, SCHOOL,
HYDERABAD HYDERABAD HYDERABAD HYDERABAD
SUBMITTED TO SUBMITTED TO SUBMITTED TO SUBMITTED TO- -- -
DR. ARUNA M (FACULTY GUIDE)
LOKESH AGGARWAL (COMPANY GUIDE)
DATE OF SUBMISSION: DATE OF SUBMISSION: DATE OF SUBMISSION: DATE OF SUBMISSION: SUBMITTED BY: SUBMITTED BY: SUBMITTED BY: SUBMITTED BY:
3
RD
MAY, 2013 MEGHA KAPOOR
12BSPHH010547



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TABLE OF CONTENTS TABLE OF CONTENTS TABLE OF CONTENTS TABLE OF CONTENTS


S.NO

CONTENTS

PAGE NO.
1 OBJECTIVE:
Objective of Study
Research Methodology
4
5
6
2 ABSTRACT 7
3 INTRODUCTION
BHEL- Corporate Profile
11
4 MAIN TEXT 15
5 PLAN OF COMPLETION:
Schedule
Topics to be studied and added in the
final report
26
6 REFERENCE 28


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OBJECTIVE
OF STUDY



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OBJECTIVE OF THE STUDY

MAIN OBJECTIVE
This project attempts to study the intricacies of the foreign exchange market. The main purpose
of this study is to get a better idea and the comprehensive details of foreign exchange risk
management.
SUB OBJECTIVES
To know the foreign exchange transactions of BHEL.
To know about the various concept and technicalities in foreign exchange.
To know the various functions of foreign exchange market.
To understand the derivatives market.
To get the knowledge about the hedging tools used in foreign exchange.
LIMITATIONS OF THE STUDY
Time constraint.
Resource constraint.
Bias on the part of interviewers.
METHODOLOGY
Collection of primary data through interviews and in depth meetings with
the professionals and observations.
Collection of secondary data from books, newspapers, other publications and Internet.
DATA ANALYSIS
The data analysis was done on the basis of the information available from various sources and
brainstorming.



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RESEARCH METHODOLOGY
This study is based on:
1. Secondary Research/Data
2. Primary Research/Data through Direct Questions.

SECONDARY DATA

Secondary data means data that are already available i.e. they refer to the data which have
already been collected and analysed by someone else. A Researcher must be very careful in
using secondary data. All relevant information connected with this study was assembled from
following sources:-
Course Books.
Annual Report of the company
Manuals and Documents.
Websites.


PRIMARY DATA

Primary data is collected afresh and thus happen to be original in character. But for my study, in
primary research I was only able to have one-to-one interaction with personnel of the finance
services department who guided me in the working of the project.

The data collected from secondary sources was assembled, screened, sorted, evaluated
interpreted and analyzed in line with the objectives of the study and has been incorporated in this
Project.



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ABSTRACT









F O R E I G N E X C H A N G E R I S K M A N A G E M E N T

This project is to study and analyze the
of this study is to get a better idea and the comprehensive details of foreign exchange risk
management.

