Foreign Exchange Risk Analysis Sumesh Nair

Foreign Exchange
Risk Analysis
Nandan Exim Limited
Submitted To:
AES Post Graduate Institute of Business Management
(HL MBA)
Submitted By:
Ankita Parikh (Roll no. 32)
(2006-08)
Nandan Exim Limited
Certificate July 14,
2007
This is to certify that Ms. Ankita Parikh a student of

AES Post Graduate Institute of Business Management,
Ahmedabad has undergone her summer training at
Nandan Exim Limited from 21st of May to 14th of
July2007.
The project entitled was “Foreign Exchange Risk

Analysis” is submitted in partial fulfilment of the
requirement for the award of degree of Master of
Business Administration, is a bonafide work carried out
by her.
During this period she acquainted herself with the

working of the company and has completed the project
successfully. We found her sincere and quick learner.
We wish her all the best for her future endeavours.
Regards,
Nandan Exim - The Perfect Denim Maker Page

2
Authorized Signatory
_________________
Dakshesh Choksi
(GM Finance)
Nandan Exim Limited
Table of contents
I. Preface
II. Acknowledgement
III. Executive Summary
Foreign Exchange.................................................................1
Risk Analysis 1
Nandan Exim Limited..........................................................1
Nandan Exim Limited..........................................................2
Certificate July 14, 2007................................................2
9
Chiripal Group Profile:................................................................................9
Management: 10
Employees 10
2. ACTIVITY...............................................................................................11
1. Forward Contract...................................................................................64
(i) Fixed forward contract:.........................................................................64
a. Rupee Forward Contract........................................................................65
b. Cross Currency Forward Contract.........................................................66
(ii) Option forward contract:......................................................................66
2. Future Contract......................................................................................67
Currency Options.......................................................................................69
4. Exotic options........................................................................................71
Currency Swap...........................................................................................72

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Preface
The trend towards liberalization of the economy and growing integration of
global financial markets is irreversible. The speed of innovation has accelerated
the pace of reforms and the new technology demands almost instant responses.
The new developments, in the coming years of globalization, in India will bring
into sharp focus the role of exchange rates and interest rates in business
decision. As India is becoming integrated part of the world, trade with world
will increase the foreign exchange risk, which will require professional
management of such risk.
The project begins with Introduction of the Company, Other important details
of the company, Denim Industry scenario, Market Strategy of the company &
also profitability projections of the Company.
Chapter Three gives the brief overview regarding what is Foreign Exchange,
What does Foreign Exchange involve, Need of Foreign Exchange, and what
does Foreign Exchange provide?
The next chapter discusses foreign exchange exposure & financial risk at
NANDAN EXIM LTD. & in general and provides a more detailed examination
of currency exposure and risk. It provides the information about classification
of exposures, types of risks & nature of risks.
The management of Foreign Exchange risk is about use of tools and techniques
available internally and externally in global market and about complying with
rules and regulations of RBI- That is explained in 5th Chapter.
The last but not the least part of the project takes about forward rates arithmetic
and factors useful in predictions of exchange rate movement. It also mentions

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findings & conclusions about forex & risk management at NANDAN EXIM
LTD.
Acknowledgement
Preparing a project of this nature is an arduous task and I was fortunate enough
to get support from large number of people to whom I shall always remain
grateful.
With immense pleasure I would like to express my sincere thanks and gratitude
towards Prof. Taral Pathak, Project Guide & Faculty Member, AES Post
Graduate Institute of Business Management, for having given me this privilege
of working under him and making the Report and for giving their valuable
advice, guidance, precious time and support that he offered.
I am desirous of placing on record profound indebtedness to Mr. Dinesh

Inaniji AGM Finance and Mr. Dakshesh Chowksi GM Finance, CHIRIPAL
GROUP for the valuable advice, guidance, precious time and support that they
offered.
I would be failing in duty if I do not acknowledge my gratitude towards

Dr. A.H Kalro Director, AES Post Graduate Institute of Business
Management, who motivated me a lot in carrying out this project and whose
kind supervision, keen interest and valuable suggestions that went in successful
completion of this work.

5
Ankita Parikh
(AES PG IBM)

6
Executive Summary
The project is on Study of Forex Exchange Risk Analysis at NANDAN EXIM

LTD., Chiripal Group.
Foreign Exchange, in common parlance, is the exchange of one currency for
another. This exchange is done at a particular rate called the exchange rate or
the FX Rate. The FX Rate is the price of one currency in terms of another. As
is true with rates, FX rate too is for a pre-determined settlement date i.e. the
date on which the actual exchange of the currencies involved would take place.
The Liberalized Exchange Rate Management System (LERMS) was introduced

in March 1992, and as a result the foreign exchange market in India effectively
became a two-tire one, with a dual exchange rate system in force. One rate was
the administered one at which specified type or proportion determined by
demand and supply in the market and applied to the remaining transactions. In
March 1993, this system was abolished and now a single market determined
rate is applicable for all transactions.
The volatility of exchange rates can’t be traced to the single reason and
consequently, it becomes very difficult to precisely define the factors that affect
exchange rates.
Foreign exchange risk is related to the variability of the domestic currency
values of assets, liabilities or operating income due to unanticipated changes in
exchange rates, whereas foreign exchange exposure is what is at risk. FOREX
risk is the variability in the profit due to change in foreign exchange rate.
Business firms/Companies like NANDAN EXIM LTD. have internationalized

their activities considerably. This trend has manifested itself not only in
increased involvement in international trade and foreign operations, but also in
the fact that even firms without explicit international transactions have become
subject to the direct and indirect effects of foreign competition to a much larger
extent than in the past. Thus, the impact of exchange rate changes on business
operations tends to be pervasive; the concern is not limited to specific financial
functions such as corporate treasury.

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Chapter 1: Research Study
I. Research Objectives
The objectives of the Project study are mentioned below:
1. To study & identify Foreign Exchange risk at the company.

2. To understand Foreign exchange Mechanism in Company.
3. To evaluate Foreign exchange Risk and its management
4. To know the tools and Technique in risk management.
5. To Study the Role of Reserve Bank of India in relation with foreign
exchange.
II. Research Methodology Adopted:
1. Research design : Exploratory Research
2. Data Collection Method : Secondary Method
3. Sources : Publications,
Articles,
Reports of Nandan Exim Ltd.
& Other Secondary Source
4. Limitations : Lack of Practical exposure in

the area of Risk Management,
: Lack of Formal Sources of Data
III. Scope of the Study:
The Scope of the study is limited to Forex Risk Analysis; it has nothing to do with any kind
of forecasts about currency movement.

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Chapter 2: Introduction to company
2.1. Introduction
Founded in 1972 by Mr. Vedprakash Chiripal, the Chiripal Group has blazed a
trail to emerge as a valued group of companies in the fields of textile
processing, spinning, weaving, knitting and petrochemicals. The group is
committed to total customer satisfaction and continued excellence in quality and
service. The group offers employment to more than 20,000 people both directly
and indirectly associated with the Group.
Chiripal Group Profile:
Group and its Genesis-

Established in the year 1972, Chiripal Group of Companies based at Ahmedabad has
established a strong position as one of the leading textile process houses in the country and
successfully forayed into new product lines expanding the product range.
The Group, which had started with a few power looms in 1972, has evolved into one of the
most respected and leading process houses of the country. The manufacturing facilities are
capable of handling a wide range of fabrics irrespective of the count, construction or blend.
This flexibility and complexity is one of the key strengths. Various divisions like Knits
division, Polar Fleece division, Flock Printing plant cater needs of varied customer groups.
The Group has also integrated facilities to manufacture partially oriented yarn (POY), Fully
Drawn Yarn , ensuring the supply of raw materials, required for the manufacturing various
fabrics, in the desired quantity, quality and time. The group has further diversified by setting
new project for manufacture of Bottom Weight , Denim, Home Furnishing and Cotton Knit
Fabric.

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The Group has always focused on delivering the best of its products and services by rigorous
R&D, defined processes, stringent quality policies and state-of-the-art technologies. These
are backed by dedicated, experienced and competent experts to ensure that the products /
services delivered to the customers are the best. With clear focus and growth plans on the
anvil, the Group is gearing itself to take on the challenges. The group has employed about
5000 people in its various units and has achieved turnover of Rs 95 crores, Rs 142 crores and
Rs 295 crores in 2002/03, 2003/04 & 2004/05 respectively.
Management:
Chiripal is a professionally managed business group. The Management comprises of a team

of professionals from different fields and expertise. The management believes in recruiting
professionals and specialists in various fields of operations and delegating responsibilities
and freedom of work at all levels.
It has diversified businesses in the fields of spinning, weaving, knitting, processing,

petrochemicals. It is the trust and accountability that breathes confidence in the employees
encouraging them to put in their best efforts contributing towards the growth of the group.
Employees
The Company employs 465 workmen falling within the definition of workmen under Section
2(s) of the Industrial Disputes Act, 1948 and 194 employees who are in the Supervisory and
above cadre. There are no contract employees. The Company is in compliance with the
provisions of the Payment of Wages Act, 1936 and Minimum Wages Act, 1948 and have
been accordingly making payment of salary and remuneration to the employees.
The Chiripal Group comprises of the following

companies:
1. Nandan Exim Ltd.
2. Nova Petrochemicals Ltd.
3. Shanti Processors Ltd.
4. Chiripal Petrochemicals Ltd.
5. Vishal Fabrics Pvt. Ltd.
6. Shanti Exports Pvt Ltd.

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COMPANY: CHIRIPAL INDUSTRIES LIMITED
Segment C&I Industry Textiles
1. Company profile
1.1 Name: Chiripal Industries Ltd
1.2 Address of the Regd. Office : Sajipur- Gopalpur Road, Piplej,

Ahmedabad 382405
Corporate office: Chiripal House, Shivranjani Cross
Roads, Satellite, Ahmedabad 15
1.3 Constitution : Closely held Public Limited
Company
Manufacturing of Partially GROUP/ Chiripal Group
2. ACTIVITY Oriented Yarn (POY), Promoters
Fully Drawn Yarn (FDY)
CEO Mr Ved Prakash
and Processing of textile
Chiripal
products
Date of 27.4.1988 (originally

incorporation incorporated as a Pvt. Ltd.
Company & converted
into a Public Ltd Company
on 23.10.03).
Brief Note on 3 Wings of the Company:

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1. Nandan Exim Ltd.
Originally incorporated as Nandan Exim Private Limited on 9th August 1994 and
subsequently name changed to Nandan Exim Ltd. on January 16, 2004 at Ahmedabad,
Gujarat The Registered Office of the company is located at Survey No. 198/1, 203/2, Saijpur-
Gopalpur, Pirana Road, Piplej, Ahmedabad – 382405.
Nature of Activities:
The Company is engaged in the business of export of fabrics. It buys the raw material from
outside market and then get its converted into processed fabrics for exports through its
associate concerns who have their own process house.
2. Vishal Fabrics Pvt. Ltd. (VFPL)

Vishal Fabrics Pvt. Ltd. was incorporated on October 22, 1985..Its registered office is located
at Ranipur, Narol Road, Ahmedabad – 382405, Gujarat.
VFPL was started with the objective of carrying on the business of manufacturing, exporting
and trading in textiles and related Goods. It is promoted by the Ahmedabad based Chiripal
Group. The Company is engaged in manufacture of processed fabrics at its plant located at
Narol, Ahmedabad.
3. Shanti Processors Ltd. (SPL)

Shanti Processors Ltd. was incorporated on the 25th of September 1985. The registered office
of SPL is located at “Chiripal House", Ahmedabad and its plant is located at Saijpur,
Gopalpur, Pirana Road, Ahmedabad.
SPL‘s primary focus has been on the manufacturing of high quality fabrics. It had availed FI
under Technology Upgradation Fund Scheme (TUFS) with 5% interest subsidy. The
Company's manufacturing activities comprises of:
• Processing of Fabrics
• Knitted Fabrics
• Texturised Yarn
• Polar Fleece
• Flock
Competencies
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• Research & Development
The group has set its R&D focus on quality and reliability assurance and product
development. Being an integrated unit with expertise and know-how from the yarn stage and
with experts for various process stages has helped in problem solving.
• Defined Processes
Processes that are part of printing and dyeing of fabrics are carried out in-house with utmost
care. The workers are adept at various processes like Resist, Khadi, Direct and Discharge
Styles of Printing, Micro disperse, Micro vat and Leuco vat discharge, Discharge wit Khadi,
Grindal padding discharge, PV twill and PV double print, tie-and-dye marble etc.
• Quality
The fabric undergoes rigorous quality checks at various stages in the processing cycle. The
Management strongly believes in TQM that includes timely delivery and optimum quality at
reasonable prices.
• Technology
The management has adapted to newer, modern and cost effective technology. The “Kusters”
Padding Mangle and the Stormec rotary printing machines have ensured continuous
production without variations. The Group proudly claims to have completely eradicated the
center to selvedge? (C.S.) problem that used to plague the processing of larger width fabrics.
• Machinery
The Group has state-of-the-art machines for processing of fabrics, which includes machines
for wet processing starting from bleaching to finishing. Some important machines are
Automatic Jiggers, Paddles Chainless Mercerizing machine, Micro Raising & Peaching
machine, Singeing Machine, Corduroy Brushing, Storemac Rotary Printing machine for
continuous and mass production.
1.2 Company details

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a. Name and address of the associates/identical : NANDAN EXIM LTD.
concerns (give address of Registered Office Survey No. 198/1,203/2 Saijpur-
as well as location of manufacturing Gopalpur, Pirana Road, Piplej,
activities). Ahmedabad.
b
. Year of incorporation/ registration 09/08/1994
:
c
. Names of Directors and Percentage Shri Vedprakash D Chiripal
shareholding/share. : -Chairman
Shri Brijmohan Agarwal - Director
Dr. D K Jain
Shri G C Gandhi
Shri S T Shah
d Brief summary of history of concern. The main object of the Company is to

. Changes in the management, if any, and note : carry on the business of
on present activity giving names of items manufacturing & exporting of Textile
traded/ manufactured, installed capacity for and related goods.
each product, etc.
Initial Public Offer of Co. was a
resounding success with
oversubscription by 31 times in May
2005.
The Company is engaged in the

Business of export of Fabrics by
purchasing the Gray and converting it
into process of fabrics through
outside process house.
The Company has now implemented

the project for Denim & Weaving.

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• Existing Divisions
• Grey
• Denim
• The Company has set up plant for manufacture of grey and denim at a project cost of Rs
6310 lacs.
• This project was financed by Term Loans of Rs 3883 lacs sanctioned by consortium
comprising of SBI, OBC and UCO Bank.
• To part finance this project, the company had floated its maiden public issue of Rs.1200
lacs comprising of 60 lacs shares of Rs 10 each at a premium of Rs 10 per share.
• The issue had opened on 12th May 05 and closed on 20th May 05. The issue was
oversubscribed by 32 times.
• Mission
The mission of the group is to become a globally recognized textile major having a dominant
market presence backed by flexibility in manufacturing, high product capacity and strong
customer relationships.
• Values
The Core Values of the group are Customer satisfaction, through Innovation and Participative
management. The group is dedicated to continuous improvement and providing better quality
products to the customer.
• Vision :
The Vision of the Group is to make Chiripal a leading textile house. In a period of five years
it wants to be reckoned as one among the top 10 Indian textile giants with a significant
presence in the domestic as well global markets. New technologies and materials will
engineer the future of Chiripal group. The ultimate aim is to make Chiripal a benchmark for
quality.

