FOREIGN EXCHANGE RISK MANAGEMENT

IN BHEL : A STUDY OF JHANSI UNIT

AN

INDUSTRIAL PROJECT

SUBMITTED IN PARTIAL FULFILLMENT OF

DEGREE OF B.COM(HONS)

Under the supervision of :

Dr. Swami Prasad Saxena,

Associate Professor

Submitted By:-

Bhavneet kaur

FACULTY OF COMMERCEDAYALBAGH EDUCATIONAL INSTITUTE

DAYALBAGH, AGRA-282110

Declaration

I hereby declare that the project work entitled “Foreign Exchange Risk Management” is my own work conducted under the supervision of Dr. Swami Prasad and my trainer at B.H.E.L. Sir Chandan Maurya. I further declare that to the best of my knowledge this project does not contain any part of any work which has been submitted for the award of any degree in this university or any other university.

Signature of the candidate

______________________

Preface

It gives me a great pleasure to present this project report on the topic “Foreign Exchange Risk Management, B.H.E.L.” Well the project report is an integral part of the B.com (HONS) program.

As a matter of fact, every commerce student has to go through some practical understanding regarding the realistic applications of business.

The project I have undertaken talks about the foreign exchange risk management concepts. Being a government organization it has to follow the pre-determined set of guidelines for risk management. Under this project, its Being studied what will be effect, if the methods are followed.

I contacted various managers and my supervisor to understand the criteria of performance management and other issues.

In this report, I have tried to put my best efforts to compile the data.

Certificate

This is to certified that Ms. Bhavneet Kaur, B.Com. VIth semister

student in the Faculty of Commerce, Dayalbagh Educational

Institute [Deemed University] Dayalbagh, Agra, has completed

her Industrial project work under my supervision during the

session 2010-2011 entitled “Foreign Exchange Risk Management, B.H.E.L.”

is her original work and fit for submission.

Date: …., April 2011 Dr. Swami Prasad

(Associate Professor)

Acknowledgement

Any research work increases a person’s ability to think broadly and expand his/her level of knowledge.

The project has been a great source of learning and a good experience as it made me aware of professional culture and conducts that exist in an organization.

Inspiration and guidance are valuable in all aspects of life especially in an academic field.

I would like to express my deep gratitude to Dr. Swami Prasad (Associate Professor, Faculty of Commerce, Dayalbagh Educational Institute Dayalbagh, Agra) who acted as my guide and mentored me for the successful completion of this project.

Special thanks to Mr. Chandan Maurya (Deputy Manager, Material Management dptt. , BHEL Jhansi) who gave me an opportunity to learn about the inter organizational matters in his very busy schedule..

In all, this project work has made me learn various aspects of life that will always guide me to work in the near future in a much enhanced way.

Thanks to all people, once again.

INDEX

CHAPTER 1: Introduction

Need of the study

Objectives

Period of the study

Research Methodology

CHAPTER 2: Literature Review

CHAPTER 3: B.H.E.L Profile

Data Collected

CHAPTER 4: Empirical Study

CHAPTER 5: Interpretation & Suggestion

References

CHAPTER 1

INTRODUCTION:

The increase in world trade and the lowering of capital controls have led to tremendous growth

in the foreign exchange markets over the years. It is a market that trades 24 hours a day and

spans the globe .Participants in this market take position in currencies in order to generate profits

for their organizations .In this process, they expose the organizations to foreign exchange risk.

Each nation has its own official currency, which is normally issued by the central bank of that

country .The official currency is used for denominating trade transactions that happen within

each country’s domestic geographical area. In today’s global village however, firms operating in

different countries often conduct trade with each other when goods are traded across boundaries,

the selling and buying firms prefer to receive/pay consideration in a currency of their choice.

Thus, there has to be a market that enables participants to buy and sell currencies in such a way

that they can convert the inflow or outflow into currency of their choice. The market that

facilitates such exchange of currencies is the foreign exchange market. The world is emerging as

a global economy because of flow of goods, services and capital. The foreign exchange market is

that in which currencies are bought and sold against each other.