For achieving these objectives the following steps have been undertaken:
UNDERSTANDING THE FO
Working on the tasks allotted by my guide on the foreign exchange transactions of
BHEL.
Updating the foreign currency remittance:
BHEL is updated on a daily basis for the outward flow i.e. payme
and updated in two files namely,
1) Foreign Currency Remitt
an internally developed system by BHEL which
automatically updates the payments to be made in
foreign currency.
2) Foreign Currency Remittance File:
an excel file which is maintained manually and is updated on a daily basis
with the payments to be made in foreign currency.
There are two files maintained to avoid duplication of the transactions and to keep
a check on the transactions and to maintain authent
Reconciliation of the bank balances of EEFC A/C:
50 lakhs are made by corporate office through EEFC A/c. Letter of credit (LC)
payments are processed through Corporate Office account in foreign currency.
LCs which are due for payments are reported by respective units with necessa
documents. The mode of payment is
maintains two accounts in foreign currency one in EUR and other in USD, to
facilitate the payments of foreign currency. These A/Cs are debited or credited
accordingly in case of a paym
F O R E I G N E X C H A N G E R I S K M A N A G E M E N T
ABSTRACT
This project is to study and analyze the intricacies of foreign exchange market.
of this study is to get a better idea and the comprehensive details of foreign exchange risk
For achieving these objectives the following steps have been undertaken:
UNDERSTANDING THE FOREIGN EXCHANGE TRANSACTIONS OF
Working on the tasks allotted by my guide on the foreign exchange transactions of
Updating the foreign currency remittance: The foreign currency remittance of
BHEL is updated on a daily basis for the outward flow i.e. payme
and updated in two files namely,
Foreign Currency Remittance System: This is
an internally developed system by BHEL which
automatically updates the payments to be made in
foreign currency.
Foreign Currency Remittance File: This file is
el file which is maintained manually and is updated on a daily basis
with the payments to be made in foreign currency.
There are two files maintained to avoid duplication of the transactions and to keep
a check on the transactions and to maintain authentication of the transactions.
Reconciliation of the bank balances of EEFC A/C: All forex payments above
50 lakhs are made by corporate office through EEFC A/c. Letter of credit (LC)
payments are processed through Corporate Office account in foreign currency.
LCs which are due for payments are reported by respective units with necessa
documents. The mode of payment is through EEFC A/C
maintains two accounts in foreign currency one in EUR and other in USD, to
facilitate the payments of foreign currency. These A/Cs are debited or credited
accordingly in case of a payment or receipt. These A/Cs are processed in the

F O R E I G N E X C H A N G E R I S K M A N A G E M E N T Page 8
of foreign exchange market. The main purpose
of this study is to get a better idea and the comprehensive details of foreign exchange risk
For achieving these objectives the following steps have been undertaken:
ANGE TRANSACTIONS OF BHEL:
Working on the tasks allotted by my guide on the foreign exchange transactions of
The foreign currency remittance of
BHEL is updated on a daily basis for the outward flow i.e. payments are made
el file which is maintained manually and is updated on a daily basis

There are two files maintained to avoid duplication of the transactions and to keep
ication of the transactions.
All forex payments above
50 lakhs are made by corporate office through EEFC A/c. Letter of credit (LC)
payments are processed through Corporate Office account in foreign currency.
LCs which are due for payments are reported by respective units with necessary
through EEFC A/C. Corporate office
maintains two accounts in foreign currency one in EUR and other in USD, to
facilitate the payments of foreign currency. These A/Cs are debited or credited
ent or receipt. These A/Cs are processed in the


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respective currency according to payments or receipts but in case of a payment is
due in say USD and the USD EEFC A/C falls short of the required balance then
EUR EEFC A/C can be used for making the payment after converting the value
into EUROs.
Exchange Earners' Foreign Currency Account (EEFC) is an account
maintained in foreign currency with an Authorized Dealer i.e. a bank dealing in
foreign exchange. It is a facility provided to the foreign exchange earners,
including exporters, to credit 100 per cent of their foreign exchange earnings to
the account, so that the account holders do not have to convert foreign exchange
into Rupees and vice versa, thereby minimizing the transaction costs.
Features of EEFC:
1) An EEFC account can be held only in the form
of a current account. No interest is payable on
EEFC accounts
2) One can credit up to 100 per cent of his/ her
foreign exchange earnings into the EEFC
account, subject to permissible credits and
debits.
Providing Swift messages to different units: These are provided to the units as a
proof of the transactions made. It consists of the swift code (which is unique for
all transactions), Foreign currency amount, value date, vendor name, Nostro A/C
details. It is basically a summary of the transaction.
Foreign Exchange MIR (5.12 & 5.13): Preparation of Monthly Information
Report (MIR). A routine Forex MIR is required from every unit in the prescribed
format at the beginning or every month for the purpose of Internal Reporting to
management and for the purpose of Foreign Currency Hedging. This can be
elaborated as follows:


