Professional Documents
Culture Documents
2014-2015
CERTIFICATE
This is to certify that MISS ANKITA SINGH of M.Com -1
(Evening) Semester-1(2014-2015) has successfully completed the
project on NATURE AND FEATURE OF FOREIGEN
EXCHANGE MARKET under the guidance of Dr ANIL R
CHOUGULE
.
Date:
Place:
DECLARATION
I, MISS. ANKITA SINGH student of M.Com Part-1 (2014-2015) hereby declare that I
have completed the project on NATURE
AND FEATURE OF
SIGNATURE
(MISS. ANKITA SINGH)
ROLL NO.111
ACKNOWLEDGEMENT
I hereby express my heartiest thanks to all sources who have contributed to the
making of this project. I oblige thanks to all those who have supported,
provided their valuable guidance and helped for the accomplishment of this
project. I also extent my hearty thanks to my family, friends, our coordinator
college teachers and all the well wishers .I also would like to thanks my project
guide PROF. Dr ANIL R CHOUGULE for his guidance and timely suggestion
and the information provided by him on this particular topic.
It is matter of outmost pleasure to express my indebt and deep
sense of gratitude to various person who extended their maximum help to
supply the necessary information for the present thesis, which became available
on account of the most selfless cooperation.
Above all its sincere thanks to the UNIVERSITY OF MUMBAI for which
this project is given consideration and was done with outmost seriousness.
INDEX
SR.NO
CONTENTS
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Executive summary
Objectives
Limitations
Introduction to HCL Technologies
Need and importance
Industry Profile
Introduction to Foreign Exchange
Introduction to foreign exchange risk
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management
Tools and techniques for the management of
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EXECUTIVE SUMMARY
LIMITATIONS
The study is confined just to the foreign exchange risk but not the total
risk.
The analysis of this study is mainly done on the income statements.
This study is limited for the year 2006-2007.
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HCL TECHNOLOGIES
Overview
HCL Enterprise is a leading Global Technology and IT enterprise that
comprises two companies listed in India - HCL Technologies & HCL
Infosystems. The 3-decade-old enterprise, founded in 1976, is one of India's
original IT garage startups. Its range of offerings span Product Engineering,
Custom & Package Applications, BPO, IT Infrastructure Services, IT Hardware,
Systems Integration, and distribution of ICT products. The HCL team comprises
approximately 45,000 professionals of diverse nationalities, who operate from
17 countries including 360 points of presence in India. HCL has global
partnerships with several leading Fortune 1000 firms, including leading IT and
technologyfirms.
country or its business community raises funds from abroad, the countrys
currency is bought by others, giving foreign exchange, in exchange.
Multinational firms operate in more than one country and their operations
involve multiple foreign currencies. Their operations are influenced by politics
and the laws of the counties where they operate. Thus, they face higher degree
of risk as compared to domestic firms. A matter of great concern for the
international firms is to analyze the implications of the changes in interest rates,
inflation rates and exchange rates on their decisions and minimize the foreign
exchange risk.
The importance of the study is to know the features of foreign exchange and the
factors creating risk in foreign exchange transactions and the techniques used
for managing that risk.
INDUSTRY PROFILE
The vision of information Technology (IT) policy is to use It as a tool for
raising the living standards of the common man and enriching their lives.
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Though, urban India has a high internet density, the government also wants PC
and Internet penetration in the rural India.
In Information technology (IT), India has built up valuable brand equity in the
global markets. In IT-enables services (ITES), India has emerged asa the most
preferred destination for business process outsourcing (BPO),a key driver of
growth for the software industry and the services sector.
Indias most prized resource in todays knowledge economy is its readily
available technical work force. India has the second largest English speaking
scientific professionals in the world, second only to the U.S.
According the data from ministry of communication and information
technology, the ITES-BPO industry has grown by 54 per cent with export
earnings of US$ 3.6 billion during 2003-2004. Output of the Indian electronic
and IT industry is estimated to have grown by 18.2 percent to Rs.1,14,650 crore
in 2003-2004.
The share of hardware and non-software services in the IT sector has declined
consistently every year in the recent past. The share of software services in
electronic and IT sector has gone up from 38.7 per cent in 1998-99 to 61.8
percent in 2003-04.
However, there has been some welcome acceleration in the hardware sector
with a sharp deceleration in the rate of decline of hardwares share in electronic
and IT industry. Output of computers in value terms, for example, increased by
36.0, 19.7 and57.6 percent in 2000-01, 2002-03, and 2003-04, respectively.
All the sub-sectors of the non- software components of electronic and It
industry grew at over 8 percent in 2003-04, but this was far below the rate of
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Today a large number of foreign affiliates operate IT- enabled services in India.