The foreign exchange market is largely known as over-the-counter (OTC) market. This

means that there is no single market place or organized exchange, electronic or physical place,

where all trades are executed between exchange members. In this traders communicate through

phones, fax, and other means.

The foreign exchange market includes IMPORT and EXPORT. Import refers to act of

bringing goods and services into one country from another, while Export means selling,

transporting an idea or goods to another country or area.

Foreign exchange risk usually affects businesses that export and/or import, but it can also affect

investors making international investments. For example, if money must be converted to another

currency to make a certain investment, then any changes in the currency exchange rate will cause

that investment's value to either decrease or increase when the investment is sold and converted

back into the original currency.

TECHNIQUES:-

1) SWAP: A swap transaction in the foreign exchange market is a combination

of a spot and a forward in opposite direction. The term swap implies a

temporary exchange of one currency for another with an obligation to reverse

it at a specific future date. Swap or double deals- one deal involving a buy and

other involving a sell, separated in time, but one has to cancel the other. It

involves: :

Spot -Forward Swap, in this one deal is done in the spot market and another

in the forward. If the buy is in spot and sell is in the forward then it is Swap-in

, otherwise it is swap-out.

Forward -Forward Swap, in this both the deals are in forward i.e both buy

and sell is done in forward

2) FUTURE AND OPTIONS: Briefly , a currency futures contract is a contract

for future delivery of a specified currency against another, In other words, it is

an agreement between two parties to exchange one currency for another, with

the exchange taking place at a specified date in future but with the exchange

rate being fixed at the time the agreement is entered into. However, there are a

number of significant differences between forward and futures. these relate to

contractual features, the way the markets are organized and the way in which

they use the two instruments.

Options are unique financial instruments that confer upon the holder the right to

buy or sell the underlying asset without the obligation to do so. More specifically, an

option is a financial contract in which the buyer of the option has the right to buy or

sell an asset, at a pre-specified date it chooses to do so.

However, there is no obligation to do so. In other words, the option buyer can simply

let his right lapse by not exercising his option. The seller of the option has an

obligation to take the other side of the transaction if the buyer exercises his option.

Obviously, the option buyer has to pay the option seller a fee for receiving such a

one-sided privilege.

3) HEDGING: Hedging in the foreign exchange market is the avoidance of risk.

The purpose of hedging is loss minimization, not profit maximization.

Hedging is achieved by avoiding open positions in foreign exchange, i.e the

imbalances in assets and liabilities denominated in foreign currencies.

A long position arises when foreign currency assets exceed foreign

currency liabilities. A short position arises when foreign currency liabilities

exceed foreign currency assets. Both positions involve exchange risk, because

these open positions expose the holder of assets and liabilities to potential

losses resulting from adverse in foreign exchange rates.

A spot depreciation in foreign currency against domestic currency reduces

the value of assets or liabilities denominated in foreign currency. Similarly, an

appreciation of foreign currency increases their value.

Losses due to depreciation and appreciation can be avoided by hedging

in the foreign exchange market through a forward sale / purchase of these

assets or liabilities.

NEED OF THE STUDY :

Globalization has led to corporations expanding their operations across countries. On the one

hand this has generated huge opportunities. On the other, corporations are exposed to major risks

of various types- Foreign exchange risks is one such risk which arises due to Foreign exchange

exposures that company creates. The types of Foreign exchange exposures need to be studied.

Mounting pressure on treasury managers in financial and non- financial corporations to churn out

profits is making them take risky positions in foreign exchange markets .Exporters and importers

constantly look for profitable opportunities. Add to this the volatility that forex markets witness,

and one can understand the need for foreign exchange risk management.

OBJECTIVES :

1. To study the need techniques of foreign exchange risk management.

2. To know the trend of foreign dealings in BHEL Jhansi Unit.

3. To study the mechanism of foreign exchange risk management in BHEL.

4. To analyze the effectiveness of risk management approach used by BHEL.

PERIOD OF STUDY: In order to identify the method for foreign exchange risk

management in BHEL, 5 years data (form 2005-06 to 2009-10) is taken.