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1) For the purpose of internal reporting: Presentation to the Management
regarding the Budgeted and Actual Inflows & Outflows of Foreign
Currency from various Units.
2) For the purpose of Hedging: After considering the inflows and outflows
detail, FSD will hedge 10% to 25% of the Net Exposure where,
Net Exposure = (Outflow Inflow)
High Value Letter Of Credit (HVLC) Quotes:
1) In case if any unit want to open an LC having the value of Rs. 10 crores or
more, the said unit is required to report the same to Corporate Office and
then Corporate office will than float the HVLC Tender and ask for quotes
from banks.
2) All the instructions regarding the opening
of HVLC will be notified under the
intimation of opening of HVLC to the
banks. E.g. Unit Name, Foreign
Currency, Nature of LC (whether
revolving or not), time duration of the
HVLC etc.
3) The bank which will quote the minimum would be awarded as L1 and LC
will be open by the L1 BANK.
4) Constant follow up is required with the banks for inviting quotes.
The various concept and technicalities in foreign exchange- Understanding the
concepts related to Currency Rates like exchange rate, different exchange rate systems,
the appreciation and depreciation of currency, reason for fluctuation of currencies, spot
rate, forward rate, cross rates, bid and ask etc., understanding the trading in foreign
exchange market with the Banks, the different types of exposures, the concept of hedging
and the different hedging strategies and the derivative market.


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INTRODUCTION






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BHEL: CORPORATE PROFILE

Bharat Heavy Electricals Limited (BHEL) is an Indian state-owned integrated power plant
equipment manufacturer and operates as an engineering and manufacturing company based in
New Delhi, India. BHEL was established in 1964, ushering in the indigenous Heavy Electrical
Equipment industry in India. The company has been earning profits continuously since 1971-72
and paying dividends since 1976-77. It is one of the only 7 mega Public Sector Undertakings
(PSUs) of India clubbed under the esteemed 'Maharatna' status. On 1 February 2013, the
Government of India granted Maharatna status to Bharat Heavy Electricals Limited.
It is engaged in the design, engineering, manufacture, construction, testing, commissioning and
servicing of a wide range of products and services for the core sectors of the economy, viz.
Power, Transmission, Industry, Transportation, Renewable Energy, Oil & Gas and Defense. It
has 15 manufacturing divisions, two repair units, four regional offices, eight service centres,


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eight overseas offices and 15 regional centres and currently operates at more than 150 project
sites across India and abroad. Most of its manufacturing units and other entities have been
accredited to Quality Management Systems (ISO 9001:2008), Environmental Management
Systems (ISO 14001:2004) and Occupational Health & Safety Management Systems (OHSAS
18001:2007).
It is the 7th largest power equipment manufacturer in the world. In the year 2011, it was ranked
ninth most innovative company in the world by US business magazine Forbes. BHEL is the only
Indian Engineering company on the list, which contains online retail firm Amazon at the second
position with Apple and Google at fifth and seventh positions, respectively. It is also placed at
4th place in Forbes Asia's Fabulous 50 List of 2010.
BHEL has a share of 59% in Indias total installed generating capacity contributing 69%
(approx.) to the total power generated from utility sets (excluding non-conventional capacity).
The company has been exporting its power and industry segment products and services for over
40 years. BHELs global references are spread across 75 countries. The cumulative overseas
installed capacity of BHEL manufactured power plants exceeds 9,000 MW across 21 countries
including Malaysia, Oman, Iraq, the UAE, Bhutan, Egypt and New Zealand. Its physical exports
range from turnkey projects to after sales services.
The company's Corporate R&D division at Hyderabad leads BHEL's research efforts in a number
of areas of importance to its product range. Research and Product Development (RPD) centers at
all its manufacturing divisions play a complementary role. BHEL has introduced, in the recent
past, several state of the art products. Commercialization of products and systems developed by
way of in-house Research and Development contributed Rs.95,120 Million corresponding to
around 19.3% of the company's total turnover in 2011-12. In 2011-12, BHEL filed 351 patents
and copyrights, enhancing the company's intellectual capital to 1,786 patents and copyrights
filed, which are in productive use in the company's business. The company established four new
Centres of Excellence, taking the total tally to 13. Significantly, BHEL is one of the only four
Indian companies and the only Indian Public Sector Enterprise figuring in 'The Global
Innovation 1000' of Booz & Co., a list of 1,000 publicly traded companies which are the biggest
spenders on R&D in the world.