The different services lines of IT enabled services offshored to India include
customer care, finance, human resources, billing and payment services,
administration and content development.
b)
c)
d)
Foreign exchange:
Foreign exchange is the mechanism by which the currency of one country
gets converted into the currency of another country. The conversion is done
by banks who deal in foreign exchange. These banks maintain stocks of
foreign currencies in the form of balances with banks abroad. For instance,
Indian Bank may maintain an account with Bank of America, new York, in
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which dollar are held. In the earlier example, if Indian importers pay the
equivalent rupee to Indian bank, it would arrange to pay American export at
New York in dolor from the dollar balances held by it with Bank of America.
Exchange rate:
The rate at which one currency is converted into another currency is the rate
of exchange between the currencies concerned. The rate of exchange for a
currency is known from the quotation in the foreign exchange market.
In the illustration, if Indian bank exchanged us for Indian rupee at Rs.40 a
dollar, the exchange rate between rupee and dollar can be expressed as
USD 1=Rs.40.
The banks operating at a financial center, and dealing in foreign exchange,
constitute the foreign exchange market. As in any commodity or market, the
rates in the foreign exchange market are determined by the interaction of the
forces of demand and supply of the commodity dealt, viz., foreign exchange.
Since the demand and supply are affected by a number of factors, both
fundamental and transitory, the rates keep on changing frequently, and
violently too.
Some of the important factors which affect exchange rates are:
Balance of payments
Inflation
Interest rates
Money Supply
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National Income
Resource Discoveries
Capital Movements
Political Factors
Psychological Factors and Speculation
Technical and Market Factors
Balance of payment: It represents the demand for and supply of foreign
exchange which ultimately determine the value of the currency. Exporters from
the country demand for the currency of the country in the forex market. The
exporters would offer to the market the foreign currencies have acquired and
demand in exchange the local currency. Conversely, imports into the country
will increase the supply of currency of the country in the forex market. When
the BOP of a country is continuously at deficit, it implies that demand for the
currency of the country is lesser than the supply. Therefore, its value in the
market declines. If the BPO is surplus, continuously, it shows the demand for
the currency is higher than its supply and therefore the currency gains in value.
Inflation: inflation in the country would increase the domestic prices of the
commodities. With increase in prizes exports may dwindle because the price
may not be competitive. With the decrease in export the demand for the
currency would also decline; this it in turn would result in the decline of
external value of the currency. It should be noted that it is the relative rate of
inflation in the two counties that cause changes in the exchange rates.
Interest rates: The interest rate has a great influence on the short-term
movement of capital. When the interest rate at a center rises, it attracts short
term funds from other centers. This would increase the demand for the currency
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at the center and hence its value. Rising of interest rate may be adopted by a
country due to money conditions or as a deliberate attempt to attract foreign
investment.
Money supply: An increase in money supply in the country will affect the
exchange rates through causing inflation in the country. It can also affect the
exchange rate directly.
National income: An increase in national income reflects increase in the
income of the residents of the country. The increase in the income increases the
demand for goods in the country. If there is underutilized production capacity in
the country, this would lead to increase in production. There is a change for
growth in exports too. Where the production does not increase in sympathy with
income rises, it leads to increased imports and increased supply of the currency
of the country in the foreign exchange market. The result is similar to that of
inflation viz., and decline in the value of the currency. Thus an increase in
national income will lead to an increase in investment or in the consumption,
and accordingly, its effect on the exchange rate will change.
Resource discoveries: When the country is able to discover key resources, its
currency gains in value.
Capital Movements: There are many factors that influence movement of
capital from one country to another. Short term movement of capital may be
influenced by the offer of higher interest in a country. If interest rate in a
country rises due to increase in bank rate or otherwise, there will be a flow of
short-term funds into the country and the exchange rate of the country will rise.
Reserves will happen in case of fall in interest rates.
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foreign exchange transactions taking place among banks are known as inter
bank transactions and the rates quoted are known as inter bank rates. The
foreign exchange transactions that take place between a bank and its customer
known as Merchant transactions and the rates quoted are known as merchant
rates.
Merchant transactions take place when as exporter approaches his bank to
convert his sale proceeds to home currency or when an importer approaches his
banker to convert domestic currency into foreign currency to pay his dues on
import or when a resident approaches his bank to convert foreign currency
received by him into home currency or vice versa. When a bank buys foreign
exchange from a customer it sells the same in the inter bank market at a higher
rate and books profit. Similarly, when a bank sells foreign exchange to a
customer, it buys from the inter bank market, loads its margin and thus makes a
profit in the deal.
Remittance could take place through various modes. Some of them are:
Demand draft
Mail transfer
Telegraphic transfer
Personal cheques
Types of buying rates:
TT buying rate and
Bill buying rate
TT buying rate is the rate applied when the transaction does not involve any
delay in the realization of the foreign exchange by the bank. In other words, the
Nastro account of the bank would already have been credited. This rate is
calculated by deducting from the inter bank buying rate the exchange margin as
determined by the bank.
