Foreign Exchange

Topics: Foreign exchange market, Risk management, Value at risk Pages: 7 (2618 words) Published: February 2, 2013
Foreign Exchange risk management has always been an area look up by people from varied fields, weather literary or profession related matter. For the purpose of this paper I gone through few literary works to understand the whole concept and formulate my paper, a distinct one. Collier and Davis (1985) in their study about the organization and practice of currency risk management by U.K. multi-national companies. The findings revealed that there is a degree of centralized control of group currency risk management and that formal exposure management policies existed. There was active management of currency transactions risk. The preference was for risk-averse policies, in that automatic policies of closeout were applied. Batten, Metlor and Wan (1992) focused on foreign exchange risk management practice and product usage of large Australia-based firms. The results indicated that, of the 72 firms covered by the Study, 70% of the firms traded their foreign exchange exposures, acting as foreign exchange risk bearers, in an attempt to optimize company returns. Transaction exposure emerged as the most relevant exposure. Jesswein et al, (1993) in their study on use of derivatives by U.S. corporations, categorizes foreign exchange risk management products under three generations: Forward contracts belonging to the First Generation; Futures, Options, Futures- Options, Warranties and Swaps belonging to the Second Generation; and Range, Compound Options, Synthetic Products and Foreign Exchange Agreements belong to the Third Generation. The findings of the Study showed that the use of the third generation products was generally less than that of the second-generation products, which was, in turn, less than the use of the first generation products. The use of these risk management products was generally not significantly related to the size of the company, but was significantly related to the company's degree of international involvement. Phillips (1995) in his study focused on derivative securities and derivative contracts found that organisations of all sizes faced financial risk exposures, indicating a valuable opportunity for using risk management tools. The treasury professionals exhibited selectivity in their use of derivatives for risk management. Howton and Perfect (1998) in their study examines the pattern of use of derivatives by a large number of U.S. firms and indicated that 60% of firms used some type of derivatives contract and only 36% of the randomly selected firms used derivatives. In both samples, over 90% of the interest rate contracts were swaps, while futures and forward contracts comprised over 80% of currency contracts. Hentschel and Kothari (2000) identify firms that use derivatives. They compare the risk exposure of derivative users to that of nonusers. They find economically small differences in equity return volatility between derivative users and nonusers. They also find that currency hedging has little effect on the currency exposure of firms' equity, even though derivatives use ranges from 0.6% to 64.2% of the firm's assets. Our findings are very important since no previous work has examined the FERM practice in Indian context. This study will be a pioneering attempt in Indian scenario and first of its kind to survey the Indian companies and their risk management practices. The current research is heavily dependent on two recently conducted researches. One by Debasish (2008) and the other by Sivakumarand Sarkar (2008). Both researchers concentrate on the foreign exchange risk management in India. Debasish in his 2008 paper “Foreign Exchange Risk Management Practices – A Study in Indian Scenario” conducts an industry wide cross-sectional research on the recent techniques used by non-banking Indian based firms for foreign exchange risk management. The sampling of the study involved 501 non-banking Indian companies. The study identifies that the prime reason for hedging is the volatility reduction in cash flows....
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