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The company boasts of a dedicated team of highly skilled and committed workforce of 49,390
employees.
BHEL works along a pre-determined CSR Scheme and its Mission Statement on CSR is "Be a
Committed Corporate Citizen, alive towards its Corporate Social Responsibility". BHEL's
contributions towards Corporate Social Responsibility till date include adoption of villages, free
medical camps/charitable dispensaries, schools for the underprivileged and handicapped
children, ban on child labour, disaster/natural calamity aid, employment for the differently abled,
widow resettlement, employment for ex-serviceman, irrigation using treated sewage, pollution
checking camps, plantation of millions of trees, energy saving and conservation of natural
resources through environmental management. As part of social commitment, BHEL provides
financial assistance to various NGOs/Trusts/Social Welfare Societies that are engaged in social
welfare activities throughout the country. 56 villages having nearly 80,000 inhabitants have been
adopted.
In June 2012, BHEL commissioned 250 MW power generating unit at Harduaganj in Uttar
Pradesh. This would add six million units of electricity on a daily basis.




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MAIN TEXT



F O R E I G N E X C H A N G E R I S K M A N A G E M E N T

FOREIGN EXCHANGE AND RISK MANAGEMENT

Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a
free economy, a country's currency is valued according to factors of supply and demand. A
country's currency value also may
countries float their currencies freely against those of other countries, which keep them in
constant fluctuation. The value of a
on trade, investment, tourism, and
between banks and all transactions f
Settlements.

EXCHANGE RATE: The price of one currency viewed in relation to another currency is called
exchange rate.
EXCHANGE RATE SYSTEMS:

FIXED EXCHANGE RATE SYSTEM:
officially fixed by the government or monetary authority and not determined by market
forces.

FLEXIBLE (FLOATING) EXCHANGE RATE SYSTEM:
rate in which rate of exchange is determined by force
exchange market is called flexible exchange rate system. Here, value of currency is
allowed to fluctuate or adjust freely according to change in demand and supply of foreign
exchange. There is no official intervention in f
F O R E I G N E X C H A N G E R I S K M A N A G E M E N T
FOREIGN EXCHANGE AND RISK MANAGEMENT
, is the conversion of one country's currency into that of another. In a
free economy, a country's currency is valued according to factors of supply and demand. A
country's currency value also may be fixed by the country's government. However, most
their currencies freely against those of other countries, which keep them in
constant fluctuation. The value of any particular currency is determined by market forces based
on trade, investment, tourism, and geo-political risk. Foreign exchange is handled globally
between banks and all transactions fall under the auspice of the Bank of International
The price of one currency viewed in relation to another currency is called

EXCHANGE RATE SYSTEMS:
FIXED EXCHANGE RATE SYSTEM: Fixed exchange rate is the rate which is
officially fixed by the government or monetary authority and not determined by market
FLEXIBLE (FLOATING) EXCHANGE RATE SYSTEM: The system of exchange
rate in which rate of exchange is determined by forces of demand and supply in foreign
exchange market is called flexible exchange rate system. Here, value of currency is
allowed to fluctuate or adjust freely according to change in demand and supply of foreign
exchange. There is no official intervention in foreign exchange market.

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FOREIGN EXCHANGE AND RISK MANAGEMENT
, is the conversion of one country's currency into that of another. In a
free economy, a country's currency is valued according to factors of supply and demand. A
be fixed by the country's government. However, most
their currencies freely against those of other countries, which keep them in
ny particular currency is determined by market forces based
. Foreign exchange is handled globally
all under the auspice of the Bank of International
The price of one currency viewed in relation to another currency is called
Fixed exchange rate is the rate which is
officially fixed by the government or monetary authority and not determined by market
The system of exchange
s of demand and supply in foreign
exchange market is called flexible exchange rate system. Here, value of currency is
allowed to fluctuate or adjust freely according to change in demand and supply of foreign
oreign exchange market.