TOOLS: In order to achieve above objective and make study more scientific analysis of time

series is used and there is use of secondary data for the purpose of study.

RESEARCH METHODOLOGY:

DATA COLLECTION

To accomplish the above objective of the study, the following research methodology is

used.

Primary data:-

Researcher has collected primary data from:-

Interview

Secondary data:-

Researcher has collected secondary data from:-

Books Journals Published & Unpublished Reports Mechanism

CHAPTER 2

LITERATURE REVIEW:

1. [1]Anuradha Sivakumar and Runa Sarkar, (19 november2000) Corporate Hedging for Foreign Exchange Risk in India: This paper attempts to evaluate the various alternatives available to the Indiancorporates for hedging financial risks. By studying the use of hedging instruments bymajor Indian firms from

different sectors, the paper concludes that forwards and options are preferred as short term hedging instruments while swaps are preferred aslong term hedging instruments. The high usage of forward contracts by Indian firmsas compared to firms in other markets underscores the need for rupee futures in India. In addition, the paper also looks at the necessity of managing foreign currency risks, and looks at ways by which it is accomplished. A review of available literature results in the development of a framework for the risk management process design, and a compilation of the determinants of hedging decisions of firms. [1]

2. [2]George S. Allayannis (feb 2001)Exchange risk management, The recent East Asian (EA) financial crisis provides a natural experiment for investigating foreign-exchange risk management by non-financial corporations..More specifically, firms using derivatives before the crisis perform just as poorly as nonhedgers during the crisis. Post-crisis, firms that hedged performed somewhat better than nonhedgers, but this result appears to be explained by a larger post-crisis currency exposure for hedgers (an exchange rate risk premium), due to limited access to derivatives during that period. [2]

3. [3]Michael and Peter n. Smith (2001), Macroeconomic Sources of Forex risk: SDF (Stochastic discount factor) theory is used to derive expressions for the risk premia for domestic and foreign investors. It is shown that these are likely to be different. A combined theory of market risk when both types of investor are trading is then obtained. Complete and incomplete markets are considered. It is shown how macroeconomic sources of risk can be introduced by modeling the SDF using observable macroeconomic variables. Three SDF models are compared: a benchmark model which provides a reformulation of traditional tests of FOREX efficiency; inter-temporal consumption-based CAPM; and the monetary model of the exchange rate, a familiar macroeconomic model of FOREX which can be interpreted as arising from traditional hedging concerns. The empirical work is based on monthly data for the sterling-dollar exchange rate. Our main new finding is that the evidence is more consistent with the FOREX risk premium arising from traditional partial equilibrium models of currency risk that form the basis of hedging than with consumption-CAPM. In particular, output appears to be important source of FOREX risk. [3]

1. Anuradha Sivakumar and Runa Sarkar,(19 november2000 )Corporate Hedging for Foreign Exchange Risk in India 2. George S. Allayannis (feb 2001)Exchange risk management,3. Michael and Peter n. Smith(2001),Macroeconomic Sources of Forex risk

4. []Christopher, Naceur and Richard (June 2003), A New Framework for Foreign Exchange Risk Management in the Canadian Department of National Defence : There has been little research on the applicability and utility of private sector financial risk management practices within public or non-profit institutions and in particular the Canadian Department of National Defence. They examine

the historical magnitude of the DND's USD foreign exchange exposure (averaging 7.1% per annum over the study period April 1990 to October 2002) and compare the current no hedge approach to a passive and active financial hedging strategy. The results of their study suggest that an active hedging strategy employing one-year plain vanilla forward contracts consistently outperforms the DND's current no hedge approach and reduces the impact of adverse currency fluctuations in the order of 2.2% per month. [4]