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• KEY PERSONS OF THE COMPANY
The Board of Directors of Nandan Exim Limited are supported in their endeavour by the
following key personnel:
Sr Name Designation Qualification Experience Functional

no (years) Responsibility
1 Mr. Deepak CEO B.Com, MBA. 5 Overall

Chiripal Management
2 Mr. Suresh President B. Com., C.A. 23 Production

Maheshwari
Year Milestones
1994 Incorporation and commencement of trading of fabrics in domestic and
international markets.
2003-04 Foray into manufacturing through commencement of implementation of
Weaving (Grey) project.
2004-05 Strategic Focus shifted to Denim by implementation of Denim Project.
2005-06  Successful completion of the IPO of Nandan Exim Ltd.,

 Commencement of full scale commercial production of 10 million metres
per annum capacity Denim Manufacturing Project in July 05.
 Commencement of full scale commercial production of additional 10
million mtrs per annum capacity Denim Manufacturing Project in March
06.
2006-07 Commencement of implementation of Spinning Project (Backward
Integration).
• Operational performance

16
Expansion Project of Doubling Denim capacity, Spinning Project and 15
MW CPP at a Project Cost of Rs 32700 lacs.
 Denim :- Expansion to increase the production capacity from 200 lacs meters per annum
to 400 lacs meters per annum at a total cost of Rs 10200 lacs.
 Spinning:- Backward Integration Project by installing Open Ended Machines of 32,000

spindles to produce 50 TPD of Cotton Yarn at a total cost of Rs 16250 lacs with an object
to reduce the raw material cost and ensuring consistency in quality of cotton yarn.
 15 MW Captive Power Plant:- Implementing 15 MW Captive Power Plant for

continuous and uninterrupted power supply at a total cost of Rs 6250 lacs.
 EXPANSION PROJECTS ON ANVIL
 Doubling of Denim Capacity: - The Company has decided for Doubling of

Denim Capacity looking into good demand in domestic and international marekts. The
company has already placed orders for procuring the following plant and machinery for
its Expansion Project :-
i. High Production Indigo Dyeing Sizing Machine.
ii. Denim Finishing and Shrinking Machine.
iii. Hacoba Direct Warping Machine.
iv. ZAX-e type Air Jet Looms.
The financial tie up of Term Loan & Working Capital is already over with the Company’s
existing Bankers.
 Foray into Readymade Garments
As a measure to move towards complete vertical integration, the company plans to establish
itself in the readymade garment market. The company has begin the first phase of its garment
manufacturing plant which is expected to be completed by July 2007. The company mainly
plans to target various retail chains or its garment segment. In the next phase of expansion,
the company will add capacity to manufacture an additional 5000 garments a day and this
project shall be implemented by April 2008.

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• Financial performance
Financial Highlights
(Rs. in Lacs)
Particulars 2002-03 2003-04 2004-05 2005-06
(Audite (Audite (Audite (Audite

d) d) d) d)
Sales and Other Income 700 764 5949 12906
Gross Profit (PBDIT) 293 225 759 2707
Interest 16 37 218 362
Depreciation 2 30 206 497
Profit Before Tax 275 158 335 1848
Tax 32 68 30 257
Net Profit 243 90 305 1591
Cash Accruals (PAT+ 245 120 511 2088

Depreciation)
Capital 15 255 790 1390
Net Worth 1054 1435 1837 4297
Term Loans - 968 1561 5486
Unsecured Loans - 900 804 170
Net Block 14 1866 3404 7948
 The company has achieved Net Sales of Rs 59.19 crores in its first year of operation in
2004/05.
 In the current year 2005/06, the Company has estimated Net Sales of Rs119.93 crores.

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1.3 Denim industry scenario
1) Denim Industry in India:
 Cyclical and fashion-driven industry.
 Total denim production capacity : 220 million meters of which 90 mmpa is exported
 Strong growth expected in the domestic market owing to a perception of denim as

aspiring, specifically in the lower to middle-income groups, and its increased penetration
in women’s wear.
 Volume growth expectations of 15% a year.
 Domestic competition comes from Arvind Mills, Aarvee Denim and KG Denim among
others.
2) Consumer Spend on Jeans in India:
Segment Price 2001-02 2002-03 2003-04 2004-05

Range
(Rs.) Volume Value Volume Value Volume Value Volume Value
(Mn. (Rs. (Mn. Pcs) (Rs. (Mn. Pcs) (Rs. (Mn. Pcs) (Rs.
Pcs) Crores) Crores) Crores) Crores)
Super 2,000+ 0.01 3.0 0.02 4.5 0.03 9.0 0.06 18.00
Premium
Premium 1,000 1.00 150.0 1.20 180.0 1.50 225.0 1.90 281.0
-2,000
Middle 500 – 5.33 400.0 6.10 460.0 7.05 529.0 8.10 608.0
1,000
Economy 300 – 500 12.50 500.0 13.80 550.0 15.13 605.0 16.60 666
Lower & <300 15.50 310.0 15.80 316.2 16.13 322.5 16.40 329.0
Unorg.
TOTAL 34.30 1363.0 36.90 1510.7 39.80 1690.5 43.10 1902.0

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3)Denim on Global landscape :
 Global jeans wear market is growing at more than 10%. Denim is the fabric for Jeans.
 Primary consumers – 16 to 25 years age
 Secondary consumer group – 25 years and above
 Jeans wear available in Super premium, Premium, Middle, Economy segments
 About 80% of jeans wear is branded
 Men’s wear : 76%, Women’s wear : 17%, Kid’s wear : 7%

 Global denim volumes estimated at 4.5 billion mpa.
 Slump in prices between FY-99-FY02, when they fell by 27% combined with an increase
in cotton price put pressure on all major denim suppliers.
 Estimated capacity of 4 billion mpa concentrated in Far East, South-East Asia, South
America etc.
Worldwide DenimConsumption Pattern

21%
North America
South America
52%
European Union
17% AsiaPacific
10%
4) Current industry status:

 India has the second-largest and fairly modernized spinning mills.
 India has the largest number of looms for weaving.
 The Indian government has opened apparel sector to large firms.
 And permits foreign investment in the sector.
 The goal is to achieve earnings of $50 billion by 2010.
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 The industry is poised to achieve a potential size of US$ 85 billion by 2010, with a
domestic market size of US$ 45 billion and nearly 60 per cent of exports comprising
garments.
 India's huge domestic market, offers the prospect of significant growth opportunities in
domestic textiles and apparel consumption.
1.4 Marketing of products & Market strategy
• Marketing:
1. The Chiripal Group has been in the textile industry for over two decades. The Group
has earned market reputation over the years and has an established clientele in the
domestic market. It has a footing in Dubai, other Gulf countries, Turkey, Mauritius, USA,
UK, Spain etc., where variety of textile items are exported by the group companies.
2. The Company also proposes to export some material like Processed Fabrics,
Ready Made Garments etc. in international markets out of total turnover. The
company proposes to capitalize on the marketing experience in channeling its exports
through traders/actual users in various countries viz. Egypt, Turkey, Italy, England,
Portugal, Hong Kong, Singapore, Nepal, Spain, Ireland, Syria, France, Tanzania,
Chile, Israel, Muscat etc.
3. The Company appoints brokers/agents on an exclusive basis for each domestic

market. The Company is also partly selling its products directly to its customers (India
and abroad). These sales are through referrals and enquiries that come through their
existing connections in the textile industry.
4. The major part of the sales of this project will be in domestic markets. It
proposes to capitalize on the wide network of dealers located mainly in Surat. All the
products of the Group Company are presently sold through these dealers. The
proposed fibre division shall also be marketed through the same network as the
product is essentially similar and has the same end use.
5. The Company has marketing team which strives to increase sales with existing
customers as well as for expansion of project. The domestic market for yarn is highly
fragmented. Domestic brokers and agents assist the Company in identifying buyers.

21
• Strategy
Nandan’s strategy is to become a vertically integrated player in the denim industry. The
Company has been implementing the following projects which it believes will lead to high
turnover, increase in profitability and market share.
2.5 Profitability Projections

The projected financial performance of the company including expansion project
is detailed under:
March ending 2008 2009 2010 2011 2012 2013 2014 2015
Net Sales 336.52 336.52 336.52 336.52 336.52 336.52 336.52 336.52
(Of which 152.5 152.5 152.5 152.5 152.5 152.5 152.5 152.5
exports)
Other income 8.75 8.75 8.75 8.75 8.75 8.75 8.75 8.75
Total Income 345.06 345.06 345.06 345.06 345.06 345.06 345.06 345.06
PBT 68.28 69.26 71.06 73.53 75.89 78.15 80.27 82.21
PBT/Net sales% 20.29% 20.58 21.12 21.85 22.55 23.22 23.85 24.43
% % % % % % %
PBDIT 123.96 124.96 124.96 124.96 124.96 124.96 124.96 124.96
PAT 48.60 46.66 45.61 45.31 45.23 45.31 45.50 45.74
Gross Cash 84.54 82.60 81.55 81.25 81.17 81.25 81.44 81.68
Accruals
Net Cash 82.26 79.17 78.12 77.82 77.74 77.82 78.01 78.25
Accruals
PUC 19.9 19.9 19.9 19.9 19.9 19.9 19.9 19.9
TNW 190.27 233.5 275.69 317.57 359.38 401.26 443.34 485.65
Adjusted TNW 184.02 227.25 269.44 311.32 353.13 395.01 437.09 437.40
TOL/TNW 2.21 1.61 1.13 0.83 0.60 0.42 0.30 0.26
TOL/Adj. TNW 2.28 1.65 1.16 0.84 0.61 0.42 0.30 0.26
Current Ratio 1.58 1.65 1.73 1.86 1.95 2.18 2.88 3.56
PAT/Net sales% 14.44% 13.87 13.55 13.46 13.44 13.46 13.52 13.59
% % % % % % %
Industry average/ benchmark

22
PBT/Net Sales Net Sales/Total Bank Finance/ Inventory plus
tangible Assets Current assets receivables/ Net
(%) sales
Industry* 13.91 0.86 26.89 193
NEL** 16.44 0.56 35.16 226
(Source: Prowess)
*based on selected companies.
**based on 2007-08 first full year operations.
Chapter 3: Introduction to Foreign
Exchange Market
3.1 Introduction
The international currency market - the foreign exchange, is a special kind of the world
financial market. The Foreign Exchange, also referred to as the "Forex" or "Spot FX"
market, is the largest financial market in the world, with over $3 trillion changing hands
every single day. If you compare that to the $30 billion a day volume that the New York
Stock Exchange trades, you see how giant the Foreign Exchange really is. In fact it is thirty
times larger than all of the US Equity and Treasury markets combined!
What is traded on the Foreign Exchange? The answer is money. Forex trading is where the
currency of one nation is traded for that of another. Trader’s purpose on this market is to get
profit as the result of foreign currencies purchase and sale in accordance with a known
principle “buy cheaper – sell higher” and to convert profits made in foreign currencies, buy
or sell products and services in a foreign country, into their domestic currency. Forex trading
is always traded in pairs. The most commonly traded currency pairs are traded against the
US Dollar (USD). They are called ‘the majors'. The major currency pairs are the Euro Dollar
(EUR/USD); the British Pound (GBP/USD); the Japanese Yen (USD/JPY); and the Swiss
Franc (USD/CHF). As there is no central exchange for the Forex market, these pairs and
their crosses are traded over the telephone and online through a global network of banks,
multinational corporations, importers and exporters, brokers and currency traders i.e. the FX
market is considered as an Over The Counter (OTC) or 'inter-bank' market.
On the spot market, according to the BIS study, the most heavily traded products were:
 EUR/USD - 28%
 USD/JPY - 17%
 GBP/USD (also called cable) - 14%

23
And the US currency was involved in 89% of transactions, followed by the euro (37%), the
yen (20%) and sterling (17%). (Note that volume percentages should add up to 200% - 100%
for all the sellers, and 100% for all the buyers). Although trading in the euro has grown
considerably since the currency's creation in January 1999, the foreign exchange market is
thus still largely dollar-centered.
Forex is different in compare to all other sectors of the world financial system thanks to his
heightened sensibility to a large and continuously changing number of factors, accessibility
to all individual and corporative traders, exclusively high trade turnover which creates an
ensured liquidity of traded currencies and the round – the clock business hours which enable
traders to deal after normal hours or during national holidays in their country finding
markets abroad open. Just as on any other market the trading on Forex, along with an
exclusively high potential profitability, is essentially risk - bearing one.
3.2 Foreign Exchange: Meaning
Foreign Exchange, in common parlance, is the purchase or sale of a currency against sale or
purchases of another i.e. the exchange of one currency for another. This exchange is done at
a particular rate called the exchange rate or the FX Rate. The FX Rate is the price of one
currency in terms of another. As is true with rates,
FX rate too is for a pre-determined settlement date i.e. the date on which the actual exchange
of the currencies involved would take place.
III.3 Requisites for Foreign Exchange

Deals:
A Foreign Exchange deal involves:

 Exchange of two currencies,
 At an agreed exchange rate,
 For a specified settlement date,
 Settlement instructions for receipt and payment, and
 Confidence that the terms of the trade will be adhered to, i.e. limits.

24
III.4 Need for Foreign Exchange
We can see some cases of barter trades that have taken place and continue to take place. For
example, Iraq’s oil-for food and medicines deal with the UN, Iran paying with oil for its
imports, our own barter agreement with Russia in settlement of our debt across escrow
account, Cuba paying for its much needed food, medicines and raw materials with sugar and
so on. Though we see these isolated cases of barter trades, the world primarily deals for
money.
In this global village, which has almost as many currencies as countries, business activity
would come to near standstill if each country insisted on dealing in its own currency and
none other. With growing importance of international trade and maturity in financial
markets, the major international trade participants have
come to accept certain currencies as “traded currencies” or “major currencies”. These

currencies are termed as such based on the strength of their economies and their financial
markets, the political backing of the countries, international acceptability, liquidity and depth
of their markets, economic, currency and political stability. The World Bank, leading
international leading agencies and world bodies have given a further boost to these
currencies, using them in their dealings too. A country’s external reserves are denominated
in these currencies. This is what necessitates Foreign Exchange.
III.5 What does Foreign Exchange

provide?
Foreign Exchange provides us:
 The method or mechanism to conduct and settle the proceeds of International trade,
 The means to obtain / provide technology, expertise and the sharing of information,
 The means to minimize the risks of currency fluctuations – primarily through the use of
various tools and financial instruments, and
 Trading opportunities to generate incremental income.

25
Chapter 4: Foreign Exchange Market in India
4.1. Introduction
Foreign Exchange business in India is regulated closely by the RBI. With Exchange Control
Regulations, the RBI ensures that involvement in the Foreign Exchange business is restricted
to certain sections of the business community only.
The main market participants here are:
1. Corporate: Importers, Exporters and Customers for genuine trades or merchant

transactions.
2. Banks: One authorized dealer dealing with another to generate profit or cover its open
exposure.
3. Overseas Traders: Banks in India are permitted to buy and sell currencies abroad in
cover of customer requirements. They have very recently been permitted to initiate positions
abroad too. Overseas banks call banks in India to cover their Indian Rupee requirements.
4. Authorized Dealers v/s RBI: This occurs only when the RBI intervenes in the market and
not in the normal course.
RBI restrictions in terms of participation in foreign currencies can be summarized as

under.
Corporate: Individuals as per the Exchange Control Manual (Retail)
Importers, Exporters and Borrowers of Foreign Currencies

(Wholesale)
Banks/Others: Money Changers (RMC's and FFMC's) licensed by the RBI to

26
buy/sell Foreign Currency Notes and Travelers Cheques from
individuals (Retail)
Banks licensed by the RBI, to carry out foreign exchange business

on a Commercial wholesale level, called Authorized Dealers.
Brokers: Brokers are permitted to bring together buyers and sellers but cannot trade for
their own account. This means they have to strike the deal with the buyers and sellers
simultaneously.
Reasons for a remarkable growth in the last few years in The Indian FX Market:
 Relaxation of controls by RBI and permitting banks to deal freely in the Inter-bank
market - this essentially is the process of economic reforms.
 Better communication and availability of information - Reuters, Telerate, Knight Ridder,
RTA, Dealing System, Swift etc.
 A virtual explosion in volumes in global FX market and Indian markets follows suit.
The Indian forex market is made up of banks authorized to deal in foreign exchange, known
as Authorized Dealers (ADs), foreign exchange brokers, money changers and customers -
both resident and non-resident, who are exposed to currency risk. It is predominantly a
transaction-based market with the existence of underlying forex exposure generally being an
essential requirement for market users.
The Indian forex market has grown manifold over the last several years. Average daily total
turnover has increased from US$3.67 billion in 1996-97 to US$9.71 billion in 2003-04. The
normal spot market quote has a spread of 0.50 to 1 paisa while swap quotes are available at 1
to 2 paisa spread. The derivatives market activity has shown tremendous growth as well,
especially after the MIFOR (Mumbai Inter-bank Forward Offered Rate) swap curve evolved
in 2000.
Many policy initiatives have been taken to develop the forex market. ADs have been
permitted to have larger open position and aggregate gap limits, linked to their capital. They
have been given permission to borrow overseas up to 25 per cent of their Tier-I capital and
invest up to limits approved by their respective Boards. Cash reserve requirements have been
exempted on inter-bank borrowings.
Exporters and importers are, in general, permitted to freely cancel and rebook forward
contracts booked in respect of their foreign currency exposures, except in respect of forward
contracts booked to cover import and non-trade payments falling due beyond one year. They
have also been permitted to book forward contracts on the basis of past performance
(without production of underlying documents evidencing transactions at the time of booking
the contract). Corporate have been permitted increasing access to foreign currency funds.