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FOREIGN EXCHANGE MARKET:
The foreign exchange market (forex, FX, or currency market) is a form of exchange for the
global decentralized trading of international currencies. Financial centers around the world
function as anchors of trading between a wide range of different types of buyers and sellers
around the clock, with the exception of weekends. The foreign exchange market determines the
relative values of different currencies. The foreign exchange market assists international trade
and investment by enabling currency conversion.
Forex trading as it relates to individual retail investors and traders is the speculation of the future
rate of a particular currency pair. For example, traders who think that the rate of the EURUSD
will go up might decide to buy, or go long, the EURUSD in the
Forex market. If a trader thinks the currency rate or price will go
down they will sell, or go short, the particular currency pair they are
interested in. All Forex trading done by retail traders and investors
must be facilitated by a Forex broker, there are many brokers
available on the internet.
Forex trading strategies can take a number of different forms, and it
is really up to the individual trader to pick the method that works the best for them. Following
are the popular Forex trading methods:
Indicator based trading methods: these trading methods involve analyzing lagging
indicators to try and predict future price movement of a Forex currency pair.
Robot trading systems: Forex trading robots have recently become quite popular on the
internet, these robot trading systems are essentially computer programs that tell you exactly
where to enter and exit and drastically reduce the need for human interaction.
Scalping: This is a short-term trading strategy where traders jump in and out of the market
quickly for small profits.


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Price action based directional trading: The trading method of price action is a Forex trading
strategy that involves analyzing a clean or indicator-free price to chart make ones trading
decisions. The primary advantage of price action trading is that it makes use of the core price
data of the market; price, therefore it removes the clutter and confusion that other trading
methods can bring, leaving your mind clear and calm.
FOREIGN EXCHANGE RISK:
Also known as exchange rate risk or currency risk is a financial risk posed by an exposure to
unanticipated changes in the exchange rate between two currencies. Investors and multinational
businesses exporting or importing goods and services or making foreign investments throughout
the global economy are faced with an exchange rate risk which can have severe financial
consequences if not managed appropriately. Employing a number of foreign exchange hedging
strategies is done in order to protect against exchange rate risk.

FOREIGN EXCHANGE EXPOSURES:
Exposure refers to the degree to which a company is affected by exchange rate changes.




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TRANSLATION EXPOSURE

Translation exposure, also called accounting exposure, arises because financial
statements of foreign subsidiaries which are stated in foreign currency must be
restated in the parents reporting currency for the firm to prepare consolidated financial
statements.
Translation exposure is the potential for an increase or decrease in the parents net worth
and reported net income caused by a change in exchange rates since the last translation.
The accounting process of translation, involves converting these foreign subsidiaries
financial statements into home currency-denominated statements.
Two basic methods for the translation of foreign subsidiary financial statements are
employed worldwide:
The current rate method
The temporal method

TRANSACTION EXPOSURE

Transaction exposure measures changes in the value of outstanding financial obligations
incurred prior to a change in exchange rates but not due to be settled until after the
exchange rates change.
Thus, this type of exposure deals with changes in cash flows that result from existing
contractual obligations.
Transaction exposure arises from:
Purchasing or selling on credit goods or services whose prices are stated in
foreign currencies.
Borrowing or lending funds when repayment is to be made in a foreign
currency.
Being a party to an unperformed foreign exchange forward contract.
Otherwise acquiring assets or incurring liabilities denominated in foreign
currencies


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Whoever makes a contract denominated in a foreign currency bears
transaction risk.

ECONOMIC EXPOSURE

Operating exposure, also called economic exposure, competitive exposure, and even
strategic exposure on occasion, measures any change in the present value of a firm
resulting from changes in future operating cash flows caused by an unexpected change in
exchange rates.
Changes in competitive position as a result of permanent changes in exchange rates.
Every company buying or selling abroad or even just competing with foreign companies
has economic risk.

