Foreign Exchange Risk Management A

Case Study of TCS Technology Ltd

GROUP-6
DUSHYANT|LALITHA|APARNA|MANASA|RAHUL|SANTHOSH|USHA|ABHIRUP|JYOTHI

Foreign Exchange Risk

Foreignexchange riskis a financialriskthat exists when a financial transaction is

denominated in a currency other than that of the base currency of the company.

One of the most difficult and persistent problems for the firms exposed to forex risk

Frequent fluctuations in exchange rates a major source of uncertainty for

multinational and domestic firms

Current exchange rates are favourable for exports but imports are working out to
be pricey.

Indian IT sector export oriented sector which requires frequent management and
measurement of exchange rate risk.

Analysis of the forex exposure and its management of TCS Technologies Ltd.

Types of foreign exchange exposure

Transaction Exposure
Foreignexchange
Sources - Payables risk(also
and Receivables
in FXrisk,exchange
foreign currency
known as
rate riskor currencyrisk) is a
financialriskthat
Imports,exports,capital
the country,debt
in foreign
exists flows
whenacross
a financial
transaction isservicing
denominated
in a currency other
currency,dividend
payments
receipts
in foreign currency.
than
that of the base
currencyand
of the
company.
Translation Exposure
If the holding company has a foreign subsidiary or foreign currency assets or liabilities,
there is a need for the financial statements of the foreign subsidiary which are in foreign
currency to be translated into the home currency of the parent.
This leads to translation gain or loss
Economic Exposure
Operating exposure applicable for both MNCs and domestic companies.
Risk of exchange gain/loss due to future cash flows or costs of capital arising from
unexpected exchange rate changes.

LITERARTURE REVIEW OF FOREIGN EXCHANGE

RISK MANAGEMENT

ALPA DHANANI(2003)

Reviewed the foreign exchange risk management

practices of a single large UK MNC.
Instances were observed where corporate practices
deviates from normative prescriptions do not necessarily
imply sub-optimal behavior.

BRNGT PRAMBORG(2005)

Throws light on Korean & Swedish non-financial firms on

their foreign exchange risk exposure & hedging practices.
Korean firms more likely to focus on minimizing
fluctuations of cash flows.
Swedish firms minimizing on alternative hedging methods

ALINE MULLER & WILLEM F.C

VERSCHOOR (2006)

Assessing the sensitivity of firm value to exchange

rates.
Focus on 2 primary areas of enquiry theoretical
foundation of exchange risk exposure & empirical
evidence on the link between stock returns & currency
fluctuations.
More complete understanding of time varying, horizondependent & non linear nature of exchange risk

 Empirical evidence :- There is a positive relationship between bank size & foreign
exchange exposure: ERIC WRONG (2008)
Reason:- Larger banks tends to have more significant foreign exchange
operations & trading positions.
Larger banks also have more businesses with large and international
corporations of which competitiveness & sensitivity to exchange rates
movements
BIANCA DE POLI & JENS SINDERGAARD (2009)
Examined the properties of foreign exchange rate risk premium in a canonical
general equilibrium small open economy model.
Features assure that not only risk aversion but also precautionary savings are
counter-cycle.
Helps generate forex risk premium that co-varies negatively.
TIGRAN POGHOSYAN (2010)
Provides the first empirical evidence on the relationship between US macroeconomic variables, international oil prices & foreign exchange risk in GCC
countries.
Analysis performed using stochastic discount factor methodology impose no
arbitrage relationship on the risk premium and its theoretically grounded
macroeconomic determinants.
Estimation result suggested macroeconomic development in US constitute

VIJ MADHU (2009)

MANISHA GOEL (2011)

ANU JOSY JOY & Dr G S Gireesh

Kumar
(2011)

Surveyed the hedging techniques used in Indian firms

He observed the 2 techniques famous among Indian
companies for hedging Long dated & Short dated
forward exchange contracts
Indian companies hedge their risks foreign currency
forwards, swap & options agreements in Over the
Counter (OTC) markets.
A sketch of foreign exchange exposure management as
practiced by various multinational companies in India.
A comparative analysis of management of foreign exchange
exposure by banking & non banking as well as foreign &
Indian MNCs operating in India.
Most of the companies faced all three exposures
Transaction, economic & translation

Research study globalization and increased cross

border flow of funds have increased the exposure to
market risk hedging of such exposures has become
critical
Introduction of currency derivatives is a landmark
achievement benefiting importers, exporters &
companies with foreign exchange exposure

Indian IT sector

Indian IT and ITES sector lead the economic growth

Direct and Indirect employment opportunity of nearly 2.8 million

and 8.9 million respectively

Market size of the industry is expected to rise to $ 225 billion by

2020

Localized and clustered in 7 cities-Bangalore, Hyderabad,

Chennai, New Delhi, Kolkata, Mumbai and Pune

Expansion to newer places due to infrastructure limit and

scarcity of land

Factors leading to growth in the IT/ITES

sectors are:

Low operating cost abd tax advantage

Favorable government policies

Technically qualified personnel in the country

Rapid adoption of IT technologies in major sectors

Strong growth in export demand

Use of new and emerging technology

SEZ are growth drivers

FE Exchange exposure of TCS

Income and expenses in foreign currencies are converted at

exchange rates prevailing on date of transaction

Exchange differences arising on a monetary item is accumulated

in a foreign currency translation reserve

Premium or discount on foreign exchange are amortised and

recognised in the statement of P&L over the period of the
contract

Sales and Exports

Particulars
Percent of
export sales

For the year ended March 31

2012

2011

2010

91.84

91.02

92.18

Activity in foreign currency

Forex exposure Hedge

Enters into foreign currency forward contracts and currency

option contracts (accordance with the risk management
policies ).

Contract period varies from 1 days to 8 years

Hedge risk associated with foreign currency fluctuation relating

to firm commitments and forecasted transactions
Cash flow Hedges- March 31, 2012

Foreign Currency

USD

PS

AUD

Currency option
contract (Rs in crores)

218.5

21.75

21.0

3.0

Fair Value (Rs in

crores)

29.56

14.66

18.64

3.34

Hedging instruments are initially measures at fair value and are remeasured
at subsequent reporting dates.

Changes in fair value of the derivatives that are effective as hedges of

future cash flows are recognized in shareholders funds

When a hedge is discontinued, for forecasted transaction, any cumulative

gain or loss on heading instrument recognized is retained in shareholders
fund until the forecasted transaction occurs

If the hedge transaction is not expected to occur, recognized gain or loss is

transferred to the profit and loss statement for that period

Conclusion

In international business, Exchange rate risk is one of the most

important risks that firm faces

IT sectors mainly depends on exports. Hence exposed to the forex

risk

Companies manage exchange rate risk by hedging in currency

forward and options market

Exports of TCS accounts for more than 90%. (Majority: US)

Its major challenge is to hedge USD exposure

Based on the data, it can inferred that the exposure of next 8 years
can be hedged through foreign currency forwards and options

Thank You