27
General permission has been given to ADs for approving External Commercial Borrowings
of their customers up to a limit of US $ 500 million; appropriate restrictions have been
placed on the end-use of such funds. While exchange earners in select categories such as
Export Oriented Units (EOU) are permitted to retain 100 per cent of their export earnings,
others are permitted to retain 50 per cent of their forex receipts in EEFC accounts.
Residents may also enter into forward contracts with ADs in respect of transactions
denominated in foreign currency but settled in Indian rupee. They can hedge the exchange
risk arising out of overseas direct investments in equity and loan.
Residents engaged in export/import trade, are permitted to hedge the attendant commodity
price risk in international commodity exchanges/ markets using exchange traded as well as
OTC contracts.
Non-residents are permitted to hedge the currency risk arising on account of their
investments in India. However, once cancelled, these contracts cannot be rebooked for the
same exposure.
4.2. History of Forex Market in India
Until the early seventies, given the fixed rate regime, the foreign exchange market was
perceived as a mechanism merely to put through merchant transactions. With the collapse of
the Breton Woods agreement and the floatation of major currencies, the conduct of exchange
rate policy posed a great challenge to central banks as currency fluctuations opened up
tremendous opportunities for market players to trade in currency volatilities in a borderless
market.
The market in Indian, however, remained insulated as exchange rate controls inhibited
capital movements and the banks were required to undertake cover operations and maintain a
square position at all times.
Slowly a demand began to build up that banks in India be permitted to trade in FOREX. In
response to this demand the RBI, as a first step, permitted banks to undertake intra-day trade
in FOREX in 1978. As a consequence, the stipulation of maintaining square or near square
position was to be complied with only at close of business each day. The extent of position
which conduct be left uncovered overnight (the open position) as well as the limit up to
which dealers conduct trade during the day was to be decided by the management of the
banks.
 As opportunities to make profit began to emerge, the major banks started quoting two-
way prices against the Rupee as well as in cross-currencies (Non-rupee) and gradually,
trading volumes began to increase. This was enabled by a major change in the exchange rate

28
regime in 1975 whereby the Rupee was delinked from the Pound Sterling and under a
managed floating arrangement; the external value of the rupee was determined by the RBI in
terms of a weighted basket of currencies of India’s major trading partners. Given the RBI’s
obligation to buy and sell unlimited amounts of Pound Sterling (the intervention currency),
arising from the bank’s merchant trades, its quotes for buying/selling effectively became the
fulcrum around which the market moved.
As volumes increased, the appetite for profits was found to lead to the observance of widely
different practices (some of which were irregular) dictated largely by the size of the players,
their location, expertise of the dealing staff, and availability of communications facilities, it
was thought necessary to draw up a comprehensive set of guidelines covering the entire
gamut of dealing operations to be observed by banks engaged in FOREX business.
Accordingly, in 1981 the “Guidelines for Internal Control over Foreign Exchange Business”
was framed for adoption by banks.
During the eighties, deterioration in the macro-economic situation set in, ultimately
warranting a structural change in the exchange rate regime, which in turn had an impact on
the FOREX market. Large and persistent external imbalances were reflected in rising level
of internal indebtedness. The graduated depreciation of the rupee could not compensate for
the widening inflation differentials between India and the rest of the world and the exchange
rate of the Rupee was getting increasingly overvalued. The Gulf problems of August 1990,
given the fragile state of the economy, triggered off an unprecedented crisis of liquidity and
confidence. This unprecedented crisis called for the adoption of exceptional corrective steps.
The country simultaneously embarked upon measures of adjustment to stabilize the economy
and got in motion structural reforms to generate renewed impetus for stable growth.
As a first step in this direction, the RBI effected a two-step downward adjustment of the
Rupee in July 1991. Simultaneously, in order to provide a closer alignment between exports
and imports, the EXIM scrip scheme was introduced. The scheme provide a boost to exports
and with the experience gained in the working of the scheme, it was thought prudent to
institutionalize the incentive component and convey it through the price mechanism, while
simultaneously insulating essential imports from currency fluctuations. Therefore, with
effect from March 1, 1992, RBI instituted a system of dual exchange rates under the
Liberalised Exchange Rate Management System (LERMS). Under this, 40% of the exchange
earnings had to be surrendered at a rate determined by the RBI and the RBI was obliged to
sell foreign exchange only for imports of essential commodities such as oil, fertilizers, life
saving drugs etc., besides the government’s debt servicing. The balance 60% could be
converted at rates determined by the market. The scheme worked satisfactorily preparing the
market for its emerging role and the Rupee remained fairly stable with the spread between
the official and market rate hovering around 17%.

29
Even through the dual exchange rate system worked well, it however, implied an implicit tax
on exporters and remittances. Moreover it distorted the efficient allocation of resources. The
LERMS was essentially a transitional mechanism and in March 1993, the two legs of the
exchange rates were unified and christened Modified LERMS. It stipulated that form March
2nd 1993, all FOREX receipt could be converted at market determined rates of exchange.
Over the next eighteen months restrictions on a number of other current account transactions
were relaxed and on August 20th 1994, the Rupee was made fully convertible for all current
account transactions and the country formally accepted obligations under Article VIII of the
IMF’s Article of Agreement.
Year Type of Change

1966 The Rupee was devalued by 57.5% against on June 6
1967 Rupee-Sterling parity change as a result of devaluation of the sterling
1971 Bretton Woods system broke down in August. Rupee briefly
pegged to the USD @ Rs 7.50 before reneging to Sterling at
Rs. 18.8672 with a 2.25% margin on either side
1972 Sterling floated on June 23. Rupee sterling parity revalued to Rs 18.95
and the in October to Rs 18.80
1975 Rupee pegged to an undisclosed basket with a margin of 2.25%on either
side. Sterling the intervention currency with a central bank
rate of Rs 18.3084
1979 Margins around basket parity widened to 5% on each side in
January
1991 Rupee devalued by 22% July 1st and 3rd. Rupee dollar rate
depreciated from 21.20 to 25.80. A version of dual exchange
rate introduced through EXIM scrip scheme, given exporters
freely tradable import entitlements equivalent to 30-40% of
export earnings.
1992 LERMS introduced with a 40-60 dual rate converting export
proceeds, market determined rate for all but specified imports
and market rate for approved capital transaction. US Dollar
became the intervention currency from March 4th. EXIM scrip
scheme abolished.
1993 Unified market determined exchange rate introduced for all
transactions. RBI would buy/sell US Dollars for specified
purposes. It will not buy or sell forward Dollars though it will
enter into Dollar swaps.

30
1994 Rupee made fully convertible on current account from August
20th.
1998 Foreign Exchange Management Act – FEM Bill 1998, which was
placed in the Parliament to replace FERA.
1999 Implication of FEMA start.

31
4.3. Modified Liberalized Exchange Rate
Management System
The process of liberalization continued further and it was decided to make the Rupee fully
floating with effect from March 1, 1993. The new arrangement is called Modified LERMS.
Its salient features are as under:
Effective March 1, 1993, all foreign exchange transactions, receipts and payments, both
under current and capital accounts of balance of payments are being put through by
authorized dealers at market determined exchange rates. Foreign exchange receipts and
payments, however, continued to be governed by Exchange Control Regulations. Foreign
exchange receipts are to be surrendered to the authorized dealers except in cases where the
residents have been permitted by RBI to retain them either with the banks in India or abroad.
Authorized dealers are free to retain the entire foreign exchange surrendered to them for
being sold for permissible transactions and are not required to surrender to the Reserve Bank
any portion of such receipts.
Reserve Bank of India, under Section 40 of RBI Act, 1934, was obliged to buy and sell
foreign exchange to the authorized dealers. Reserve Bank is now required to sell any
authorized person at its offices/branches US Dollars for meeting foreign exchange payments
at its exchange rates based on the market rate only for such purposes as are approved by the
Central Government. The RBI buys spot US Dollars from authorized dealers at its exchange
rate. Reserve Bank does not ordinarily buy spot Pound Sterling, Deutsche Mark and
Japanese Yen. It does not buy forward any currency. The exchange rate at which the RBI
buys and sells foreign exchange is in the ± 5% band of the market rate. Also, the RBI
announces the reference rate at 12:00 hours which is the rate at which transactions with
IMF/IBRD etc. are undertaken.
Advantages of the New System
 The system seeks to ensure equilibrium between demand and supply with respect to a
fairly large subset of external transactions.
 It has facilitated removal of several trade restrictions and granted relaxation in exchange
control (under current account transactions).
 It is a step towards full convertibility of current account transactions in order to achieve

the full benefits of integrating the Indian economy with the world economic system.

32
 The incentives to exporters will be higher and more particularly to those whose exports
are not highly import intensive. Exporters of agricultural products will find exports
attractive.
 A large number of expatriates, who are hitherto denied any advantages on their
remittances to India in line with the earnings of the exporters, are now eligible for market
rate for the full amount of remittances being in the nature of capital inflows.
 This system, coupled with the exchange control relaxation in certain areas, and the
abolition of travel tax is expected to make the havala route less tempting. In this context it
needs to be remembered that smaller the gap between the average rate received by the
exporters and other earners of foreign exchange and the market rate, the lesser will be the
temptation to continue using illegal channels for remittances.
 In the fiscal area, customs revenue is likely to be higher, other things being the same, to
the extent the valuation of imports would be based on the market exchange rate. It is,
however, necessary to ensure that the tariff rates together with higher input values do not
result in a sharp increase in import costs.
4.4. Exchange Rate System
Countries of the world have been exchanging goods and services amongst themselves. This
has been going on from time; immemorial. The world has come a long way from the days of
barter trade. With the invention of money the figures and problems of barter trade have
disappeared. The barter trade has given way ton exchanged of goods and services for
currencies instead of goods and services.
Different countries have adopted different exchange rate system at different time. The
following are some of the exchange rate system followed by various countries:
A. The Gold Standard
Many countries have adopted gold standard as their monetary system during the last two
decades of the 19th century. This system was in vogue till the outbreak of World War 1.
Under this system the parties of currencies were fixed in terms of gold. There were two main
types of gold standard:

33
1. Gold specie standard
Gold was recognized as means of international settlement for receipts and payments amongst
countries. Gold coins were an accepted mode of payment and medium; of exchange in
domestic market also. A country was stated to be on gold standard if the following condition
were satisfied:
I. Monetary authority, generally the central bank of the country, guaranteed to buy and
sell gold in unrestricted amounts at the fixed price.
II. Melting gold including gold coins, and putting it to different uses was freely allowed.
III. Import and export of gold was freely allowed.
IV. The total money supply in the country was determined by the quantum; of gold
available for monetary purpose.
2. Gold Bullion Standard
Under this system, money in circulation was either partly of entirely paper and gold served
as reserve asset for the money supply. However, par money could be exchanged for gold at
any time. As the monetary authorities did not aspect all the paper currency to be converted
into gold, there was no need or they to hold gold for covering money supply in full.
The exchange was determined by the gold content of the respective currency. E.g. if the gold
content in Britain was 3 times US, then automatically pound sterling(GBP) was equivalent
of 3 US dollars.
This system is also known as ‘Mini Parity Theory’.
After World Was 1, all European gold standard countries left in 1936, thus the gold standard
era was effectively over.
B. The Bretton Woods System
The bitter experience of war year, and danger of the recurrence looming large, forced the
countries to create a free, stable and multilateral money system, which would help in
restoration of international trade. As early as in 1943 USA and Great Britain accepted at the
Bretton Woods Conference held in July 1944 and International Monetary Fund (IMF) was
established in 1946.

34
In this system the member countries require to fix the parities of their currencies in terms US
dollar or gold with fluctuations in their currency within 1% of limit. Due to massive deficit
increased the supply of US dollar in international market and gold reserve held by USA were
not sufficient to cover.
Through the Smithsonian Agreement, USA devalued dollar from 35 ounce to 38 per ounce,
but could not last long.
The concept of one single currency of entire European was accepted way back in 1991 under
Maastricht Treaty, and has come into reality effective January 4 1999 and the currency now
has established independent currency since January 2001.
C. Purchasing Power Parity (PPP)
Professor Gustav Cassel, a Swedish economist, introduced this system. The theory, to put in
simple terms states that currencies are valued for what they can buy. Thus if 135 JPY buy a
fountain pen and the same fountain pen can be bought for USD 1, it can be inferred that
since 1 USD or 135 JPY can buy the same fountain pen, there fore USD 1 = JPY 135.
For example if country A had a higher rate of inflation as compared to country A then goods
produced in country A would become costlier as compared to goods produced in country B.
This would induce imports in to country A and also the goods produced in country A being
costlier, would lose in international competition to goods produced in country B. This
decrease in exports of country A as compared to exports from country B would lead to
demand for the currency of country B and excess supply of currency of country A. This in
turn, causes currency of country A to depreciate in comparison of currency of country B
which is having relatively more exports.
After the collapse of PPP system there came the Bretton woods System, and after the
collapse of that Smithsonian Agreement. At present the floating rate system is used in all
most countries.
4.5. Exchange Rate System in India
The rupee was historically linked i.e. pegged to the pound sterling. Earlier, during British
regime and till late sixties, most of India’s trade transactions were dominated to pound
sterling. Under Bretton Woods system, as a member of IMF Indian declared its par value of
rupee in terms of gold. The corresponding rupee sterling rate was fixed 1 GBP = RS 18.

35
When Bretton Woods system bore down in August 1971, the rupee was de-linked from US $
and the exchange rate was fixed at 1 US $ = Rs 7.50. Reserve bank of India, however,
remained pound sterling as the currency of intervention. The US $ and rupee pegging was
used to arrive at rupee-sterling parity. After Smithsonian Agreement in December 1971, the
rupee was de-linked from US $ and again linked to pound sterling. This parity was
maintained with a band of 2.25%. Due to poor fundamental pound got depreciated by 20%,
which cause rupee to depreciate.
To be not dependent on the single currency, pound sterling on September 25, 1975 rupee
was de-linked from pound sterling and was linked to basket of currencies, the currencies
includes as well as their relative weights were kept secret so that speculators don’t get a
wind of the direction of the movement of exchange rate of rupee.
From January 1, 1984 the sterling rate schedule was abolished. The interest element, which
was hitherto in built the exchange rate, was also de-linked. The interest was to be recovered
from the customers separately. This not only allowed transparency in the exchange rate
quotations but also was in tune with international practice in this regard. FEDAI issued
guidelines for calculation of merchant rates.
The liquidity crunch in 1990 and 1991 on forex front only hastened the process. On March 1,
1992 Reserve Bank of India announced a new system of exchange rates known as
Liberalized Exchange Rate Management System.
LERMS was to make balance of payment sustainable on ongoing basis allowing market
force to play a greater role in determining exchange rate of rupee. Under LERMS, the rupee
become convertible for all approved external transactions. The exporters of goods and
services and those who received remittances from abroad were allowed to sell bulk of their
forex receipts. Similarly, those who need foreign exchange to import and travel abroad were
to buy foreign exchange from market-determined rate.
From March 1 1993 modified LERMS under which the all forex transactions, under current
and capital account, are being put through by Authorized Dealers at market determined
exchange rate.

