“RISK MANAGEMENT IN FOREIGN EXCHANGE”

SYNOPSIS OF DISSERTATION SUBMITTED TO

BANGALORE UNIVERSITY

by
Mr.YOGANANDASWAMY.B.
Reg. No., 09KSCMA106

Under The Guidance Of

Prof.A.Kuppusamy

INDIAN ACADEMY SCHOOL OF MANAGEMENT STUDIES

BANGALORE
 “RISK MANAGEMENT IN FOREIGN EXCHANGE”

1. INTRODUCTION:

The importance of international trade in the economy of a country is too well known to
require emphasis. A number of advantages flow from international trade. Many developed
nations of the world owe their present status to international trade; many developing
countries place their hopes of development on it. A common man, who is not keenly
interested in these use a large number of these items which are either imported or some
components of them are imported. Even if an item is indigenously produced, it may be
found that it is made on an imported machine.

FOREIGN TRADE AND FOREIGN EXCHANGE

International trade refers to trade between the residents of two different countries. Each
country functions as a sovereign state with its own set of regulations and currency. The
difference in the nationality of the exporter and the importer presents certain peculiar
problems in the conduct of international trade and settlement of the transactions arising
there from. Important among such problems are:
1. Different countries have different monetary units;
2. Restrictions imposed by countries on import and export of goods;
3. Restrictions imposed by nations on payments from and into their countries; and
4. Differences in legal practices in different countries.
The existence of national monetary units poses a problem in the settlement of
international transactions. The exporter would like to get the payment in the currency of
his own. A need, arises for conversion of the currency of the importer’s country into that
of the exporter’s country. Foreign exchange is the mechanism by which the currency of
one country gets converted into the currency of another country.
The conversion of currencies is done by banks who deal in foreign exchange. These banks
maintain stocks of foreign currencies in the form of balance with banks abroad.
EXCHANGE RATE:

The rate at which one currency is converted into another currency is the rate of exchange
between the currencies concerned The rates in the foreign exchange market are
determined by the interaction of the forces of demand and supply and are affected by a
number of factors, both fundamental and transitory, the rates keep on changing frequently,
and violently too.

STATEMENT OF PROBLEM:

In the world of globalization and international business, where a company would be

performing one or the other kind of activity like selling its products, sourcing its raw
materials, raising funds abroad, investing in the international markets it has to deal with
many currencies for making payments or receiving its receipts. So the firms would be
facing the currency risk where an appreciation or depreciation of the currency it is dealing
with may eat away its profits, so there arises the issue of managing the currency risk. This
study thus deals with the various strategies by which those risk could be managed.

The study involves the following: -

 Identify the various forms of exposures (Transaction, Translation and Economic
exposures) a company is facing
 The ways of measuring them
 The various ways by which they can be managed and its effects.
 A paired sample t-test was to find out which tool best suits the firm.

SCOPE OF THE STUDY

The scope of the study is to see the various strategies to manage the various forms of
exposures and includes a detailed study of currency forwards, currency options, swaps,
exposure netting, risk sharing and shifting. And also areas like interest rate parity,
purchasing power parity and pricing of currency options.

OBJECTIVES OF THE STUDY:

 To know the various methods of managing transaction exposures and the benefits
from them.
 To understand the various forms of managing translation exposures
 And also economic exposures.
 Study on forex market.

2. METHODOLOGY:
The objective of the study is determined first and the various forms of dealing it so this
study is a DESCRIPTIVE STUDY.

Limitations of the study

 The study only takes up the dealings in one currency however the strategies are
same for all the currencies but a fundamental study about the currency helps for
the better implementation of the techniques which the study has not dealt in detail.
 The study deals with the historical data for its accuracy of testing.
 As the methodology uses the statistical tools hence, all the constraints of statistics
are applicable.

Research methodology
Primary data: primary sources involve interaction with the finance department. There
will be a use of primary data in the case of financing and of performance through paper
work and discussions held with the concerned finance manager.

Secondary data: The secondary data will be obtained from the financial statement of the
company in the form of balance sheet and profit and loss account. The analysis and
interpretation will thus be derived with the help of secondary data available.

Sampling

For the purpose of the study, non-probabilistic convenient sampling technique has been
used.

3. PLAN OF ANALYSIS.

• Beta and Alpha

• Standard Deviation
• Rank sum analysis

Chapter scheme:
Chapter 1. Introduction.
 The importance of international trade in the economy of a country is too well known
to require emphasis. A number of advantages flow from international trade. This
chapter outlines importance of foreign trade , exchange rate and risk involved.

Chapter 2. Review of Literature & Research Design.

A research design serves as a bridge between what has been done in the conduct of
study to realize the specified objectives. This chapter outlines the research design of
the study.

Chapter 3. Profile of Foreign Exchange scenario.

This Chapter will analyse the Foreign Exchange Market Situation.

Chapter 4. Methodology.
This Chapter gives the details of primary/secondary data collection methods.

Chapter 5. Plan of Analysis.

This Chapter gives the calculation of Beta and Alpha Methods

Chapter 6. Summary of Findings, Conclusions and Suggestions

In this chapter we will actually include all that we have analyzed and what has been
found. Finally conclude checking whether the objective of the study has been
achieved or not.

Bibliography
Websites, Books, Journal, Reports.