5. [5]Niclas Hagelin: (March 26, 2004  ), Journal of International Financial Management & Accounting, Vol. 15, pp. 1-20, March 2004 , Hedging Foreign Exchange Exposure Risk Reduction from Transaction and Translation Hedging : The risk reducing effect of foreign exchange exposure hedging ,he investigate risk reduction from using different hedging instruments, and particular interest is directed towards the impact of transaction exposure hedges and translation exposure hedges respectively. He find that firms' foreign exchange exposure is increasing with the level of inherent exposure, measured as the difference between revenues and costs denominated in foreign currency, and that it is decreasing with firm size. He also find a significant reduction in foreign exchange exposure from the use of financial hedge. [5]

6. [6]Bengt Pramborg and Swedbank (November 10, 2004), Pacific-Basin Finance Journal, Vol. 13, pp. 343-366, 2005 Foreign Exchange Risk Management By Swedish and Korean Firms :This study compares the hedging practices of Swedish and Korean non-financial firms. His findings suggest that the aim of hedging differed between firms in the two countries. Korean firms mostly focused on reducing fluctuations in cash flows, while Swedish firms more commonly emphasized reducing fluctuations of accounting numbers. The proportion of firms that used derivatives was significantly lower in the Korean than in the Swedish sample, a finding that may stem from the relative immaturity of the Korean derivatives markets. [6]

4. Christopher, Naceur and Richard (June 2003), A New Framework for Foreign Exchange Risk Management in the Canadian Department of National Defence

5. Niclas Hagelin: (March 26, 2004  ), Journal of International Financial Management & Accounting, Vol. 15, pp. 1-20, March 2004 , Hedging Foreign Exchange Exposure Risk Reduction from Transaction and Translation Hedging

6. Bengt Pramborg and Swedbank (November 10, 2004), Pacific-Basin Finance Journal, Vol. 13, pp. 343-366, 2005 Foreign Exchange Risk Management By Swedish and Korean Firms

7. [7]Rene M. Stulz (October 2008), Risk Management Failures: What are They and When do They Happen?: A large loss is not evidence of a Risk Management failure because a large loss can happen even if Risk Management is flawless. I provide a typology of Risk Management failures and show how various types of Risk Management failures occur. Because of the limitations of past data in assessing the probability and the implications of a financial crisis, I

conclude that financial institutions should use scenarios for credible financial crisis threats even if they perceive the probability of such events to be extremely small. [7]

8. [8]Vivekananda B. Y., Narendra Babu , (December 2008),An Empirical Study of Forex Risk Management Strategies : There are a variety of strategies which are designed to manage foreign exchange risk. The current study addresses this issue empirically, using a set of simulated foreign exchange cash flows to compare the profits resulting from the use of different foreign exchange Risk Management strategies. The Risk Management strategies considered for the study are: forward currency contacts, currency options, and cross-currency hedges. The study analyzes and evaluates these foreign exchange Risk Management strategies to find out which of the strategies is appropriate in particular situation. [8]

9. [9]Mihir Dash (September 14, 2009), Forex Risk Management Strategies for Indian IT Companies: Foreign exchange risk is the effect that unanticipated exchange rate changes have on the value of the firm.. This study deals with the impact of currency fluctuations on cash flows of IT service providers (who would be receiving foreign currencies), and explores various strategies for managing transaction exposure from this viewpoint. The Risk Management strategies considered for the study are: forward currency contacts, currency options, and cross - currency hedging. The study analyzes and evaluates these foreign exchange Risk Management strategies to find out which of the strategies is appropriate in particular situations.[9]

7. Christopher, Naceur and Richard (June 2003), A New Framework for Foreign Exchange Risk Management in the Canadian Department of National Defence

8. Niclas Hagelin: (March 26, 2004  ), Journal of International Financial Management & Accounting, Vol. 15, pp. 1-20, March 2004 , Hedging Foreign Exchange Exposure Risk Reduction from Transaction and Translation Hedging

9. Bengt Pramborg and Swedbank (November 10, 2004), Pacific-Basin Finance Journal, Vol. 13, pp. 343-366, 2005 Foreign Exchange Risk Management By Swedish and Korean Firms