36
4.6. Factors Affecting Exchange Rates
In a free market, it is the demand and supply of the currency which should determine the
exchange rates but demand and supply is the dependent on many factors, which are
ultimately the cause of the exchange rate fluctuation, some times wild.
The volatility of exchange rates can not be traced to the singe reason and consequently, it
becomes difficult to precisely define the factors that affect exchange rates. How ever, the
more important among them are as follows:
 Balance of payments
 Strength of economy
 Fiscal policy
 Interest rates
 Monetary policy
 Political factor
 Exchange control
 Central bank intervention
 Speculation
 Technical factors
 Expectations of the foreign exchange market
4.7. Factors Affecting Indian Rupee
As we know that Forex market for Indian currency is highly volatile where one cannot
forecast exchange rate easily, there is a mechanism which works behind the determination of
exchange rate. One of the most important factors, which affect exchange rate, is demand and
supply of domestic and foreign currency. There are some other factors also, which are
having major impact on the exchange rate determination. After studying research reports on
relationship between Rupee and Dollar of last four years we identified some factors, which
have been segregated under four heads. These are:
1. Market Situation.
2. Economic Factors.
3. Political Factors.

37
4. Special Factor.
1. Market Situation:
India follows the “floating rate system” for determining exchange rate. In this system
“market situation” also is pivot for determining exchange rate. As we know that 90% of the
Forex market is between the inter-bank transactions. So how the banks are taking the
decision for settling out their different exposure in the domestic or foreign currency that is
impacting to the exchange rate. Apart from the banks, transactions of exporters and
importers are having impact on this market. So in the day-to-day Forex market, on the basis
of the bank and trader’s transactions the demand and supply of the currencies increase or
decrease and that is deciding the exchange rate. On the basis of this study we found out the
different types of the decisions, which is affecting to market. These are as follows:
 In India, there are big Public Sectors Units (PSUs) like ONGC, GAIL, IOC etc. all the
foreign related transactions of these PSUs are settled through the State Bank of India. E.g.
India is importing Petroleum from the other countries so payment is made through State
Bank of India in the foreign currency. When State Bank of India (SBI) sells and buys the
foreign currency then there will be noticeable movement in the rupee. If the SBI is going for
purchasing the Dollar then Rupee will be depreciated against Dollar and vice versa.
 Foreign Institutional Investor’s (FIIs) inflow and outflow of the currency is having the
major impact on the currency. E.g. U.S. based company is investing their money through the
Stock markets BSE or NSE so her inflows of the Dollars is increasing and when it is selling
out their investments through these Stock markets then outflows of the Dollars are
increasing. However if the FIIs inflowing the capital in the country then there will be the
supply of the foreign currency increases and Demand for the Rupee will increases and that
will resulted appreciation in the rupee and vice versa.
 Importer and Exporter’s trading is also affecting to the rupee. Like if an Indian exported
material to U.S. so he will get his payments in Dollars and that will increase the supply of
Dollars and increase of demand of rupee and that will appreciate the rupee and vice versa.
 Banks can be confronted different positions like oversold or over bought position in the
foreign currency. So bank will try to eradicate these positions by selling or purchasing the
foreign currency. So this will be increased or decreased demand and supply of the currency.
And that will cause to appreciation or depreciation in the currency.

38
 As we know that in India there is a floating rate system. In India Central Bank (RBI) is
always intervene in the trade for smoothen the market. And this RBI can achieve by selling
foreign exchange and buying domestic currency. Thus, demand for domestic currency
which, coupled with supply of foreign exchange, will maintain the price foreign currency at
the desired level. Interventions can be defined as buying or selling of foreign currency by the
central bank of a country with a view to maintaining the price of a given currency against
another currency. US Dollar is the currency of intervention in India.
2. Economic Factors:
In the Forex Market Economic factors of the country is playing the pivot role. Every country
is depending on its prospect economy. If there will be change in any economy factors, which
will directly or indirectly affected to Forex market. Here there are two types of economic
factors. These are as follows:
A. Internal Factors.
B. External Factors.
A. Internal Factors:
 Industrial Deficit of the country.

 Fiscal Deficit of the country.
 GDP and GNP of the country.
 Foreign Exchange Reserves.
 Inflation Rate of the Country.
 Agricultural growth and production.
 Different types of policies like EXIM Policy, Credit Policy of the country as well
reforms undertaken in the yearly Budget.
 Infrastructure of the Country
B. External Factors:
 Export trade and Import trade with the foreign country.

 Loan sanction by World Bank and IMF
 Relationship with the foreign country.
39
 Internationally OIL Price and Gold Price.
 Foreign Direct Investment, Portfolio Investment by the country.
3. Political Factors:
In India election held every five years mean thereby one party has rule for the five years. But
from the 1996 India was facing political instability and this type of political instability has
created hefty problem in the different market especially in Forex market, which is highly
volatile. In fact in the year 1999 due to political uncertainty in the BJP Government the
rupee has depreciated by 30 paise in the month of April. So we can say that political can
become important factor to determine foreign exchange in India.
Due to political instability there can be possibility of de possibility delaying implementation

of all policies and sanction of budget. So that will create also major impact on trade.
4. Special Factors:
 Till now we have seen the general factors, which will affect the Forex market in daily
business. And on that factors the different players in the market have taken the decision. But
some times some event happened in such a way that it will really change the whole scenario
of the market so we can called that event special factors. However traders have to really
consider those things and take the decisions. We will see these types of factors in detailed:
 In the year 1998, when BJP government has done “Pokhran Nuclear Test” at that time
rupee has been depreciated around 85 paise in day and 125 paise in seven days. Her main
fear was that U.S., Australia and other countries have stop to sanctions the loans So this type
of event will have major impact on the market. And due to this the decision procedure of the
trader also varies.
 In the year 2000,India has faced Kargil war, which is also affected to the market. By this
war the defense expenditures are raised and due to that there will be increase in the fiscal
deficit. And become obstacle in the growth of the economy. So this type of event has impact
on the Forex market.

40
Chapter 5: Foreign Exchange Exposure and
Risk at NANDAN
5.1. Foreign Exchange Exposure
5.1.1. Description
Foreign exchange risk is related to the variability of the domestic currency values of assets,
liabilities or operating income due to unanticipated changes in exchange rates, whereas
foreign exchange exposure is what is at risk.
Foreign currency exposures and the attendant risk arise whenever a company has an income
or expenditure or an asset or liability in a currency other than that of the balance-sheet
currency. Indeed exposures can arise even for companies with no income, expenditure, asset
or liability in a currency different from the balance-sheet currency.
When there is a condition prevalent where the exchange rates become extremely volatile the
exchange rate movements destabilize the cash flows of a business significantly. Such
destabilization of cash flows that affects the profitability of the business is the risk from
foreign currency exposures.
5.1.2. Classification of Exposures
Financial economists distinguish between three types of currency exposures - transaction

exposures, translation exposures, and economic exposures. All three affect the bottom- line
of the business.
5.1.2.1. Transaction Exposure

Transaction exposure can be defined as “the sensitivity of realized domestic currency values
of the firm’s contractual cash flows denominated in foreign currencies to unexpected
exchange rate changes. Transaction exposure is sometimes regarded as a short-term
economic exposure. Transaction exposure arises from fixed-price contracting in a world
where exchange rates are changing randomly.
Suppose that a company is exporting deutsche mark and while costing the transaction had
reckoned on getting say Rs.24 per mark. By the time the exchange transaction materializes
i.e. the export is affected and the mark sold for rupees, the exchange rate moved to say Rs.20
per mark.

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The profitability of the export transaction can be completely wiped out by the movement in
the exchange rate. Such transaction exposures arise whenever a business has foreign
currency denominated receipt and payment. The risk is an adverse movement of the
exchange rate from the time the transaction is budgeted till the time the exposure is
extinguished by sale or purchase of the foreign currency against the domestic currency.
Furthermore, in view of the fact that firms are now more frequently entering into commercial
and financial contracts denominated in foreign currencies, judicious management of
transaction exposure has become an important function of international financial
management.
 Some strategy to manage transaction exposure
1. Hedging through invoice currency:
While such financial hedging instruments as forward contract, swap, future and option
contracts are well known, hedging through the choice of invoice currency, an operational
technique, has not received much attention. The firm can shift, share or diversify exchange
risk by appropriately choosing the currency of invoice. Firm can avoid exchange rate risk by
invoicing in domestic currency, there by shifting exchange rate risk on buyer.
As a practical matter, however, the firm may not be able to use risk shifting or sharing as
much as it wishes to for fear of losing sales to competitors. Only an exporter with substantial
market power can use this approach. Further, if the currencies of both the exporter and
importer are not suitable for settling international trade, neither party can resort to risk
shifting to deal with exchange exposure.
2. Hedging via lead and lag:
Another operational technique the firm can use to reduce transaction exposure is leading and
lagging foreign currency receipts and payments. To “lead” means to pay or collect early,
where as “lag” means to pay or collect late. The firm would like to lead soft currency
receivables and lag hard currency receivables to avoid the loss from depreciation of the soft
currency and benefit from the appreciation of the hard currency. For the same reason, the
firm will attempt to lead the hard currency payables and lag soft currency payables. To the
extent that the firm can effectively implement the Lead/Lag strategy, the transaction
exposure the firm faces can be reduced.

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5.1.2.2 Translation Exposure (Accounting Exposures)
Translation exposure is defined as the likely increase or decrease in the parent company’s
net worth caused by a change in exchange rates since last translation. This arises when an
asset or liability is valued at the current rate. No exposure arises in respect of
assets/liabilities valued at historical rate, as they are not affected by exchange rate
differences. Translation exposure is measured as the net of the foreign currency denominated
assets and liabilities valued at current rates of exchange. If exposed assets exceed the
exposed liabilities, the concern has a ‘positive’ or ‘long’ or ‘asset’ translation exposure, and
exposure is equivalent to the net value. If the exposed liabilities exceed the exposed assets
and results in ‘negative’ or ‘short’ or ‘liabilities’ translation exposure to the extent of the net
difference.
Translation exposure arises from the need to "translate" foreign currency assets or liabilities
into the home currency for the purpose of finalizing the accounts for any given period. A
typical example of translation exposure is the treatment of foreign currency borrowings.
Consider that a company has borrowed dollars to finance the import of capital goods worth
$10000. When the import materialized the exchange rate was say Rs 30 per dollar. The
imported fixed asset was therefore capitalized in the books of the company for Rs 300000.
In the ordinary course and assuming no change in the exchange rate the company would
have provided depreciation on the asset valued at Rs 300000 for finalizing its accounts for
the year in which the asset was purchased. If at the time of finalization of the accounts the
exchange rate has moved to say Rs 35 per dollar, the dollar loan has to be translated
involving translation loss of Rs50000. The book value of the asset thus becomes 350000 and
consequently higher depreciation has to be provided thus reducing the net profit.
Thus, Translation loss or gain is measured by the difference between the value of assets and
liabilities at the historical rate and current rate. A company which has a positive exposure
will have translation gains if the current rate for the foreign currency is higher than the
historic rate. In the same situation, a company with negative exposure will post translation
loss. The position will be reversed if the currency rate for foreign currency is lesser than its
historic rate of exchange. The translation gain/loss is shown as a separate component of the
shareholders’ equity in the balance-sheet. It does not affect the current earnings of the
company.
5.1.2.3 Economic Exposure

Economic exposure can be defined as the extent to which the value of the firm would
be affected by unanticipated changes in exchange rates.

43
An economic exposure is more a managerial concept than a accounting concept. A company
can have an economic exposure to say Yen: Rupee rates even if it does not have any
transaction or translation exposure in the Japanese currency.
This would be the case for example, when the company's competitors are using Japanese
imports. If the Yen weekends the company loses its competitiveness (vice-versa is also
possible).
The company's competitor uses the cheap imports and can have competitive edge over the
company in terms of his cost cutting. Therefore the company's exposed to Japanese Yen in
an indirect way.
In simple words, economic exposure to an exchange rate is the risk that a change in the rate
affects the company's competitive position in the market and hence, indirectly the bottom-
line. Broadly speaking, economic exposure affects the profitability over a longer time span
than transaction and even translation exposure. Under the Indian exchange control, while
translation and transaction exposures can be hedged, economic exposure cannot be hedged.
Economic exposure consists of mainly two types of exposures.

 Asset exposure
 Operating exposure
Exposure to currency risk can be properly measured by the sensitivities of (1) the future
home currency values of the firm’s assets (and liabilities) (2) the firm’s operating cash flows
to random changes in exchange rates.
 Asset exposure:
Let us discuss the case of asset exposure. For convenience, assume that dollar inflation is
non random. Then, from the perspective of the U.S. firm that owns an asset in Britain, the
exposure can be measured by the coefficient ‘b’ in regressing the dollar value ‘P’ of the
British asset on the dollar/pound exchange rate ‘S’.
P=a+b*S+e
Where ‘a’ is the regression constant and ‘e’ is the random error term with mean zero, P =
SP*, where P* is the local currency (pound) price of asset. It is obvious from the above
equation that the regression coefficient ‘b’ measures the sensitivity of the dollar value of
asset (P) to the exchange rate (S). If the regression coefficient is zero, the dollar value of the
asset is independent of exchange rate movement, implying no exposure. On the basis of
above analysis, one can say that exposure is the regression coefficient. Statistically, the
exposure coefficient, ‘b’, is defined as follows:

44
b = Cov (P,S)/ Var (S)
Where Cov (P,S) is the covariance between the dollar value of the asset
and the exchange rate, and Var (S) is the variance of the exchange rate.
Next, we show how to apply the exposure measurement technique using numerical
examples. Suppose that a U.S. firm has an asset in Britain whose local currency price is
random. For simplicity, let us assume that there are three states of the world, with each state
equally likely to occur. The future local currency price of this British asset as well as the
future exchange rate will be determined, depending on the realized state of the world.
 Operating exposure:
Operating exposure can be defined as “the extent to which the firm’s operating cash flows
would be affected by random changes in exchange rates”. Operating exposure may affect in
two different ways to the firm, viz., competitive effect and conversion effect.
Adverse exchange rate change increase cost of import which makes firm’s product costly
thus firm’s position becomes less competitive, which is competitive effect.
Adverse exchange rate change may reduce value of receivable to the exporting firm which is
called conversion effect.
 Some strategy to manage operating exposure
1. Selecting low cost production sites:
When the domestic currency is strong or expected to become strong, eroding the competitive
position of the firm, it can choose to locate production facilities in a foreign country where
costs are low due to either the undervalued currency or under priced factors of production.
Recently, Japanese car makers, including Nissan and Toyota, have been increasingly shifting
production to U.S. manufacturing facilities in order to mitigate the negative effect of the
strong yen on U.S. sales. German car makers such as Daimler Benz and BMW also decided
to establish manufacturing facilities in the U.S. for the same reason. Also, the firm can
choose to establish and maintain production facilities in multiple countries to deal with the
effect of exchange rate changes. Consider Nissan, which has manufacturing facilities in the
U.S. and Mexico, as well as in Japan. Multiple manufacturing sites provide Nissan with
great deal of flexibility regarding where to produce, given the prevailing exchange rates.
When the yen appreciated substantially against the dollar, the Mexican peso depreciated
against the dollar in recent years. Under this sort of exchange rate development, Nissan may
choose to increase production in the U.S. and especially in Mexico, in order to serve the U.S.
market. This is, in fact, how Nissan has reacted to the rising yen in recent years.

45
Maintaining multiple manufacturing sites, however, may prevent the firm from taking
advantage of economies of scale, raising its cost of production. The resultant higher cost can
partially offset the advantages of maintaining multiple production sites.
2. Flexible sourcing policy:
Even if the firm manufacturing facilities only in the domestic country, it can substantially
lessen the effect of exchange rate changes by sourcing from where input costs are low.
Facing the strong yen in recent years, many Japanese firms are adopting the same practice. It
is well known that Japanese manufacturers, especially in the car and consumer electronics
industries, depend heavily on parts and intermediate products from such low cost countries
as Thailand, Malaysia, and China. Flexible sourcing need not be confined just to materials
and parts. Firms can also hire low cost guest workers from foreign countries instead of high
cost domestic workers in order to be competitive.
3. Diversification of the market:
Another way of dealing with exchange exposure is to diversify the market for the firm’s
products as much as possible. Suppose that GE is selling power generators in Mexico as well
as Germany. Reduced sales in Mexico due to the dollar appreciation against the peso can be
compensated by increased sales in Germany due to dollar depreciation against the euro. As a
result, GE’s overall cash flows will be much more stable than would be the case if GE sold
only in one foreign market, either Mexico or Germany. As long as exchange rates do not
always move in the same direction, the firm can stabilize its operating cash flow by
diversifying its export market.
4. R&D efforts and product differentiation:
Investment in R&D activities can allow the firm to maintain and strengthen its competitive
position in the face of adverse exchange rate movements. Successful R&D efforts allow the
firm to cut costs and enhance productivity. In addition, R&D efforts can lead to the
introduction of new and unique products for which competitors offer no close substitutes.
Since the demand for unique products tend to be highly inelastic, the firm would be less
exposed to exchange risk. At the same time, the firm can strive to create a perception among
consumers that its product is indeed different from those offered by competitors. This helps
firm to pass-through any adverse effect of exchange rate on to the customers.

