Research on Foreign Exchange Risk Management

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Research Paper
On Foreign Exchange Risk Management
Submitted In Partial Fulfillment
Of the Requirement
Of Masters of Business Administration
Table of Contents
EXECUTIVE SUMMARY1
CHAPTER 1: PLAN OF THE RESEARCH4
1.1. INTRODUCTION5
1.1.1. Features of Forex Market6
1.1.2. Functions of Forex Market7
1.1.3. Structure of Forex Market8
1.1.4. Needs for Foreign Exchange9
1.1.5. What Does Forex Provide?9
1.1.6. Methods of Quoting Exchange Rates9
1.1.7. Types of Transactions11
1.1.8. Factors Affecting Exchange Rates12
1.1.9. Factors Affecting Indian Rupee13
1.1.10. FORIEGN EXCHANGE RISK17
Classification of Foreign Exchange Risk17
1.1.11. Trends in currencies fluctuation21
1.1.12. Foreign Exchange exposure23
Types of Foreign exchange exposure23
Managing the Transaction Exposure25
Differences between Forward Contracts & Future Contracts28
1.2. OBJECTIVES33
1.3. SCOPE34
1.4. LITERATURE REVIEW35
CHAPTER 2: COMPANY PROFILE38
2.COMPANY’S INTRODUCTION39
2.1. Company History39
2.2. Company Profile39
2.3. Company Layout42
2.4. Company’s Role and Vision43
2.5. Sales Performance44
2.6. Profitability45
2.7. Market Share46
2.8. SWOT Analysis47
CHAPTER 3: RESEARCH METHDOLOGY48
3. RESEARCH METHODOLOGY49
CHAPTER 4: ANALYSIS AT HSCI50
4. FOREIGN EXCHANGE RISK MANAGEMENT AT HSCI51
4.1.Foreign currency exposure faced by HSCI51
4.2.Foreign currency transactions at HSCI52
4.3.HSCI’s exposure elasticity52
4.4.Analysis of HSCI’s delta53
4.5.Determining the foreign exchange exposure55
4.5.1.Imports payment system at HSCI55
4.5.2.Estimating the forex exposure56
4.5.3.Tracking Chart of Honda city, Japan57
4.5.4.Statement of Exposure58
4.5.5.Booking of forward contract59
4.5.6.Currency Options as an alternative for Forward Contracts63
4.6.Situational Analysis63
4.6.1.Situation A63
4.6.2.Situation B65
4.6.3 Situation A V/s Situation B68
CONCLUSION69
SUGGESSTIONS71
BIBLIOGRAPHY72

EXECUTIVE SUMMARY

Foreign Exchange, in common parlance, is the exchange of one currency for another. This exchange is done at a particular rate called the exchange rate or the FX Rate. The FX Rate is the price of one currency in terms of another. As is true with rates, FX rate too is for a pre-determined settlement date i.e. the date on which the actual exchange of the currencies involved would take place.

Foreign exchange risk is the risk that profits will change if FX rates change. FX risks present complicated transfer pricing issues. What FX risks does the Honda Siel Cars India Ltd bear? If not, what adjustments are appropriate? Foreign exchange risk is related to the variability of the domestic currency values of assets, liabilities or operating income due to unanticipated changes in exchange rates, whereas foreign exchange exposure is what is at risk. This project focuses on an FX risk management and how to structure the provisions to adjust results when exchange rate changes occur.

The Liberalized Exchange Rate Management System (LERMS) was introduced in March 1992, and as a result the foreign exchange market in India effectively became a two-tire one, with a dual exchange rate system in force. One rate was the administered one at which specified type or proportion determined by demand and supply in the market and applied to the remaining transactions. In March 1993, this system was abolished and now a single market determined rate is applicable for all transactions.

The volatility of exchange rates can’t be traced to the single reason and consequently, it...
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