Operating exposure is inevitably subjective, because it depends on estimates of future
cash flow changes over an arbitrary time horizon.
Planning for operating exposure is a total management responsibility because it depends
on the interaction of strategies in finance, marketing, purchasing, and production.
An expected change in foreign exchange rates is not included in the definition of
operating exposure, because both management and investors should have factored this
information into their evaluation of anticipated operating results and market value.
From an investors perspective, if the foreign exchange market is efficient, information
about expected changes in exchange rates should be reflected in a firms market value.
Only unexpected changes in exchange rates, or an inefficient foreign exchange market,
should cause market value to change.


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How are Forex Rates Determined?
Economic factors: These include: economic policy made by government agencies and
central banks, and economic conditions as described by and through economic reports as
well as various economic indicators.
Political conditions: International, national, and regional political conditions and events
can have a large impact on the Forex currency markets.
Market Psychology: The psychology of market participants can influence the foreign
exchange market in numerous ways. Ultimately all economic variables are expressed
through the filter of the human brain / trader psychology
Trading Algorithms: Electronic trading based on algorithms (or computer / robot
trading) is become more and more popular, as a result algorithmic trading is starting to
have a large effect on Forex currency rate.
THE MAJOR FACTORS INFLUENCING THE DIFFERENCES IN THE CURRENCY
RATES:
1. Inflation rates
2. Interest rates
3. Balance of payment position
4. Volume of international reserves
5. Level of activity and employment

INFLATION RATES:
If domestic inflation rate > foreign inflation rate, it means domestic goods are costlier than
foreign goods. This encourages import of foreign goods. Foreign goods are cheaper. There is an
increased demand for foreign currencies. Foreign currencies are costlier. Decline in the value of
domestic currencies occurs, i.e. domestic currency depreciates.


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If domestic inflation rate < foreign inflation rate, domestic goods are cheaper. This encourages
export. Foreign exchange inflow increases. Domestic currency appreciates.
INTEREST RATES:
If interest rate in home country > foreign country, foreign country funds are likely to be attracted
in the home country as the investor can earn better return in the home country rather than in the
foreign country. Funds fly from the foreign country to the home country. There will be more
demand for the home currency in the foreign country causing appreciation for home currency.
More foreign currency is required to buy home currency in foreign country which depreciates
foreign currency.

BALANCE OF PAYMENT POSITION:
Deficit balance of payments means inability to meet the
demand of foreign currency. This leads to depreciation of
home currency. It discourages import as foreign goods
become costlier. It encourages export as domestic goods
are cheaper in foreign country.

LEVEL OF ACTIVITY AND EMPLOYMENT:
Higher levels of economic activity and full employment have good potential and prospects of
appreciation in the value of currencies.

Therefore, Low inflation rate, higher interest rates, surplus balance of payment, possession of
sizeable foreign exchange reserves, higher level of economic activity have positive impact on
exchange rate.







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FOREIGN EXCHANGE RISK MANAGEMENT FRAMEWORK
Once a firm recognizes its exposure, it then has to deploy resources in managing it. A heuristic
for firms to manage this risk effectively is presented below which can be modified to suit firm-
specific needs i.e. some or all the following tools could be used.
1. Forecasts: After determining its exposure, the first step for a firm is to develop a forecast
on the market trends and what the main direction/trend is going to be on the foreign
exchange rates. The period for forecasts is typically 6 months. It is important to base the
forecasts on valid assumptions. Along with identifying trends, a probability should be
estimated for the forecast coming true as well as how much the change would be.

2. Risk Estimation: Based on the forecast, a measure of the Value at Risk (the actual profit
or loss for a move in rates according to the forecast) and the probability of this risk
should be ascertained. The risk that a transaction would fail due to market-specific
problems should be taken into account. Finally, the Systems Risk that can arise due to
inadequacies such as reporting gaps and implementation gaps in the firms exposure
management system should be estimated.

3. Benchmarking: Given the exposures and the risk estimates, the firm has to set its limits
for handling foreign exchange exposure. The firm also has to decide whether to manage
its exposures on a cost centre or profit centre basis. A cost centre approach is a defensive
one and the main aim is ensure that cash flows of a firm are not adversely affected
beyond a point. A profit centre approach on the other hand is a more aggressive approach
where the firm decides to generate a net profit on its exposure over time.