46
5. Financial hedging:
While not a substitute for the long-term, financial hedging can be used to stabilize the firm’s
cash flow. For example, the firm can lend or borrow foreign currencies as a long term basis.
Or, the firm can use currency forward of options contracts and roll them over if necessary.
5.2. Foreign Exchange Risk
5.2.1. Nature of Foreign Exchange Risk
Foreign Exchange dealing is a business that one get involved in, primarily to obtain
protection against adverse rate movements on their core international business. Foreign
Exchange dealing is essentially a risk-reward business where profit potential is substantial
but it is extremely risky too.
FX business has the certain peculiarities that make it a very risky

business. These would include:
1) FX deals are across country borders and therefore, often foreign currency prices are
subject to controls and restrictions imposed by foreign authorities. Needless to say, these
controls and restrictions are invariably dictated by their own domestic factors and economy.
2) FX deals involve two currencies and therefore, rates are influenced by domestic as
well as international factors.
3) The FX market is a 24-hour global market and overseas developments can affect
rates significantly.
4) The FX market has great depth and numerous players shifting vast sums of money.
FX rates therefore, can move considerably, especially when speculation against a currency
rises.
5) FX markets are characterized by advanced technology, communications and speed.
Decision-making has to be instantaneous.
5.2.2. Description
In simple word FOREX risk is the variability in the profit due to change in foreign exchange
rate. Suppose the company is exporting goods to foreign company then it gets the payment
after month or so then change in exchange rate may effect in the inflows of the fund.

47
If rupee value depreciated he may loose some money. Similarly if rupees value appreciated
against foreign currency then it may gain more rupees. Hence there is risk involved in it.
5.2.3. Classification of Foreign Exchange Risk
1) Position Risk
2) Gap or Maturity or Mismatch Risk
3) Translation Risk
4) Operational Risk
5) Credit Risk
1. Position Risk
The exchange risk on the net open FX position is called the position risk. The position can
be a long/overbought position or it could be a short/oversold position. The excess of foreign
currency assets over liabilities is called a net long position whereas the excess of foreign
currency liabilities over assets is called a net short position. Since all purchases and sales are
at a rate, the net position too is at a net/average rate. Any adverse movement in market rates
would result in a loss on the net currency position.
For example, where a net long position is in a currency whose value is depreciating, the
conversion of the currency will result in a lower amount of the corresponding currency
resulting in a loss, whereas a net long position in an appreciating currency would result in a
profit.
Given the volatility in FX markets and external factors that affect FX rates, it is prudent to
have controls and limits that can minimize losses and ensure a reasonable profit.
The most popular controls/limits on open position risks are:
A) Daylight Limit : Refers to the maximum net open position that can be built up
a trader during the course of the working day. This limit is set currency-wise and the overall
position of all currencies as well.
B) Overnight Limit : Refers to the net open position that a trader can leave
overnight – to be carried forward for the next working day. This limit too is set currency-
wise and the overall overnight limit for all currencies. Generally, overnight limits are about
15% of the daylight limits.

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2. Mismatch Risk/Gap Risk
Where a foreign currency is bought and sold for different value dates, it creates no net
position i.e. there is no FX risk. But due to the different value dates involved there is a
“mismatch” i.e. the purchase/sale dates do not match. These mismatches, or gaps as they are
often called, result in an uneven cash flow. If the forward rates move adversely, such
mismatches would result in losses. Mismatches expose one to risks of exchange losses that
arise out of adverse movement in the forward points and therefore, controls need to be
initiated.
The limits on Gap risks are:
A) Individual Gap Limit : This determines the maximum mismatch for any
calendar month; currency-wise.
B) Aggregate Gap Limit : Is the limit fixed for all gaps, for a currency,
irrespective of their being long or short. This is worked out by adding the absolute values of
all overbought and all oversold positions for the various months, i.e. the total of the
individual gaps, ignoring the signs. This limit, too, is fixed currency-wise.
C) Total Aggregate Gap Limit : Is the limit fixed for all aggregate gap
limits in all currencies.
3. Translation Risk
Translation risk refers to the risk of adverse rate movement on foreign currency assets and
liabilities funded out of domestic currency.
There cannot be a limit on translation risk but it can be

managed by:
I. Funding of Foreign Currency Assets/Liabilities through money markets i.e.
borrowing or lending of foreign currencies
II. Funding through FX swaps
III. Hedging the risk by means of Currency Options
IV. Funding through Multi Currency Interest Race Swaps

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4. Operational Risk
The operational risks refer to risks associated with systems, procedures, frauds and human
errors. It is necessary to recognize these risks and put adequate controls in place, in advance.
It is important to remember that in most of these cases corrective action needs to be taken
post-event too.
The following areas need to be addressed and controls need to be

initiated.
A) Segregation of trading and accounting functions : The execution of

deals is a function quite distinct from the dealing function. The two have to be kept separate
to ensure a proper check on trading activities, to ensure all deals are accounted for, that no
positions are hidden and no delay occurs.
B) Follow-up and Confirmation: Quite often deals are transacted over the phone
directly or through brokers. Every oral deal has to be followed up immediately by written
confirmations; both by the dealing departments and by back-office or support staff. This
would ensure that errors are detected and rectified immediately.
C) Settlement of funds: Timely settlement of funds is necessary not only to avoid

delayed payment interest penalty but also to avoid embarrassment and loss of credibility.
D) Overdue contracts: Care should be taken to monitor outstanding contracts and to

ensure proper settlements. This will avoid unnecessary swap costs, excessive credit balances
and overdrawn Nostro accounts.
E) Float transactions: Often retail departments and other areas are authorised to
create exposures. Proper measures should be taken to make sure that such departments and
areas inform the authorised persons/departments of these exposures, in time. A proper
system of maximum amount trading authorities should be installed. Any amount in excess of
such maximum should be transacted only after proper approvals and rate.

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5. Credit Risk
Credit risk refers to risks dealing with counter parties. The credit is contingent upon the
performance of its part of the contract by the counter party. The risk is not only due to non
performance but also at times, the inability to perform by the counter party.
The credit risk can be
 Contract risk: Where the counter party fails prior to the value date. In such a case,
the FX deal would have to be replaced in the market, to liquidate the FX exposure. If there
has been an adverse rate movement, this would result in an exchange loss. A contract limit is
set counter party-wise to manage this risk.
 Clean risk: Where the counter party fails on the value date i.e. it fails to deliver the
currency, while you have already paid up. Here the risk is of the capital amount and the loss
can be substantial. Fixing a daily settlement limit as well as a total outstanding limit, counter
party-wise, can control such a risk.
 Sovereign Risk: refers to risks associated with dealing into another country. These
risks would be an account of exchange control regulations, political instability etc. Country
limits are set to counter this risk.
5.3. Differentiation of Exposures with Risk
Even though foreign exchange risk and exposure have been central issues of international
financial management for many years, a considerable degree of confusion remains about
their nature and measurement.
For instance, it is not uncommon to hear the term “Foreign Exchange Exposure” used
interchangeable with the term “Foreign Exchange Risk” when in fact they are conceptually
completely different. Foreign Exchange Risk is related to the variability of domestic
currency values of assets liabilities or operating incomes due to unanticipated changes in
exchange rates.
Where as foreign exchange exposure is what is at risk.

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Chapter 6: Foreign Exchange Risk
Management and Hedging Tools
6.1. Forex Risk Management
 Description
As a business engaged in the buying and selling of goods overseas, a company is exposed to
foreign exchange risks. These risks arise from fluctuations in the currency market, which
will impact outgoing payments for imports or incoming funds from exports. Changes in the
exchange rate between two currencies will translate into additional profits or losses to your
payables or receivables. Your amount of risk depends on factors such as the volatility of the
currencies involved and the value of the contract.
The Objectives of Risk Management

To define proper objectives is a one of the issue not usually dwelt upon in market literature
or forums and chat rooms, but success in Corporate FX Risk Management, or even
speculative trading for that matter, often hinges upon
 Defining your objective(s)

 Devising a plan or strategy to achieve the objective(s)
 Executing the strategy and
 Very importantly, remaining focused on the objective
General objectives of Risk Management
 To Minimize Costs
 To Maximize Revenue
 To Stabilize Margins in the Future
A better understanding of the Importance of defining proper objectives can be

achieved with the help of case lets we have few small case lets about “THE NEED TO
DEFINE PROPER OBJECTIVES”

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An example on Swiss Franc Loan
A very popular textile company with a Rupee Balance Sheet, contracts a Swiss Franc Loan
at a USD/CHF rate near 1.25 towards the end of 1996, after which the Swiss Franc weakens
to 1.45 by early 1997 and then trades in a range of 1.45-1.55 through the greater part of
1997-1998. It strengthens to about 1.35 by end of 1998.
The company accounts for the Loan in its books at 1.50 and wants to “earn back” the “loss
between 1.50 and 1.35” through “Hedging Operations” which call upon it to sell USD/CHF
in the Forward Market and earn Cash Profits on such Hedges, which will be booked in its
Profit and Loss accounts.
Note, that the focus is on CASH Profits/ Losses generated through “Hedges” and not on the
VALUE of the Loan, which is a Balance Sheet item.
The company starts its “Hedging Operations” near the epochal birth of the Euro. As we all
remember, 1999 was the year in which the Euro was born near 1.17 against the Dollar and
caused much anguish in the market by weakening throughout the year to end just above
Parity. In the process it dragged the Swiss Franc down against the Dollar.
The company, to its dismay, found itself making Cash Losses on its “Sell USD/CHF”
hedges. To make up the initial losses, it sold more USD/CHF in ever increasing larger
amounts right through the year, trying to earn Cash Profits on interim bouts of Dollar
weakness against the Swiss Franc. Huge Sell USD/CHF trades were daily entered into for
making a few pips profits, not realizing that the trades were all against the larger Trend.
Its focus on the Cash Profit/ Loss made the company overlook the fact that the ongoing
weakness in the Swiss Franc was decreasing the value of the Loan on its Balance Sheet.
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In an attempt to first earn “hedging profits” and then to cover losses against the trend, it
ended up with a USD 1 million loss, negating, to a large extent, the real Valuation Gain on
its Balance Sheet. Had its focus been on the Balance Sheet, the company would have
stopped its “Hedging Operations” after the first few hedges made Cash Losses and proved
that the market was actually reducing the value of its primary Loan exposure!
Conclusion:
The moral of the story is that a lot of thought and deliberation should go into deciding upon
correct objectives before commencing market operations. In a subsequent issue I shall take
up the case of one of the competitors company, which started out with the correct objectives,
but lost its focus and underperformed as a result.
Example 2: Keep the Objective in mind. It pays
Almost immediately thereafter, the Dollar dived against the Yen, to hit an all time low of
79.80 in April 1995. There were 3 months of intense agony. The company had never
undertaken such a large forex deal. The Board was on the edge. Had the deal gone horribly
wrong? The Risk Manager reminded the Board that the objective was Risk Diversification
and only 10% of the loan book had been put on the line. Further, the deal had a 3 year tenor.
The market eventually turned around and the danger passed. The Swap came back into
money. Now the Board was tempted to square off the trade and book whatever small profit
was available. Again the Risk Manager stuck to his guns, saying the Objective was long term
Currency Diversification, not short term Trading Profits. The Board backed down and the
Swap was allowed to run its course.

54
The Yen eventually touched 120 in 1997. The company booked a huge currency and interest
rate gain of almost $17 million. Those who have been in the market through that period
would appreciate how difficult it must have been to steer such a trade through to its end. It is
immensely commendable that the Risk Manager did not waver from the Objective, neither in
bad times nor in good times.
The gains from the deal (which in itself was well conceptualized), was realized by remaining
focused on the Objective.
Example 3: Focus on Objectives; Learn from your mistakes
In the case of a corporate that stuck to its long term objective even in bad times on a
currency swap that went very bad initially; but ultimately booked handsome gains at the end
of three years. We now present the case of a corporate that initially failed to realize profits
because it lost focus of its objectives. But it learnt from its mistake and made good the next
time the same opportunity presented itself.
Business Exposure: An Indian Importer, having all imports invoiced in US Dollars.
Objective: To diversify a part of the exposure into another currency to reduce Currency
Concentration Risk, through off-balance-sheet transactions.
Forecast on 26-Feb-04: While below 1.30, there were chances of EURUSD falling
to 1.18 (5.2%) over 2-3 months.

55
In the first quarter of 2005, EUR-USD had fallen from its post introduction high of 1.3665
and had traced a classic Double Top (refer below). The forecast was bearish, targeting 1.20.
Recognizing the opportunity, the Corporate again bought EUR Put/ USD Call Options with
the same objective of diversifying the currency composition of its Imports as also of
lowering the cost of Imports.
The market again hesitated for a while after the deal was done, causing some anxiety to the
Corporate. But remembering the experience of 2004, it stood its ground. Finally the Euro fell
and the Corporate made a very decent amount of money on expiry of the Option. This
success has now given the Corporate enough confidence to be more proactive in managing
its Currency Exposures.
Conclusion:
It’s alright to make mistakes. But learn from it and do better next time. Do not give up on
Forex Risk Management as "speculation" if things don't work out the first time. And, things
do work out if the objective is well thought out, the hedge strategy is well laid out and you
work according to plan.
 Understanding Risk
Here is a simple approach to understanding foreign exchange risk:
1. Identify your exposure.
Risk is not just limited to imports and exports. It can exist for any area of a business that has
an international component and requires foreign funds. For example, these can include:
 goods and services for import/export

 company assets that are purchased from a supplier abroad
 operational costs for overseas offices or factories (such as rent, equipment and
payroll)
 staff's global travel expenses
2. Calculate your exposure.

Figure out the sum value of all the components of business that are exposed to foreign
exchange risk. Then quickly calculate what would happen if one currency falls or rises by a

56
certain amount against another currency. Also consider the timeframe for payables or
receivables, and the corresponding profits or losses over 30-60-90 days.
3. Confirm your company's foreign exchange objectives.

