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Foreign Exchange Risk Management
By Nidhi Jain

First Published : 2007
ISBN : 8177081470
: 9788177081473
Pages : 248
Binding : Hardbound
Size : 5 x 9
Price : US$ 38

In the early 1990s, the forex market in India was in the initial stages of development and suffered from several shortcomings. The spot as well as forward markets lacked depth and liquidity. The market was skewed with a handful of public sector banks accounting for bulk of merchant business and foreign banks handling most of inter-bank business. The forward rates reflected demand and supply, rather than interest rate differentials, owing to lack of integration between the money and forex markets and also due to restrictions on borrowings/lendings in the international market.

Post-reforms period (1991 onward) has been marked by wide-ranging measures to widen and deepen the foreign exchange market. The impetus for forex market reforms was provided by recommendations of the (a) Committee on Balance of Payments (Chairman: C. Rangarajan), 1993; (b) Expert Group on Foreign Exchange Markets in India (Chairman: O.P. Sodhani), 1995 and (c) Committee on Capital Account Convertibility (Chairman: S.S. Tarapore), 1997.

In line with the liberalisation measures undertaken in other areas, various reform measures have been introduced in the foreign exchange market to make it liquid, vibrant, open and market-determined.

From a managed floating system under which the exchange rate was officially determined, the regime has passed through several phases to reach the present market-based system under which the exchange rate is determined by forces of demand and supply.

   With the introduction of market-determined exchange rate, companies have been exposed to risks of fluctuating rates which divert their attention from day-to-day corporate affairs. Management of risk associated with exchange rate is a new challenge for company managers. What is this risk? What are the perceptions of corporate managers about it? How to cope with it? These are the issues and solutions discussed in this book.

1. Risk, Uncertainty and Exposure
1.1 Risk, Uncertainty and Exposure: Meaning
1.1.1 What is Risk?
1.1.2 What is Uncertainty?
1.1.3 Attitudes Towards Risk
1.1.4 Exposure
1.2 Business Risk or Corporate Risk: Types
1.2.1 Commercial Risk
1.2.2 Financial Risk
1.2.3 Country Risk
1.2.4 Price Risk
1.2.5 Credit Risk
1.2.6 Interest Rate Risk
1.2.7 Currency Risk (Foreign Exchange Risk)
1.3 Foreign Exchange Exposure and Foreign Exchange Risk
1.4 Foreign Exchange Exposure: Defined
1.5 Basic Types of Foreign Exchange Exposure
1.5.1 Translation Exposure
1.5.2 Economic Exposure
1.5.3 Transaction Exposure
1.6 Measuring Exposure to Foreign Exchange Risk
1.6.1 The Exchange Traders Measure
1.6.2 The Accountants Measure
1.7 Accounting Aspects of Exposure Management
1.7.1 Treatment of Foreign Currency Transactions
1.7.2 Translation of Financial Statements of Foreign Branches
1.7.3 Disclosures
1.8 Components of Foreign Exchange Risk Exposure
1.8.1 Currency
1.8.2 Volatility
1.8.3 Magnitude
1.8.4 Duration (Time Horizon)
1.8.5 Trend of Cash Flow
2. Foreign Exchange Risk Exposure Management
2.1 Does Foreign Exchange (FX) Risk Matter?
2.2 Risk Exposure Management
2.2.1 Risk Avoidance
2.2.2 Risk Transfer and Distribution
2.2.3 Risk/Uncertainty Reduction
2.2.4 Loss Prevention
2.2.5 Loss Reduction
2.2.6 Risk Neutralisation
2.3 Objectives of Exposure Management
2.4 Arguments for and Against FX Exposure Management
2.5 Administration of Exposure Management
2.6 Organisational Structure for Exposure Management
2.7 Profit Centre vs. Cost Centre Treasury
3. Hedging: Techniques and Alternatives
3.1 Hedging: Meaning and Alternatives
3.1.1 Hedging Everything
3.1.2 Hedging Nothing
3.1.3 Hedging Selectivity
3.2 Hedging Versus Speculation
3.3 Corporate Internal Hedging Techniques
3.3.1 Internal Techniques Affecting Existing Positions
3.3.2 Internal Techniques Affecting Future Positions
3.3.3 Money Market Hedge
3.3.4 Risk Shifting Hedge
3.4 Corporate External Hedging Techniques
3.4.1 Derivatives Defined
3.4.2 Academic Views
3.4.3 Basic Types of Derivative Markets
3.4.4 Basic Derivative Instruments
3.5 Strategic Responses to Foreign Exchange Risk Exposure
3.5.1 Market Selection: Markets in which to Sell
3.5.2 Pricing Strategy
3.5.3 Product Strategy
3.5.4 Production Sourcing
3.5.5 Plant Location
3.5.6 Input Mix
3.5.7 Raising Productivity
4. Exposure Management: Role of Information System
4.1 Management Information Systems
4.2 Decision Support Systems
4.3 Executive Support Systems
4.4 Strategic Information Systems
4.5 Management Information System for FX Exposure
4.6 Information System for Exposure Management: Survey Findings
5. Foreign Exchange Risk Exposure Management: Select Studies
6. Foreign Exchange Risk Management: Techniques and Applications
7. Developing Information System for Exposure Management
7.1 Introduction
7.2 The Company and its Structure
7.3 Exchange Risk Policy Objectives
7.4 Management Information System for Exposure Management of ABC Company
7.5 Operational Guidelines Followed by ABC Company for FX Risk Management
8. Summary and Conclusions
8.1 Foreign Exchange Risk Exposure Management: Findings
8.2 MIS for Foreign Exchange Risk Exposure Management
8.3 Developing MIS for Foreign Exchange Exposure Management
8.4 Conclusion




Dr. Nidhi Jain did her B. Com. (Hons.) from Shri Ram College of Commerce (SRCC), University of Delhi. A Gold Medalist, she secured her M.Com., M.Phil. and Ph.D. degrees also from the University of Delhi. She has successfully completed 2 research projects sponsored by the University Grants Commission (UGC). With 20 years of teaching and research experience to her credit, she specialises in business and corporate law and management accounting.

Presently, she is a Reader in the Department of Financial Studies, South Campus, University of Delhi.


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