10.[10]Anand kumar (2009), Exchange Rate Dynamics and Forex Hedging Strategies: The present study has extended the analysis of Dash by comparing the performance of different hedging strategies, approaching the problem from the point of view of exchange rate dynamics, using a model for exchange rate

movements. Based on the results of the simulation of this model, the hedging strategies which yielded highest returns and lowest variability of returns could be identified. [10]

10. Christopher, Naceur and Richard (June 2003), A New Framework for Foreign Exchange Risk Management in the Canadian Department of National Defence

CHAPTER 3

BHEL: AN OVERVIEW

Bharat Heavy Electricals Limited (BHEL) (BSE: 500103, NSE: BHEL) is one of the oldest and largest state-owned engineering and manufacturing enterprise in India in the energy-related and infrastructure sector which includes Power, Railways, Transmission and Distribution, Oil and Gas sectors and many more. It is the 12th largest power equipment manufacturer in the world.BHEL was established more than 50 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. 74% of the total power generated in India is produced by equipment manufactured by BHEL.It is one of India's nine largest Public Sector Undertakings or PSUs, known as the Navratnas or 'the nine jewels'.

BHEL was founded in 1950s. Bharat Heavy Electricals Limited-BHEL, has today emerged as the largest engineering and manufacturing enterprise of its kind in India and ranks amongst the top ten power generation equipment manufacturers in the world.With a massive network of 14 manufacturing Units located at various important centres all over India , BHEL manufactures almost all critical high technology products required for power sector like Gas Turbines, Steam Turbines, Turbogenerators, Boilers, Pumps and Heat exchangers, Pulverisers and electrical switch gears.

BHEL is one of the largest exporters of engineering products & services from India. BHEL has established its references in around 60 countries of the world, ranging from the United States in the West to New Zealand in the Far East. Its export range include: individual products to complete power stations, turnkey contracts for power plants, EPC contracts, HV/EHV Sub-stations, O&M services for familiar technologies, specialized after-market services like Residual Life Assessment (RLA) studies and retrofitting, refurbishing & overhauling, and supplies to manufacturers & EPC contractors.

BHEL has acquired certifications to Quality Management Systems (ISO 9001), Environmental Management Systems (ISO 14001) and Occupational Health & Safety Management Systems (OHSAS 18001) and is also well on its journey towards Total Quality Management.The company recorded revenues of INR2,160,800 million (approximately $53,674.3 million) in the fiscal year ended March 2007, an increase of 15.3% over 2006. Its net profit was INR281,500 million (approximately $6,992.5 million) in fiscal year 2007, an increase of 16.6% over 2006.

VISION

A World-class Engineering Enterprise Committed to enhancing Stakeholder Value.

MISSION

To be an Indian Multinational Engineering Enterprise providing Total Business Solutions

through Quality Products, Systems and Services in the fields of Energy, Industry, Transportation,

Infrastructure and other potential areas.

The greatest strength of BHEL is its highly skilled and committed 43,636 employees. Every

employee is given an equal opportunity to develop himself and grow in his career. Continuous

training and retraining, career planning, a positive work culture and participative style of

management all these have engendered development of a committed and motivated workforce

setting new benchmarks in terms of productivity, quality and responsiveness.

Headquarters Delhi Area, India

Industry Electrical/Electronic

Type Public

Company Manufacturing Company

Size 43636employees

Turnover: 18739Rupees(In Million)2006-07,21401Rupees(In Million)2007-08

Main Manufacturing Facilities

Bhopal (Madhya Pradesh)

Bharat Heavy Electrical Limited, Ranipur, Haridwar (Uttarakhand)

Bharat Heavy Electricals Limited, Ramachandrapuram, Hyderabad (Andhra Pradesh)

Jhansi (Uttar Pradesh)

High Pressure Boiler Plant and Seamless Steel Tube Plant, Tiruchirapalli(Tamil Nadu)

Boiler Auxiliaries Plant, Ranipet (Tamil Nadu)

Electronics Division and Electro Porcelain Division, Bangalore (Karnataka)

Jagdishpur (Uttar Pradesh)

Rudrapur (Uttrakhand)

Industrial Valves Plant, Goindwal (Punjab)

Bharat Heavy Plates and Vessels Limited (Vizag)

Besides these manufacturing units there are four power sectors which undertake EPC contract

from various customers. The Research and Development arm of BHEL is situated in Hyderabad

and two repair shops are at HERP (Heavy Equipment Repair Plant), Varanasi [ and

EMRP(Electric machines repair plant) Mumbai.