Each company will have a different approach to foreign exchange that is based upon their
industry, trade volumes, geographical markets, etc. To develop own company's strategy, it is
important to understand whether or not a company is risk-adverse, the level of risks for the
currencies you deal with and how sophisticated your knowledge is regarding financial
services.
Example 4: View point as an Exporter
16th December, 2006. Spot rate 1 US $ = 48.14 Rs. (INR)
The NANDAN EXIM Ltd. received an export order of Textile Raw material to XYZ Ltd
The shipment schedule and details of order were:
Amount
Quantity
Date in US $
Date
31-Dec 1Forward
container Rate 60,000
15-Jan 1.5 Container 90,000
31-Dec 48.20
31-Jan 1 container 60,000
15-Jan 48.27
14-Feb 2 container 1,20,000
31-Jan 48.34
28-Feb 1 container 60,000
14-Feb 48.40
390,000
28-Feb 48.47
Strategy: -
As the dollar is depreciating since last 9 months and still dollar is looking week the strategy
is, exporter should cover full.
Result: -
Date Forward Sport Net Exposure Profit
Rate Rate Differenc

57
e
31-Dec 48.20 47.95 + 0.25 60,000 15000
15-Jan 48.27 47.88 + 0.39 90,000 35100
31-Jan 48.34 47.75 + 0.59 60,000 35400
14-Feb 48.40 47.82 + 0.58 120,000 69600
28-Feb 48.47 47.61 + 0.86 60,000 51600
206700
Conclusion:
As forward points is nothing but an interest differential and in the case of INR / US $ it is
added to the spot rate. So we will get good price in forward contract and actual prices are on
a tend to decries the exporter gets double benefits by booking forward contract. So exporter
should cover all its exposure to avoid fluctuation risk and to gain form good forward rates.
Example 5: view Point of company as an Importer: -
• L/C open 1st January, 2006

• Shipment As early as Possible
• Date of Shipment 15th February, 2006
• Likely date when documents will be received 28th February,
2006
• Order amount 1,00,000 US $
• Spot Rate 1 US $ = 48.05 Rs. (INR)
• Forward Rate for 28th February, 2006 1 US $ = Rs. 48.47
Strategy: -
As Indian Rupee was appreciating against USD since last 9 months and the chances of again
appreciation were likely, the importer should not cover anything and he should live open.
Result: -
Spot rate on 28th February, 2006 1 USD = Rs. 47.75
Profit will be 48.05 – 47.75 = 0.30 Rs. * 1,00,000 = Rs. 30,000
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Conclusion:
Hear forward rates are higher than spot rates and the trend of exchange rate (INR / US $) is
declining. So, the importer should not cover anything. If it covers he has to buy a high price
forward and in the future the prices are lower than a spot rate. So he will be cost on both
ways – by paying high price in future and not taking gain form decries in exchange rate. So
any exporter dealing in US $ should not cover in this scenario.
Example 6: Foreign currency loan Borrower:
Date: 1st January, 2006 Spot: 48.05
Nandan’s one of the leading competitor company-(Mentioning it

as ABC Ltd.).Suppose it has taken a loan from Duchies Bank of US
$ 1 million at 4 %. The repayment schedules were as follows.
Strategy: -
As we are a foreign currency borrower so in mention dates we are going to pay the
instalment and the dollar is looking week, we (foreign currency payer) should not cover any
thing and leave open.
Result
Interes Amount Forwar
Date Principal t (US $) d Rates
31-Mar 250000 10000 260000 48.51

30-Jun 250000 7500 257500 48.92
30-Sep 250000 5000 255000 49.30
31-Dec 250000 2500 252500 49.88
1000000 25000 1025000
Amount(US $), 1 US $=
48.05
Re- Total
Date payment 31-Mar 30-Jun 30-Sep 31-Dec Profit
Amount 260000 257500 255000 252500

Rate Profit Profit Profit Profit

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31-Mar 47.64 0.41 0.41 0.41 0.41
Amount 106600 105575 104550 103525 420250
15-Apr 47.42 0 0.63 0.63 0.63
Amount 0 162225 160650 159075 481950
Total
Profit 106600 267800 265200 262600 902200
Conclusion:
From the above table we can see that up to the 15th April we have already made a profit of
Rs. 902200 and in further the profit will increase as dollar goes down. At present dollar is
looking week so we don’t cover but if dollar looks strong the company should cover the
remaining dates and transaction.
6.2. Hedging Tools
 To Hedge or Not To Hedge?
Hedging has come into existence because of the prevalence of risks in every business. These
risks could be physical, operating and investment and credit risks. Some of the risks such as
movements in commodity markets may be beyond our control.
Hedging provide a means of managing such risks. The need to manage external risk is thus
one pillar of the derivative market. Parties wishing to manage their risks are called hedgers.
Some people and businesses are in the business of taking risks to make money that is for the
possibility of a reward. These parties represent another pillar of derivative market and are
known as speculators.
Some derivative market participants' look for pricing differences and markets mistakes and
take advantage of these. These mistakes thus eventually disappear and never become too
large. Such participants are known as arbitrageurs.

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By covering the currency commitment by derivative contracts, exporter / importer need no
longer worry about the exchange risk element in the foreign transactions.
 Hedging Tools (Derivatives)
Introduction
The gradual liberalization of Indian economy has resulted in substantial inflow of foreign.
The gradual liberalization of Indian economy has resulted in substantial inflow of foreign
capital into India. Simultaneously dismantling of trade barriers has also facilitated the
integration of domestic economy with world economy. With the globalization of trade and
relatively free movement of financial assets, risk management through derivatives products
has become a necessity in India also, like in other developed and developing countries.
As Indian businesses become more global in their approach, evolution of a broad based,
active and liquid forex derivatives markets is required to provide them with a spectrum of
hedging products for effectively managing their foreign exchange exposures.
The global market for derivatives has grown substantially in the recent past. The Foreign
Exchange and Derivatives Market Activity survey conducted by Bank for International
Settlements (BIS) points to this increased activity. The total estimated notional amount of
outstanding OTC contracts increasing to $111 trillion at end-December 2001 from $94
trillion at end-June 2000. This growth in the derivatives segment is even more substantial
when viewed in the light of declining activity in the spot foreign exchange markets.
The turnover in traditional foreign exchange markets declined substantially between 1998
and 2001. In April 2001, average daily turnover was $1,200 billion, compared to $1,490
billion in April 1998, a 14% decline when volumes are measured at constant exchange rates.
Whereas the global daily turnover during the same period in foreign exchange and interest
rate derivative contracts, including what are considered to be "traditional" foreign exchange
derivative instruments, increased by an estimated 10% to $1.4 trillion.
Evolution of The Forex Derivatives Market In India

61
This tremendous growth in global derivative markets can be attributed to a number of
factors. They reallocate risk among financial market participants, help to make financial
markets more complete, and provide valuable information to investors about economic
fundamentals. Derivatives also provide an important function of efficient price discovery
and make unbundling of risk easier.
In India, the economic liberalization in the early nineties provided the economic rationale for
the introduction of FX derivatives. Business houses started actively approaching foreign
markets not only with their products but also as a source of capital and direct investment
opportunities. With limited convertibility on the trade account being introduced in 1993, the
environment became even more conducive for the introduction of these hedge products.
Hence, the development in the Indian forex derivatives market should be seen along with the
steps taken to gradually reform the Indian financial markets. As these steps were largely
instrumental in the integration of the Indian financial markets with the global markets.
Developments in the capital inflows
Since early nineties, we are on the path of a gradual progress towards capital account
convertibility. The emphasis has been shifting away from debt creating to non-debt creating
inflows, with focus on more stable long term inflows in the form of foreign direct investment
and portfolio investment. In 1992 foreign institutional investors were allowed to invest in
Indian equity & debt markets and the following year foreign brokerage firms were also
allowed to operate in India. Non Resident Indians (NRIs) and Overseas Corporate Bodies
(OCBs) were allowed to hold together about 24% of the paid up capital of Indian companies,
which was further raised to 40% in 1998. In 1992, Indian companies were also encouraged
to issue ADRs/GDRs to raise foreign equity, subject to rules for repatriation and end use of
funds. These rules were further relaxed in 1996 after being tightened in 1995 following a
spurt in such issues. Presently, the raising of ADRs/GDRs/FCCBs is allowed through the
automatic route without any restrictions.
FDI norms have been liberalized and more and more sectors have been opened up for
foreign investment. Initially, investments up to 51% were allowed through the automatic
route in 35 priority sectors. The approval criteria for FDI in other sectors was also relaxed
and broadened. In 1997, the list of sectors in which FDI could be permitted was expanded
further with foreign investments allowed up to 74% in nine sectors. Ever since 1991, the
areas covered under the automatic route have been expanding. This can be seen from the fact
that while till 1992 inflows through the automatic route accounted for only 7% of total
inflows, this proportion has increased steadily with investments under the automatic route
accounting for about 25% of total investment in India in 2001.

62
In 1991, there were also modifications to the limits for raising ECBs to avoid excessive
dependence on borrowings that was instrumental for 1991 BoP crises. In March 1997, the
list of sectors allowed to raise ECBs was expanded; limits for individual borrowers were
raised while interest rate limits were relaxed and restrictions on the end-use of the
borrowings largely eliminated.
In 2000, the Indian Government permitted the raising of fresh ECBs for an amount up to
USD 50 mn and refinancing of all existing ECBs through the automatic route. Corporates no
longer had to seek prior approval from the Ministry of Finance for fresh ECBs of up to USD
50 mn and for refinancing of prevailing ECBs.
Developments in capital outflows
Thus, while the inflows from abroad have been freed to a large extent, outflows associated
with these inflows like interest, profits, sale proceeds and dividend etc are completely free of
any restriction. All current earnings of NRIs in the form of dividends, rent etc has been made
fully repairable.
But convertibility in terms of outflows from residents, however, still remains more restricted
although these restrictions are gradually reduced. Residents are not allowed to hold assets
abroad. However, direct investment abroad is permissible through joint ventures and wholly
owned subsidiaries.
An Indian entity can make investments in overseas joint ventures and wholly owned
subsidiaries to the tune of USD 100 mn during one financial year under the automatic route.
At the same time investments in Nepal and Bhutan are allowed to the tune of INR 3.50 bn in
one financial year. Units located in Special Economic zones (SEZs) can invest out of their
balances in the foreign currency account. Such investments are however subject to an overall
annual cap of USD 500 mn. Indian companies are also permitted to make direct investments
without any limit out of funds raised through ADRs/GDRs.
Recently mutual funds have been allowed to invest in rated securities of countries with
convertible currencies within existing limits.
A deep and liquid market for the underlying is necessary for the development of an efficient
derivative market. The easy movement of capital between different markets and currencies is
essential to eliminate pricing discrepancies and efficient functioning of the markets. The
steps mentioned above to increase convertibility on the capital account and the current
account aided the process of integration of the Indian financial markets with international
markets. These reforms set in motion the process of the development of the forex derivatives

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markets by gradually opening the Indian financial markets and developing the foreign
exchange & the money markets.
6.3 Risk Management Tools Available In

India
The Forex derivative products that are available in Indian financial markets can be sectored
into three broad segments viz. forwards, options, currency swaps. We take a look at all of
these segments in detail:
1. Forward Contract
Forward exchange contract is a device which can afford adequate protection to an importer
or an exporter against exchange risk. Forward currency contracts are most widely used tools
for foreign exchange risk management. Under a forward exchange contract a broker and a
customer or another banker enter into a contract to buy or sell a fixed amount of foreign
currency on a specified future date at a predetermined rate of exchange.
There are two types of forward exchange contract:
(i) Fixed forward contract

a. Rupee Forward Contract
b. Cross Currency Forward Contract
(ii) Option forward contract
(i) Fixed forward contract:
“The forward contract under which delivery of foreign exchange should take place on a
specified future date is known as a fixed forward contract.”
For instance if on 5th march a customer enters into three months forward contract, with his
bank to sell GBP 10000. It means customer would be presenting a bill or any other

64
instrument on 7th June to the bank for GBP 10000. He can not deliver foreign exchange
prior to or later than the determined date.
a. Rupee Forward Contract
An important segment of the forex derivatives market in India is the Rupee forward
contracts market. This has been growing rapidly with increasing participation from
corporate, exporters, importers, banks and FIIs. Till February 1992, forward contracts were
permitted only against trade related exposures and these contracts could not be cancelled
except where the underlying transactions failed to materialize. In March 1992, in order to
provide operational freedom to corporate entities, unrestricted booking and cancellation of
forward contracts for all genuine exposures, whether trade related or not, were permitted.
Although due to the Asian crisis, freedom to rebook cancelled contracts was suspended,
which has been since relaxed for the exporters but the restriction still remains for the
importers.
RBI Regulations:
The exposures for which the rupee forward contracts are allowed under the existing RBI
notification for various participants are as follows:
i. For Residents:
Genuine underlying exposures out of trade/business

 Exposures due to foreign currency loans and bonds approved by RBI
 Receipts from GDR issued
 Balances in EEFC accounts
ii. For Foreign Institutional Investors:
 They should have exposures in India.

 Hedge value not to exceed 15% of equity as of 31 March 1999 plus increase in
market value/ inflows
iii. For Non-resident Indians/ Overseas Corporate:
 Dividends from holdings in a Indian company

 Deposits in FCNR and NRE accounts
 Investments under portfolio scheme in accordance with FERA or FEMA

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The forward contracts are also allowed to be booked for foreign currencies (other than
Dollar) and Rupee subject to similar conditions as mentioned above. The banks are also
allowed to enter into forward contracts to manage their assets - liability portfolio. The
cancellation and e-booking of the forward contracts is permitted only for genuine exposures
out of trade/business up to 1 year for both exporters and importers, whereas in case of
exposures of more than 1 year, only the exporters are permitted to cancel and rebook the
contracts. Also another restriction on booking the forward contracts is that the maturity of
the hedge should not exceed the maturity of the underlying transaction.
b. Cross Currency Forward Contract
Cross currency forwards are also used to hedge the foreign currency exposures, especially by
some of the big Indian corporate. The regulations for the cross
currency forwards are quite similar to those of Rupee forwards, though with minor
differences. For example, a corporate having underlying exposure in Yen, may book forward
contract between Dollar and Sterling. Here even though its exposure is in Yen, it is also
exposed to the movements in Dollar vis-à-vis other currencies. The regulations for rebooking
and cancellation of these contracts are also relatively relaxed. The activity in this segment is
likely to increase with increasing convertibility of the capital account.
(ii) Option forward contract:
With a view to eliminating the difficulty in fixing the exact date for delivery of foreign
exchange the customer may be given a choice of delivering 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.”
• Booking of forward contracts
The stages involved in booking and utilization of a forward

contract may be summarized as under:

66
1. The transaction of booking of forward contract is initiated with the customer enquiring of
his bank the rate at which the required foreign currency is available. Before quoting a rate
the bank should get details about (i) the currency, (ii) the period of forward cover,
including the particulars of option, and (iii) the nature and tenor of the instrument.
2. The branch may not be fed with forward rates of all currencies by the Dealing Room.
Even for major currencies forwards rates for standard delivery period may only be
available at the branch. If the rate for the currency and/or delivery period is not available,
the branch should contact the Dealing Room over phone or telex and obtain rate.
3. If the rate quoted by the bank is acceptable to the customer, he is required to submit an
application to the bank along with documentary evidence to support the application, such
as the sale contract.
4. After verification of the application and the documentary evidences submitted, the bank
prepares a ‘Forward Exchange Contract’.
2. Future Contract
As mentioned earlier, Indian forwards market is relatively illiquid for the standard maturity
contracts as most of the contracts traded are for the month ends only. One of the reasons for
the market makers’ reluctance to offer these contracts could be the absence of a well-
developed term money market. It could be argued that given the future like nature of Indian
forwards market, currency futures could be allowed.
Currency future is the price of a particular currency for settlement in a specified future
month. A currency futures contract is an agreement to buy or sell, on the futures exchange, a
standard quantity of a foreign currency at a future date, at the agreed price. Counterparty to a
futures contract is the futures exchange which ensures that all contracts will be honoured.
This effectively eliminates the credit risk to very large extent.
The exchange oversees the work related to margins, account reconciliation, delivery
revaluation, and settlements. The standardization of contract size, settlement date, tick
values, revaluation procedure etc. make the futures contract a popular tool for hedging and
trading with high liquidity and credibility. All futures contracts are dealt with the exchange
through the exchange members. The members are required to maintain a margin accounts
with the exchange against which they are permitted to trade.
All open positions are revalued at the close of business everyday, and margin amount set
accordingly. The members have their clients maintain margin accounts with them, and they
in turn revalue their clients’ open position at close of everyday.

67
No cross trades are permitted, and rates are all quoted in reciprocals. The exchange sets
daily price limit (circuit breaker) which it changes in times of extreme volatility. Settlement
of futures contract is administered by the central clearing house for each exchange, which is
the legal counterparty to each futures contract. The clearing hours thus guarantees contract
performance. It also operates the margins and supervises delivery.
In India Currency futures in Indian Rupees is not available otherwise in world Forex market
all major currency futures are available. Currency futures are traded on futures exchange and
the most popular exchanges are the ones where the contracts are transferable freely. The
Singapore International Monetary Exchange (SIMEX), and the International Monetary
Marker, Chicago (IMM) are the most popular futures exchanges. There are smaller futures
exchanges in London, Sydney, Tokyo, Frankfurt, Paris, Brussels, Zurich, Milan, New York,
and Philadelphia. The main currencies traded on the exchanges are Japanese Yen, Sterling
Pound, Swiss Franc, Australian Dollar and Canadian Dollar. The settlement months are the
spot month, January, March, April, June, July, September, October and December. The last
day of trading is the 3rd Wednesday of the delivery month.
Some of the benefits provided by the futures are as follows:
 Currency futures, since they are traded on organized exchanges, also confer benefits from
concentrating order flow and providing a transparent venue for price discovery, while
over-the-counter forward contracts rely on bilateral negotiations.
 Two characteristics of futures contract- their minimal margin requirements and the low
transactions costs relative to over-the-counter markets due to existence of a
clearinghouse, also strengthen the case of their introduction. T
 Credit risks are further mitigated by daily marking to market of all futures positions with
gains and losses paid by each participant to the clearinghouse by the end of trading
session.
 Moreover, futures contracts are standardized utilizing the same delivery dates and the
same nominal amount of currency units to be traded. Hence, traders need only establish
the number of contracts and their price.
 Contract standardization and clearing house facilities mean that price discovery can
proceed rapidly and transaction costs for participants are relatively low.

