Foreign Exchange Risk

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INTRODUCTION=Your business is open to risks from movements in competitors' prices, raw material prices, competitors' cost of capital, foreign exchange rates and interest rates, all of which need to be (ideally) managed. This section addresses the task of managing exposure to Foreign Exchange movements. These Risk Management Guidelines are primarily an enunciation of some good and prudent practices in exposure management. They have to be understood, and slowly internalised and customised so that they yield positive benefits to the company over time. It is imperative and advisable for the Apex Management to both be aware of these practices and approve them as a policy. Once that is done, it becomes easier for the Exposure Managers to get along efficiently with their task. |Exposure Analysis  |[pic] | | |The Colour of Money -Series on Forex Hedging | |An Exposure can be defined as a Contracted, Projected or Contingent Cash|Current Issue   ::    Archives | |Flow whose magnitude is not certain at the moment. The magnitude depends|Use a Forecast for Budgeting | |on the value of variables such as Foreign Exchange rates and Interest |28th May, 2012 | |rates. | | |The company will determine and analyse its Foreign Exchange exposures. | |Determination: | |The following cash flows/ transactions will be considered for the purpose of exposure management. |

|Variable / Cash Flows |Transaction Type | |Contracted Foreign Currency Cash Flows |Both Capital and Revenue in nature | |Foreign Interest Rates, whether Floating or Fixed |All Interest Payments/ Receipts | |Cash Flows from Hedge Transactions |All Open hedge transactions | |Projected/ Contingent Cash Flows |Both Capital and Revenue in nature |

• Cash Flows above $100,000/- in value will be brought to the notice of the Exposure Manager, as soon as they are projected. • It is the responsibility of the Exposure Manager to ensure that he receives the requisite information on exposures from various sections of the company in time. Analysis

These exposures will be analysed and the following aspects will be studied: • Foreign Currency Cash Flows/ Schedules
• Variability of Cashflows - how certain are the amounts and/ or value dates? • Inflow-Outflow Mismatches / Gaps
• Time Mismatches / Gaps
• Currency Portfolio Mix
• Floating / Fixed Interest Rate ratio
|Market Forecasts |[pic] | | |The Colour of Money -Series on Forex Hedging | |After determining its Exposures, the company has to form an |Current Issue   ::    Archives | |idea of where the market is headed. |Use a Forecast for Budgeting | | |28th May, 2012 | | |...
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