B.H.E.L, Jhansi UNIT

B.H.E.L is a public sector Engineering industry having 21 units all over India .The unit at Jhansi was

established on 9 January, 1974. It is also called second generation plant of B.H.E.L. The product profile

of B.H.E.L JHANSI UNIT is

I. Power Transformer,

II. Special Transformer,

III. ESP Transformer,

IV. Freight Loco Transformer,

V. ACEMU Transformer,

VI. Dry type Transformer,

VII. Instrument Transformer,

VIII. AC/DC Locomotives,

IX. Diesel Locomotives,

X. Over Head equipment.

B.H.E.L is also engaged in import and export of product produced

CHAPTER 4

EMPIRICAL STUDY:

FINDINGS:

Globalization has led to corporations expanding their operations across countries. On the one hand this has generated huge opportunities. On the other, corporations are exposed to major risks of various types- Foreign exchange risks is one such risk which arises due to Foreign exchange exposures that company creates. The types of Foreign exchange exposures need to be studied.

Mounting pressure on treasury managers in financial and non- financial corporations to churn out profits is making them take risky positions in foreign exchange markets .Exporters and importers constantly look for profitable opportunities. Add to this the volatility that forex markets witness, and one can understand the need for foreign exchange risk management

TREND OF EXPORTS AT B.H.E.L

2005-06 2006-07 2007-08 2008-09 2009-100

10000

20000

30000

40000

50000

60000

70000

80000

SALES TURNOVER(EXPORTS)

DEEMED EXPORTPHYSICAL EXPORTTOTAL

YEARS

Rs. i

n La

khs

2005-06 2006-07 2007-08 2008-09 2009-10

PHYSICALEX-PORT

4793 8522.52 17685.4399999999

11215.46 24607.8099999999

DEEMED EX-PORT

36358 41571.66 44385.36 54153.36 48156.4

TOTAL 41151 50094.18 62070.8 65370.82 72764.21

500015000250003500045000550006500075000

SALES TURNOVERRs

. in

Lakh

s

The mechanism opted for Foreign exchange risk management is” RISK AVOIDANCE” i.e. dealing are done at a single rate, prevailing at the time of transaction and accordingly payment is made .This being a traditional concept, still prevails as it is an Govt. Enterprise .

A case study-If the ltd., has to make payment of 3 million USD after six months against export of machinery. What are the different alternatives to hedge against this foreign exchange currency exposure?.

The following four alternatives are available to ltd.:

Forward : Under this alternative, X may enter into a forward contract of selling 3 million USD , maturity six months, with the bank. Suppose, today, six months forward rate is : 1 $ = Rs. 44.90 / 45.00. X may enter into a contact with bank today; under the contract the bank will sell 3 million USD to X @ Rs.45 after 6 months from today, whatever may be USD – Rupee rate on that day ( after 6 months from today ). This method is quite popular in India.

Option : Under this option, X may sell, call option for 3 million USD. It has to pay option price / premium today. Suppose X sell call option for 3 million USD , maturity 6 months, with strike price of Rs.45 by paying premium of Rs. 15,00,000. If on maturity, the foreign exchange rate is Rs.45 or more, it may buy 3 million USD from the option writer ( to

whom X paid Rs.15,00,000 as premium ), if the rate is below Rs.45, X may just ignore the option and buy the required dollars in the spot market. This method is not popular in India.

Currency Swap: X will get 3 million dollars after 6 months from today. Through some intermediary, X may be able to find some party, which has to get equivalent amount in rupees after 6 months from today. (The equivalent amount is calculated at current foreign exchange rate). Suppose today the rate is Rs. 45 / $ .X may enter into a contract with that party under which that party will pay $ 3.00 million to X after six months from today and X will party equivalent amount of rupees ( 3 million x 45 ) to that party at that time. This method is not popular in India.