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4. Hedging: Based on the limits a firm set for itself to manage exposure, the firms then
decides an appropriate hedging strategy. There are various financial instruments available
for the firm to choose from: futures, forwards, options and swaps and issue of foreign
debt. Hedging strategies and instruments are explored later on. BHEL takes futures and
options.

5. Stop Loss: The firms risk management decisions are based on forecasts which are but
estimates of reasonably unpredictable trends. It is imperative to have stop loss
arrangements in order to rescue the firm if the forecasts turn out wrong. For this, there
should be certain monitoring systems in place to detect critical levels in the foreign
exchange rates for appropriate measure to be taken.
Stop-loss orders: This is minimizing risk when
placing an entry order. A stop-loss order gives
instructions to exit your position if the currency
price reaches a certain point. If you take a short
position (expecting the price to fall) you would
place a stop loss order above current market price.
If you take a long position (expecting the price to
rise) you would place a stop loss order below
current market price.

6. Reporting and Review: Risk management policies are typically subjected to review
based on periodic reporting. The reports mainly include profit/ loss status on open
contracts after marking to market, the actual exchange/ interest rate achieved on each
exposure and profitability vis--vis the benchmark and the expected changes in overall
exposure due to forecasted exchange/ interest rate movements. The review analyses
whether the benchmarks set are valid and effective in controlling the exposures, what the
market trends are and finally whether the overall strategy is working or needs change.




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Framework for Risk Management:



















FORCAST
RISK ESTIMATION
BENCHMARKING
STOP LOSS
HEDGING

REPORT AND REVIEW


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PLAN OF
COMPLETION




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Schedule:
Background knowledge, Gaining Knowledge, analyzing Industry Scenario: 2 Weeks
Determining Methodology, Selection Criteria:1 Week
Sampling and selection: 1 Week,
Establishing statistical method: 2 Weeks
Collection and Processing of Data: 2 Weeks
Limitations of the study: 1 Week
Summary of findings: 1 Week
Conclusion: 1 Week
Topics to be studied and added in the final report:
Comparison between the rates of Dollar and Euro and its comparison with INR in the
past 3 years. Analyse the variations in their rates. This is to check the amount of
fluctuations in each so that the imports of goods in each currency can be controlled
according to the fluctuations for protection against loses.




The data is collected from the Reuters Standard (Thomas Cook). The graphs are
to be made and analysis is to be done.
Hedging: Understanding the concept of hedging, its advantages and disadvantages. To
understand the concept of derivatives and its relevance (forward contract, futures, swaps
and options) and the techniques of hedging like leads and lags, indexation clauses, netting
etc. Understanding how the hedging decisions are taken and what factors firms must take
into consideration while taking the hedging decisions. And the factors affecting the
decision to hedge foreign currency risk.


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REFERENCES






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Reference:
http://en.wikipedia.org/wiki/Foreign_exchange_market
http://en.wikipedia.org/wiki/Exchange_rate
http://en.wikipedia.org/wiki/Foreign_exchange_market
http://en.wikipedia.org/wiki/Foreign_exchange_risk
http://www.all-about-forextrading.com/foreign-exchange-risk-management.
https://www.google.co.in/search?newwindow=1&q=foreign+exchange+risk+management+ppt&
oq=foreign+exchange+risk+management+ppt&gs_l=serp.3..0j0i22i30l3.37802.38674.0.39006.4.
4.0.0.0.0.384.1196.0j1j0j3.4.0...0.0...1c.1.12.serp.Ajl-3k5uszM
http://www.investopedia.com/articles/forex/09/exchange-rate-risk-currency-etf.asp
http://www.all-about-forextrading.com
http://en.wikipedia.org/wiki/BHEL
http://www.learntotradethemarket.com/forex-university/forex-price-action-trading-strategies
Reuters Standard (Thomas cook)
BHEL Annual Report 2012-2013