In Looking into the Foreign Exchange Risk Management

Abstract

Businesses that trade internationally or have undertaken ventures overseas are likely to be exposed to foreign exchange risk on account of unpredictability in the currency markets. The usual source of exposure to foreign exchange risk arises from having to make overseas payments for your imports priced in a foreign currency or receiving foreign currency receipts for your exports. If the sum that a company expects to receive falls because of a change in the exchange rate, then it will find that its profits are squeezed even if costs remain unchanged. This paper basically deals with the measurement and management of the financial impact of international operations, particularly with reference to exchange rate risks. Exchange rate risks are classified under the broad headings : economic, transaction, and translation risks. Section 3 takes up the issue of measurement of economic, transaction and translation exposure. Control of the impact is assumed to operate through the application of hedging techniques, the most important of which are described in some detail in Section 4. A recent chronicle of foreign exchange risk management in the Indian context has been discussed in Section 5. This paper ends with a conclusion.

Danger can never be overcome without taking risks.—Latin Proverb