Money Market operations. Suppose USD can be lent at the interest rate of 6 % p.a. X Ltd may purchase $ (30, 00,000 / 1.03) i.e. $29, 12,621 in the spot market, invest this dollar amount @ 6% p.a. for six months. After 6 months, X will get 3 million from this investment and this amount may be used for paying for the imported machinery. The amount required to purchase $29, 12,621 in the spot market may be borrowed in home currency. This method is not popular in India

Company X knows that in six months it will have to buy 20,000 ounces of silver to fulfill an order. Assume the spot price for silver is $12/ounce and the six-month futures price is $11/ounce. By buying the futures contract, Company X can lock in a price of $11/ounce. This reduces the company's risk because it will be able close its futures position and buy 20,000 ounces of silver for $11/ounce in six months. If a company knows that it will be selling a certain item, it should take a short position in a futures contract to hedge its position. For example, Company X must fulfill a contract in  six months that requires it to sell 20,000 ounces of silver. Assume the spot price for silver is $12/ounce and the futures price is $11/ounce. Company X would short futures contracts on silver and close out the futures position in six months. In this case, the company has reduced its risk by ensuring that it will receive $11 for each ounce of silver it sells. Futures contracts can be very useful in limiting the risk exposure that an investor has in a trade. The main advantage of participating in a futures contract is that it removes the uncertainty about the future price of an item. By locking in a price for which you are able to buy or sell a particular item, companies are able to eliminate the ambiguity having to do with expected expenses and profits

ANALYSIS:

YEARS EXPORTS dx XY X2

2005 41151 -2 -82302 42006 50094.18 -1 -50094.18 12007 62070.80 0 - 02008 65370.82 1 65370.82 12009 72764.21 2 145528.42 4

ΣXY =78503.06; ΣX2=10; ΣY=291451.01

Use of regression:

a= Σy/x=58290.202

b=Σxy/Σx2 =7850.306

As per it,

Y=a+bx

(x=3)

Y=58290.202 + (3*7850.306) =81841.12

The above shows that there is an increase in the exports for the year 2010-2011, therefore it can be stated that there is a wide scope in the area of exports.

CHAPTER 5

INTERPRETATION:There is a need for studying foreign exchange risk management, for optimizing the risk and

enhancing the profits. The mechanism opted for Foreign exchange risk management is” RISK

AVOIDANCE” i.e. dealing are done at a single rate, prevailing at the time of transaction and

accordingly payment is made .This being a traditional concept, still prevails as it is an Govt.

Enterprise.

After use of statistical tools, it’s being observed that there is a great scope of increase in exports,

i.e. the trend is in increasing pattern.

Forward exchange contracts are used to hedge against the adverse movement in

exchange rate. For example, let us consider an exporter in India exporting shirts to

USA. Cost per shirt Rs. 44. Selling price: US $ 1 ( to be paid after one month).

Exchange rate (spot). 1 US $ = Rs. 46. He expects a profit of Rs.2/- shirt.

However, when the receives the payment after one month, the exchange rate may

be Rs.43/-. He will suffer a loss of rupee one per shirt. Therefore, he would like to

fix the exchange rate now only. He can enter into a forward exchange contract

under which he will sell dollars to bank after one month at rate determined now,

say Rs. 45.50 That means, he is assured of profit of Rs. 1.50 per shirt irrespective

of what happens to the exchange rate till he receives the payment.

SUGGESTIONS:

After studying the risk scenario, it is suggestible to opt any of the techniques of

risk management in order to increase sales by accepting sales order at any time and

it will also help the Ltd. to manage the risk environment and avail the profit

opportunities. It can also avail following as Liquid and central market,

Leverage, Position can be easily closed out, Convergence.

REFERENCES:

BOOKS

1. foreign exchange markets,

By dun & brad street

2. foreign exchange,

By Tata McGraw

SEARCH ENGINES AND SITES

3. Wikipedia

4. pdfarticles.com,

5. Google scholar,

6. ssrn.com.