68
 However given the status of convertibility of Rupee whereby residents cannot freely
transact in currency markets, the introduction of futures may have to wait for further
liberalization on the convertibility front.
Currency Options
An option is a unique financial instrument or contract that confers upon the holder or the
buyer thereof, the right but not an obligation to buy or sell an underlying asset, at a specified
price, on or up to a specified date. In short, the option buyer can simply let the right lapse by
not exercising it. On the other hand, if the option buyer chooses to exercise the right, the
seller of the option has an obligation to perform the contract according to the terms agreed.
Currency hedging decision tree
View of currency View of risk Action
Very bullish Risk averse Buy currency forward

Very bullish Risk tolerant Buy currency forward
Bullish Risk averse Buy currency forward
Bullish Risk tolerant Buy ATM call
Flat market Risk averse Buy OOTM call
Flat market Risk tolerant Do nothing *
No view Risk averse Buy ATM call
No view Risk tolerant Do nothing *
Bearish Risk averse Buy OOTM call
Bearish Risk tolerant Do nothing *
Very bearish Risk averse Buy far OOTM call
Very bearish Risk tolerant Do nothing *
The asset underlying a currency option can be a spot currency or a futures contract on a
currency. An option on a spot currency gives the option buyer the right to buy or sell the said
currency against another currency while an option on a currency futures contract gives the
option buyer the right to establish a long or short position in the relevant currency futures
contract. Options on spot currencies are commonly available in the interbank over-the-
counter markets while those on currency futures are traded on exchanges like the Chicago
Mercantile Exchange (CME) and the Singapore International Monetary Exchange (SIMEX).
The objective of including currency options in your hedging arsenal has obviously to be to
get the best protection available at the least possible cost. This is easier said than done.
However, a corporate with foreign currency payables say in euro could use the following
decision tree as a guide:

69
There are two types of option:
 Cross currency option
 Rupee currency option
 Cross currency options
The Reserve Bank of India has permitted authorized dealers to offer cross currency options
to the corporate clients and other interbank counter parties to hedge their foreign currency
exposures. Before the introduction of these options the corporates were permitted to hedge
their foreign currency exposures only through forwards and swaps route. Forwards and
swaps do remove the uncertainty by hedging the exposure but they also result in the
elimination of potential extraordinary gains from the currency position. Currency options
provide a way of availing of the upside from any currency exposure while being protected
from the downside for the payment of an upfront premium.
RBI Regulations:
These contracts were allowed with the following conditions:
 These currency options can be used as a hedge for foreign currency loans provided
that the option does not involve rupee and the face value does not exceed the outstanding
amount of the loan, and the maturity of the contract does not exceed the un-expired maturity
of the underlying loan.
 Such contracts are allowed to be freely rebooked and cancelled. Any premium
payable on account of such transactions does not require RBI approval Cost reduction
strategies like range forwards can be used as long as there is no net inflow of premium to the
customer.
 Banks can also purchase call or put options to hedge their cross currency proprietary
trading positions. But banks are also required to fulfill the condition that no ’stand alone’
transactions are initiated.
 If a hedge becomes naked in part or full owing to shrinking of the portfolio, it may be
allowed to continue till the original maturity and should be marked to market at regular
intervals.

70
 There is still restricted activity in this market but we may witness increasing activity
in cross currency options as the corporate start understanding this product better.
 Rupee currency options
Corporate in India can use instruments such as forwards, swaps and options for edging cross-
currency exposures. However, for hedging the USD-INR risk, corporate is restricted to the
use of forwards and USD-INR swaps.
Introduction of USD-INR options would enable Indian forex market participants manage
their exposures better by hedging the dollar-rupee risk. The advantages of currency options
in dollar rupee would be as follows:
 Hedge for currency exposures to protect the downside while retaining the upside, by
laying a premium upfront. This would be a big advantage for importers, exporters (of both
goods and services) as well as businesses with exposures to international prices. Currency
options would enable Indian industry and businesses to compete letter in the international
markets by hedging currency risk.
 Non-linear payoff of the product enables its use as hedge for various special cases
and possible exposures. e.g. If an Indian company is bidding for an international assignment
where the bid quote would be in dollars but the costs would be in rupees, then the company
runs a risk till the contract is awarded. Using forwards or currency swaps would create the
reverse positions if the company is not allotted the contract, but the use of an option contract
in this case would freeze the liability only to the option premium paid upfront.
 The nature of the instrument again makes its use possible as a hedge against
uncertainty of the cash flows. Option structures can be used to hedge the volatility along
with the non-linear nature of payoffs.
 Attract further forex investments due to the availability of another mechanism for
hedging forex risk.
Hence, introduction of USD-INR options would complete the spectrum of derivative

products available to hedge INR currency risk.
4. Exotic options

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Options being over the counter products can be tailored to the requirements of the clients.
More sophisticated hedging strategies call for the use of complex derivative products, which
go beyond plain vanilla options.
These products could be introduced at the inception of the Rupee vanilla options or in
phases, depending on the speed of development of the market as well as comfort with
competencies and Risk Management Systems of market participants.
Some of these products are mentioned below:
 Simple structures involving vanilla European calls and puts such as range-forwards,
bull and bear spreads, strips, straps, straddles, strangles, butterflies, risk reversals, etc.
 Simple exotic options such as barrier options, Asian options, Look back options and
also American options
 More complex range of exotics including binary options, barrier and range digital
options, forward-start options, etc
Some of the above-mentioned products especially the structure involving simple European
calls and puts may even be introduced along with the options itself.
Currency Swap
Currency swaps involve an exchange of cash flows in two different currencies. It is generally
used to raise funds in a market where the corporate has a comparative advantage and to
achieve a portfolio in a different currency of his choice, at a cost lower than if he accessed
the market of the second currency directly.
However, since these types of swaps involve an exchange of two currencies, an exchange
rate, generally the prevailing spot rate is used to calculate the amount of cash flows, apart
from interest rates relevant to these two currencies. By its special nature, these instruments
are used for hedging risk arising out of interest rates and exchange rates.
Another spin-off of the liberalization and financial reform was the development of a
fledgling market in FC- RE swaps. A fledgling market in FC- RE swaps started with foreign
banks and some financial institutions offering these products to corporates. Initially, the
market was very small and two way quotes were quite wide, but the market started
developing as more market players as well as business houses started understanding these
products and using them to manage their exposures. Corporates started using FC- RE swaps
mainly for the following purposes:

72
 Hedging their currency exposures (ECBs, forex trade, etc.)
 To reduce borrowing costs using the comparative advantage of borrowing in local
markets (Alternative to ECBs - Borrow in INR and take the swap route to take exposure to
the FC currency)
The market witnessed expanding volumes in the initial years with volumes up to USD 800
million being experienced at the peak. Corporates were actively exploring the swap market
in its various variants (such as principal only and coupon only swaps), and using the route
not only to create but also to extinguish forex exposures. However, the regulator was
worried about the impact of these transactions on the local forex markets, since the spot and
forward markets were being used to hedge these swap transactions.
So the RBI tried to regulate the spot impact by passing the below
regulations:
 The authorized dealers offering swaps to corporate should try and match demand
between the corporate
 The open position on the swap book and the access to the inter bank spot market
because of swap transaction was restricted to USD 10 million
 The contract if cancelled is not allowed to be rebooked or re-entered for the same
underlying.
The above regulations led to a constriction in the market because of the one-sided nature of
the market. However, with a liberalizing regime and a build-up in foreign exchange reserves,
the spot access was initially increased to USD 25 million and then to USD 50 million.
The authorized dealers were also allowed the use of currency swaps to hedge their asset-
liability portfolio. The above developments are expected to result in increased market
activity with corporate being able to use the swap route in a more flexible manner to hedge
their exposures. A necessary pre-condition to increased liquidity would be the further
development and increase in participants in the rupee swap market (linked to MIFOR)
thereby creating an efficient hedge market to hedge rupee interest rate risk.
Types of Currency Swaps:

73
1. Cross-currency coupon swaps:
These are fixed-against-floating swaps.
Diagram:
Cross-currency basis swap:
These swaps involve payments attached to a floating rate index for both the currencies. In
other words, floating-against-floating cross-currency basis swaps.
Swap Market in India

In India, the Reserve Bank of India has permitted banks to arrange currency swaps with one
currency leg being Indian Rupee. However, the USD/INR forward foreign exchange markets
are illiquid beyond one year. Since currency swaps involve the forward foreign exchange
markets also, there are limitations to entering the Indian Rupee currency swaps beyond

74
twelve months. Moreover, banks are also not allowed to take risk /run open swap books i.e.,
they have to locate counter parties with matching requirements; e.g. one desiring to swap a
dollar liabilities into rupee liabilities and the other wishing to exchange rupee debt servicing
obligation for dollar obligations. However, some aggressive banks do provide quotes for
currency swaps for three to five years out for reasonable size transactions.
Corporate who have huge rupee liabilities and want have foreign currency loans in their
books, both as a diversification as well as a cost reduction exercise could achieve their
objective by swapping their rupee loans into foreign currency loans through the dollar/rupee
swap route. However, the company is assuming currency risk in the process and unless
carefully managed, might end up increasing the cost of the loan instead of reducing it. In
India, it is more the norm for corporate to swap their foreign currency loans into rupee
liabilities rather than the other way round.
Example:
A corporate has a loan of USD 10 million outstanding with remaining maturity of 2 years,
interest on which is payable every six months linked to 6-month Libor + 150 basis points.
This dollar loan can be effectively converted into a fixed rate rupee loan through a currency
swap.
If the corporate wants to enter into a currency swap to convert his loan interest payments and
principal into INR, he can find a banker with whom he can exchange the USD interest
payments for INR interest payments and a notional amount of principal at the end of the
swap period. The banker quotes a rate of say 10.75% for a USD/INR swap. The total cost for
the corporate would now work out to 12.25%. If the spot rate on the date of transaction is
44.65, the rupee liability gets fixed at Rs. 446.50 mio. At the end of the swap, the bank
delivers USD 10 million to the corporate for an exchange of INR 446.50 mio, which is used

75
by the corporate to repay his USD loan. The corporate is able to switch from foreign
currency.
Forward rate agreement:
A Forward Rate Agreement (FRA) is an agreement between two parties that determines the
forward interest rate that will apply to an agreed notional principal (loan or deposit amount)
for a specified period. FRAs are basically OTC equivalents of exchange traded short date
interest rate futures, customized to meet specific requirements.
FRAs are used more frequently by banks, for applications such as hedging their interest rate
exposures, which arise from mismatches in their money market books. FRAs are also used
widely for speculative activities.
Characteristics of FRAs
 Achieves the same purpose as a forward-to-forward agreement
 An off-balance sheet product as there is no exchange of principal
 No transaction costs
 Basically allows forward fixing of interest rates on money market

transactions
 Largest market in US dollars, pound sterling, euro, Swiss francs, yen
 BBA (British Bankers Association) terms and conditions have become the industry
standard
 FRA is a credit instrument (same conditions that would apply in the case of a non-
performing loan) although the credit risk is limited to the compensation amount only
 Transactions done on phone (taped) or telex
 No initial or variation margins, no central clearing facility
 Transaction can be closed at any stage by entering into a new and opposing FRA at a
new price
 Can be tailor made to meet precise requirements
 Available in currencies where there are no financial futures
 British Bankers’ Association’s recommended terms
The BBA set up standards for FRA agreements, known as BBAFRA terms,
to provide recommended terms and conditions for FRA contracts to
provide guidance on market practice. Banks not dealing on BBA terms

76
have to make it clear to the counterparty that the FRA is not governed by
these terms.
 FRA Terminology:
FRA FRA Forward Rate Agreement

The forward rate of interest for the Contract Period as
Forward/Contract rate
agreed between the parties.
means the panel of not less than 12 banks designated from
BBA Designated Banks time to time by the BBA for the purpose of establishing the
BBA Interest Settlement Rate.
The rate quoted by specified reference banks for the

relevant period and currency. Most currencies LIBOR can
BBA Interest Settlement Rate
be taken as shown on LIBO or LIBOR01 on Reuters or
page 3750 on Telerate. For AUD the corresponding Reuter
page is BBSW.
Party seeking to protect itself against a future rise in
Buyer (Borrower)
interest rate.
Party seeking to protect itself against a future fall in
Seller (Lender)
interest rate.
the date the contract period commences, being the date on
Settlement Date
which the Settlement Sum is paid.
Maturity Date the date on which the contract period ends.
Settlement Sum as calculated by the BBA formula.
the day that is two business days prior to the Settlement

Fixing Date Date except for pound sterling for which the Fixing Date
and Settlement Date are the same.
Contract Amount the notional principal on which the FRA is based.
Contract Currency the currency on which the FRA is based.
Contract Period the period from the Settlement Date to the Maturity Date.
Broken Date Contract Period of a different duration from that used in

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the fixing of the BBA Interest Settlement Rate and any
period exceeding 1 year.
Some proposed products

Finally some innovative products may be introduced which satisfy specific customer
requirements. These are designed from the cash and derivative market instruments and offer
complex payoffs depending on the movement of various underlying factors. Some of the
examples of these products are provided below:
Accrual forward: With an accrual forward, for each of the daily fixings up to expiry
that spot remains within the range, the holder gets longer 1 unit of USD/INR at the Forward
Rate. For example, for each of the daily fixings up to expiry that spot remains within the
range let us say 48.50 to 48.60, the holder accrues 1 unit at the forward rate of 48.56.
1. Enhanced accrual forward: Enhanced accrual forward is similar to accrual

forward, but this contract has two forward rates, which apply for different ranges. For
example, Accrue long 1 unit per fixing at forward rates of 48.56(Range 1 - 48.50 to 48.60) or
Long 1 unit per fixing at 48.47(Range 2- below 48.50). So for each of the daily fixings up to
expiry that spot remains within the 48.50 - 48.60 range the holder accrues 1 unit at 48.56.
For each of the daily fixings up to expiry that spot is below 48.50 the holder accrues 1 unit at
48.47. If spot is ever above 48.60 then nothing will be accrued on that day. Note that the two
ranges do not overlap, so the holder will never accrue more than 1 unit per fixing.
2. Higher yield deposits: This product can be developed to offer a comparable

higher yield than on a traditional Rupee money market deposit.

78
There are three possible scenarios at maturity:
 If spot never trades at or beyond the in strike before expiration, the investment plus
interest at certain rate ’r’ will be paid in rupee.
 If spot trades at or beyond the in strike before expiration and closes above the exercise
price, the investor is paid the invested capital plus interest ’r’ paid in rupee.
 But if spot trades at or beyond the in strike before expiration and closes below the
exercise price, the investor is paid in USD. The sum paid in USD corresponds to the amount
of invested capital plus interest of ’r’ converted at the exercise price.
OTHER HEDGING INSTRUMENTS
1. Internal Techniques
I. Netting
II. Matching
III. Leading and Legging
IV. Price policies
V. Asset and liability management
VI. Nostro reconciliation
VII. Position sheets, overnight orders
VIII. Revaluation of exchange position
IX. Reporting of limit excesses
X. Benchmarking
I. Netting
Netting simply means offsetting exposures in one currency with exposure in the same or
anther currency, where exchange rates are expected to move in such a way
that losses on the first exposed position should be offset by gains on the secured currency
exposure which is known as bilateral netting, each pair of subsidiary nets out their own
positions with each other. The lower of each company’s purchases from of sales to its
netting partner reduces flows.