Bill buying rate: This is the rate to be applied when foreign bill is purchased.
When a bill is purchased, the rupee equivalent of the bill values is paid to the
exporter immediately.
However, the proceeds will be realized by the bank after the bill is presented at
the overseas centre.
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INTRODUCTION
TO
THE
FOREIGN
EXCHANGE
RISK
MANAGEMENT
Risk:
Risk is the possibility that the actual result from an action will deviate from the
expected levels of result. The greater the magnitude of deviation and greater the
probability of its occurrence, the greater is the risk.
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which internal measures have not been able to eliminate. They include forward
contracts, borrowing short term, discounting bills receivable, factoring, and
government exchange risk guarantees currency options.
External techniques of foreign exchange exposure management use
contractual relationships outside the group to reduce risk of exchange rate
changes. Several external techniques are available fore foreign exchange
management. The firm can make a choice of that technique which is most
suitable to it.
TOOLS FOR FOREIGN EXCHANGE RISK MANAGEMNT
Forward exchange contract
A forward exchange contract is a mechanism by which one can ensure the
value of one currency against another by fixing the rate of exchange in advance
for a transaction expected to take place at a future date.
Forward exchange rate is a tool to protect the exporters and importers
against exchange risk under foreign exchange contract, two parties one being a
banker compulsorily in India, enter into a contract to buy or sell a fixed amount
of foreign currency on a specific future date or future period at a predetermined
rate. The forward exchange contracts are entered into between a banker and a
customer or between two bankers.
Indian exporter, for instance instead of grouping in the dark or making a
wild guess about what the future rate would be, enter into a contract with his
banker immediately. He agrees to sell foreign exchange of specified amount and
currency at a specified future date. The banker on his part agrees to buy this at a
specified rate of exchange is thus assured of his price in the local currency. For
example, an exporter may enter into a forward contract with the bank for 3
months deliver at Rs.49.50. This rate, as on the date of contract, is known as 3
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month forward rate. When the exporter submits his bill under the contract, the
banker would purchase it at the rate of Rs.49.50 irrespective of the spot rate
then prevailing.
When rupee was devaluated by about 18% in July 1991, many importers
found their liabilities had increased overnight. The devaluation of the rupee had
effect of appreciation of foreign currency in terms of rupees. The importers who
had booked forward contracts to cover their imports were a happy lot.
Date of delivery
According to Rule 7 of FEDAI, a forward contract is deliverable at a
future date, duration of the contract being computed from the spot value date of
the transaction. Thus, if a 3 months forward contract is booked on 12th February,
the period of two months should commence from 14 th February and contract
will fall on 14th April.
Fixed and option forward contracts
The forward contract under which the delivery of foreign exchange
should take place on a specified future date is known as Fixed Forward
Contract.
For instance, if on 5th March a customer enters into a three months forward
contract with his bank to sell GBP 10,000, it means the customer would be
presenting a bill or any other instrument on 7th June to the bank for GBP 10,000.
He cannot deliver foreign exchange prior to or later than the determined date.
Forward exchange is a device by which the customer tries to cover the
exchange risk. The purpose will be defeated if he is unable to deliver foreign
exchange exactly on the due date. In real situations, it is not possible for any
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CONCLUSION
Despite market expansion the profit generation is still a question mark, so
companies have to search for areas of next generation like value added
services, software enhancement and development other than just BPO
services to survive in the market.
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In the present day economies are globalized and the stabilities of them is
really at stake, the only rescue for the software companies is to improve
their responsiveness to the changing scenarios.
Companies have to develop their services to the bench mark level or
global standards so that they can have acceptance all over the world.
The troubles of many exporters are not a result of the volatility of the
rupee but the unfavorably high-cost structure. Exporters are viable only
when foreign exchange earnings get converted into more and more
rupees. To improve rupee viability and preserve profits, exporters need to
be efficient and productive and bring down aggregate rupee cost.
Poor viability will not be resolved by hedging. Considering an inefficient
exporter, it requires a breakeven exchange rate of Rs.45 dollar to show
profit. It will dazzle at a rate above Rs.45. It will fizzle at any exchange
rate below Rs.45.
In case of forward contract. The forward contract locks in the exporter
conversion of dollar revenues to rupee revenues at Rs.41, the market
forward price per dollar. The market will surely not buy the exporters
dollars at Rs.41 will be wholly ineffective exporters will be in serious
trouble despite the perfect hedge.
The problem of viability will be solved only when the exporters
breakeven moves down to Rs.41 per dollar. By contrast, an inefficient
exporter that is viable at Rs.41 peer dollar can take advantage of the
hedge.
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BIBLIOGRAPHY
BOOKS
1. Foreign Exchange Arithmetic-M.jeevanandam
2. International financial management-Prasanna Chandra
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WEBLIOGRAPHY
www.mecklai.com
www.wipro.com
www.infosys.com
www.hcltechnologies.com
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