79
Multilateral netting
A complex form of netting, can take place when affiliates both import from and export to
companies within the same corporate group. Flows are reduced by the lower of each
company’s total purchase from / sale to affiliates.
In multilateral netting participating units must report all inter company positions at the end
of given period, and the centre then advice the units of the net amount which they are to pay
or receive at a certain date. So that, multilateral netting requires a centralized
communications system and lot of discipline on the part of participating units.
The major benefits of netting are reduced banking cost and increased control of inter-
company settlements. The reduced number and total amount of payment produces saving in
the form of lower flow and lower exchange cost.
II. Matching
Matching can be applied to both third party as well as inter-company cash flow and it be
used by the exporter / importer as well as the multinational company. It is a process
whereby a company matches its currency inflow and with it currency outflows with respect
to amount and timing. Receipt in a particular currency may then be sued to make payment in
that currency so that the need to go through the exchange is limited to the unmatched portion
of foreign currency cash flows.
There are two types of Matching:
1) Natural: - Natural matching is a two-way cash flow in the same foreign currency.
2) Parallel: - Parallel-matching gains in one foreign currency are expected to be

offset by losses in another.
The problem for implementing matching concerns the timing of third party receipts and
payments. Unexpected delay can cause the mismatching of a match and may consequently
leave both receivable and payable exposed to exchange risk. Timing problem can be
overcome by the utilization of foreign currency account, which allow retiming of currency
conversion to facilitate matching.

80
III. Leading and Legging
The simply refers to the adjustment of inter company credit terms, ‘leading’ meaning a
prepayment of trade obligation and ‘legging’ a delayed payment. This is primarily an inter
company technique because in third party trade there is a clear conflict of interest between
buyer and seller. Inter company legging and leading can be used as part of either a risk
minimizing strategy or an aggressive strategy. In case, a central information and decision
point is usually required, to ensure that the timing of inter company settlement is effective
from a group point of view rather than a purely local one. It requires lot of discipline and
central decision-making. It may impact on liquidity and hence profitability of company.
IV. Pricing Policies
There are two types of pricing policies
 Price variation ( External Trade )

 Price Variation ( Inter Company Trade )
 Currency-of invoicing
 Price Variation (External Trade)
To protect against the risk of Forex Company raise selling price. But with frequently
fluctuated forex price, how company can change selling price. And whether increase in
selling price will affect the market share of the company.
o Competitive situation
o Customer credibility
o Price control
o Internal delays
o Trading/financing pattern
 Price Variation (Inter company trade)

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Inter company price variation refers to the arbitrary pricing of inter company transfers of
goods and services at a higher or lower figure, which is called as transfer pricing. But there
are many reasons for deciding transfer pricing.
o Income tax minimization

o Import duties
o Government restriction
o Exchange control
 Currency-of-invoicing
Currency of invoicing tactics can be aggressive or defensive. An aggressive strategy would

be to try invoice exports in relatively strong currencies-relative to the exporter’s home
currency and imports in relatively weak currencies. Here the company is increase its
exposure to exchange risk in the expectation that this will produce exchange gains rather
than losses.
For the strong currency customer also accepts exporter the defensive approach but for weak
currency exporter there is significant opportunity for gains.
V. Assets and Liability Management
Assets and Liability Management techniques can be used to manage balance sheet, income
statement land or cash flow exposures. They can also use aggressively or defensively.
Aggressive approach will be to exposed liability, expenses, and cash outflow in weak
currency and assets, revenues and cash inflows in strong currency.
In defensive approach firm will seek to minimize foreign exchange gains and losses by
matching the currency denomination of assets/liability, revenue / expense and cash
inflow/outflow.
VI. Nostro Reconciliation
Since every FX deal eventually settles across Nostro account, the accounts ultimately reflect
all purchases and sales in each currency. Nostro account is our account with an overseas
correspondent bank, maintained in foreign currency.
The following special precautions should be taken to facilitate

the reconciliation of Nostro account:

82
1. Maintain multiple Nostro accounts where the volume of business is particularly high.
Where multiple Nostro account is warranted it is advisable to maintain separate account for
each or a group of activates.
2. To avoid confusion and errors multiple accounts with the same bank should be
avoided.
o Unreconciled entries should be attended to immediately on a priority basis

o Bank charges should be responded immediately
o Unreconciled entries should never be set off against each other.
VII. Position Sheets and Overnight Orders:
Each trader/dealer has to maintain a proper position sheet for each currency, separately,
every day. It includes following details:
o Deal number
o Time of deal
o Method
o Counter party
o Foreign currency amount
o Rate
o Value day
o Counter currency equivalent
o Net position
This is basically for trader of speculators who deal everyday.
This sheet can be maintained when dealer are present in market. But off day exchange
market is continuously working so there is need for overnight orders it is request friendly
banks/branches overseas, in other time zones to monitor open position.
The order includes following details
o Currency to be bought
o Currency to be sold

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o Amount of foreign currency
o Exchange rate
o Value day
o Whether the order is against a stop loss of take profit
o The validity of order
o Settlement instructions, if required
VIII. Reporting of Limit Excesses
All limit excesses have to be reported as soon as they occur. It is an essential function of risk
management to ensure that excess are reported at once and forwarded to the appropriate
authority for approval.
IX. Benchmarking
Benchmarking refers to the setting of the terms of references and the acceptable standards.
This is particularly essential for the purpose of revaluation of currency positions, for setting
of limits a budgetary purpose. It ensures certain degree of acceptability and credibility to
profit figures, revaluation process and MIS reports.
There are methods of setting benchmark. It is essentially a function of the comfort-level
within any organization and acceptable of the source of references rates. Beyond the source,
it also sets acceptable time of references as well.
RBI reference rate, SBI rate are considered to be reference rate in India. While LIBOR rate
is considered to be best for other currency.
2. External Techniques
(i) Short-term borrowing

(ii) Discounting
(iii) Factoring / forfeiting
(iv) Government exchange risk guarantees
I. Short-term Borrowing
Debt-borrowing in the currency to which the firm is exposed or investing in interest-bearing
assets to offset a foreign currency payment – is a widely hedging tool that serves much the
same purpose as forward contracts. The cost of this money market hedge is the interest
differentials between the two countries. According to interest rate earned, the interest

84
differential equals the forward exchange premium, the percentage by which the forward rates
differs from the sport exchange rates.
So the cost of the money market hedge should be the same as the forward of future market
hedge, unless the firm has some advantage in one market or the other.
The money market hedge suits many companies because they have to borrow anyway, so it
simply is a matter of denominating the company’s debt in the currency to which it is
exposed. That is logical.
But if a money hedge is to done for its own sake, the firm ends up borrowing from one bank
and lending to another, thus losing on the spread. This is costly, so the forward hedge would
probably be more advantageous except where the firm had to borrow for ongoing purpose
anyway.
II. Discounting
Discounting can be sued to cover only export receivables. It cannot be used to cover foreign
currency payables or to hedge a translation exposure. Where an exporter receivable is to be
settled by bill of exchange the export can discount the bill any there by receive payment
before the receivable settlement date. The bill may be discounted it either with a foreign
bank in the customer’s country, in which case the foreign currency proceeds can be
repatriated immediately, at the currency spot rate of at exporter’s country bank.
III. Factoring
Factoring can only be used as a means of covering export receivables. When the export
receivable is to be settled on open account, rather than by bill of exchange, the receivables
can be assigned as collateral for selected bank financing under most circumstances such
service will give protection against rate changes, through during unsettled periods in the
foreign exchange markets appropriate variations may be made in the factoring agreement.
IV. Government Exchange Risk Guarantees

To encourage exporter government agencies in many countries offer their exporters
insurance against export credit risk and special export financing schemes.

85
Chapter 7: Findings and Conclusions
On the basis of examples and Details discussed above it

can be concluded that:
 Devising of a plan/ strategy and execution thereof are matters of expertise in market
reading and dealing and are usually the more enchanting part of Risk Management or
Trading.
 It is rare that adequate attention is paid to the need for defining proper ‘Objectives’
for the risk management exercise. Even if the objectives have been properly defined, they
are often forgotten in the heat of market activity. This leads to failure or underperformance
in the big picture. I have already tried to illustrate this through an example in the context of
Corporate FX Risk Management.
In India since last 25 to 30 years the exporter has a tendency to not to do anything because
after 1972 the India rupee has depreciated against most traded foreign currency like US $
and GB £. The exporters are doing business in a traditional way. Now the time has changed
the dollar is depreciating and Indian rupee is appreciating. So the exporters should change
their psychology and use the tools and techniques available to protect against Forex risk.
The tools and techniques available are easy and understandable. While some external
techniques require information but in this 21st century information is available easily at
competitive cost. There are many companies like Kshitij consultancy, which have nation
wide presence in case of informative and reporting system. There is less worry to importers
and foreign currency borrowers on account of rupee appreciating scenario but if they have a
tendency of covering every thing then it should be changed to a leave open strategy.
There has also been undue inclination towards using general risk management tools such as
Forward rate agreement (FRAs) thereby neglecting the use of other important and
sophisticated tools such as Option contract on Forex. There is lack of expertise in
participants (Importers and Exporters) of Forex market which make them rely heavily on the
advice provided to them by their Forex brokers or agents rather then relying on their own
knowledge and expertise.
The major factors influencing the choice of participants (Importers and Exporters) while
deciding amongst Derivative products for risk management are as follows:
 Market view about currency movement

 Comfort level of a trader for particular product

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 Availability of contract
7.1. SWOT Analysis
• Strengths
 NEL has a pro-active management and Promoters have hands on experience in

manufacturing and trading of textile products.
 The group has agents for domestic sales as well as export of processed fabrics.
 The company has been exporting fabrics and other finished goods since last 4 years
and is better positioned for developing the market for export of Denim Fabric, Bottom
Weight Clothes and Processed Fabric.
 With backward integration & captive power plant, cost of production will come
down substantially.
 The company would be manufacturing Denim Fabric, Bottom weight clothes and
processed fabric, which is in demand across the globe.
 The plant has been set up in Ahmedabad, which is said to be the textile hub of the
country and thus has easy access to raw material and skilled labor.
• Weaknesses
 NEL will be competing with established players like Arvind Mills Ltd., Ashima Ltd
and Bombay Dyeing & Manufacturing Company Ltd.
 Overseas market is highly competitive.
 The success & viability of current projects depend to a good extent upon the interest
subsidy of 5% available from Textile Upgradation Fund Scheme of Govt. of India and duty
draw back on account export sales.
 Fashion trend in overseas market changes very fast.
• Opportunities
 With closure of many production centers in Europe and USA on account of stringent
pollution control norm, high cost labor and raw material, this opens up tremendous
opportunity for Indian manufacturers for supplying denim and Bottom weight clothes and
processed fabrics to those countries.
 As quota system has been removed, Global sourcing has been easier. Many foreign
customers can take a re-look at their supply chain to get quality products from India. There is
an enormous opportunity for textile exports from India.

87
 With subsidized interest, making new investments are more affordable.
 Govt’s policy for interest subsidy will facilitate NEL’s cost reduction.
• Threats
 Increased competition in domestic market (and also global market) owing to sizable
additional capacities, which are being set up by existing/new players in India.
 Post imposition of ‘safeguard measures’ against China by US and EU, the threat of
Chinese dumping looms large over the Asian markets; this could cause market disruption
and hurt the competitiveness of domestic players, on account of possible dumping in the
Indian market.
 Continuous rupee appreciation could negatively impact the competitiveness of
exports.
7.2. Justifications & Recommendations
 NEL is promoted by “CHIRIPAL” Group, having three decades of experience in the

field of manufacturing, trading and export of textile products.
 The group companies are exceedingly doing well and the conduct of the account has
been satisfactory.
 The major advantage of the company is the synergy that can be derived through
existing activities of Group companies. The Group companies are already in the activity of
processing of grey cloth, knitted fabrics, texturised yarn, trading in textile products and
export of fabrics etc.
 The financials and performance of the company are satisfactory.
 The conduct of the credit facilities sanctioned to the company has been satisfactory
till date.
 NANDAN EXIM LTD. can get the benefits of its lower fixed cost & operating cost
in comparison of other competitor companies in the textile industry.
 The interest subsidy of 5% is available from Textile Upgradation Fund Scheme of
Govt. Of India to NEL, this has given export benefit up to 5.6%. The company should
achieve the maximum benefits of it for ongoing projects, before the scheme is withdrawn.
 The co. should continue to acquire latest plant and machinery, so that they provide
flexibility to manufacture fabric of varying weights (up to 14.5) ounces.
 The company can use its quality as a weapon against its competitors & continue to
improve quality.
 The company can apply different strategies in different countries as per domestic
demand & supply, like-China is more present in lower and cheaper variety of Denim fabrics

88
(up to 8 ounce) and India has the preferred source for higher varieties i.e. 8.5 ounces and
above.
 Domestic market for Denim is growing significantly and with more R & D in Denim
Variety and advent of fashion culture, the Company can witness growth intensity.
Bibliography
1.Books
 A.V.Rajwade, “Foreign exchange International finances Risk

management.” Academic of business studies.
 Jeevanandam, “foreign exchange & Risk Management.” Sultan Chand &
Sons, 2004.
 D.C.Patwari, “Options & Futures, Indian Perspective.” Jaico Publishing
House, 2005.
2.News Papers
 Indian Economic review

 The Economic times
 Business Standard
 Business Line
3.Websites
 www.fxstreet.com/charts.htm
 www.rbi.gov.in/database.htm
 www.wto.org/archive.htm
 www.indiainfoline.com
 www.en.wikipedia.org

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 www.icai.org

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Foreign Exchange

Nandan Exim Limited

This is to certify that Ms. Ankita Parikh a student of

The project entitled was “Foreign Exchange Risk

During this period she acquainted herself with the

We wish her all the best for her future endeavours.

Nandan Exim - The Perfect Denim Maker Page

III. Executive Summary

Nandan Exim - The Perfect Denim Maker Page

Nandan Exim - The Perfect Denim Maker Page

I am desirous of placing on record profound indebtedness to Mr. Dinesh

I would be failing in duty if I do not acknowledge my gratitude towards

Nandan Exim - The Perfect Denim Maker Page

Nandan Exim - The Perfect Denim Maker Page

The project is on Study of Forex Exchange Risk Analysis at NANDAN EXIM

The Liberalized Exchange Rate Management System (LERMS) was introduced

Business firms/Companies like NANDAN EXIM LTD. have internationalized

Nandan Exim - The Perfect Denim Maker Page

The objectives of the Project study are mentioned below:

1. To study & identify Foreign Exchange risk at the company.

II. Research Methodology Adopted:

1. Research design : Exploratory Research

2. Data Collection Method : Secondary Method

Reports of Nandan Exim Ltd.

& Other Secondary Source

4. Limitations : Lack of Practical exposure in

III. Scope of the Study:

Nandan Exim - The Perfect Denim Maker Page

Chiripal Group Profile:

Group and its Genesis-

Nandan Exim - The Perfect Denim Maker Page

Chiripal is a professionally managed business group. The Management comprises of a team

It has diversified businesses in the fields of spinning, weaving, knitting, processing,

The Chiripal Group comprises of the following

Nandan Exim - The Perfect Denim Maker Page

1.2 Address of the Regd. Office : Sajipur- Gopalpur Road, Piplej,

Date of 27.4.1988 (originally

Brief Note on 3 Wings of the Company:

Nandan Exim - The Perfect Denim Maker Page

2. Vishal Fabrics Pvt. Ltd. (VFPL)

3. Shanti Processors Ltd. (SPL)

1.2 Company details

d Brief summary of history of concern. The main object of the Company is to

The Company is engaged in the

The Company has now implemented

Nandan Exim - The Perfect Denim Maker Page

Nandan Exim - The Perfect Denim Maker Page

Sr Name Designation Qualification Experience Functional

1 Mr. Deepak CEO B.Com, MBA. 5 Overall

2 Mr. Suresh President B. Com., C.A. 23 Production

2005-06  Successful completion of the IPO of Nandan Exim Ltd.,

Nandan Exim - The Perfect Denim Maker Page

 Spinning:- Backward Integration Project by installing Open Ended Machines of 32,000

 15 MW Captive Power Plant:- Implementing 15 MW Captive Power Plant for

 EXPANSION PROJECTS ON ANVIL

 Doubling of Denim Capacity: - The Company has decided for Doubling of

 Foray into Readymade Garments

Nandan Exim - The Perfect Denim Maker Page

Particulars 2002-03 2003-04 2004-05 2005-06

(Audite (Audite (Audite (Audite

Sales and Other Income 700 764 5949 12906

Gross Profit (PBDIT) 293 225 759 2707