PDF Ebook Corporate Hedging for Foreign Exchange Risk in India
In 1971, the Bretton Woods system of administering fixed foreign exchange rates was abolished in favour of market-determination of foreign exchange rates; a regime of fluctuating exchange rates was introduced. Besides market-determined fluctuations, there was a lot of volatility in other markets around the world owing to increased inflation and the oil shock. Corporates struggled to cope with the uncertainty in profits, cash flows and future costs. It was then that financial derivatives – foreign currency, interest rate, and commodity derivatives emerged as means of managing risks facing corporations.
In India, exchange rates were deregulated and were allowed to be determined by markets in 1993. The economic liberalization of the early nineties facilitated the introduction of derivatives based on interest rates and foreign exchange. However derivative use is still a highly regulated area due to the partial convertibility of the rupee. Currently forwards, swaps and options are available in India and the use of foreign currency derivatives is permitted for hedging purposes only.
This study aims to provide a perspective on managing the risk that firm’s face due to fluctuating exchange rates. It investigates the prudence in investing resources towards the purpose of hedging and then introduces the tools for risk management. These are then applied in the Indian context. The motivation of this study came from the recent rise in volatility in the money markets of the world and particularly in the US Dollar, due to which Indian exports are fast gaining a cost disadvantage. Hedging with derivative instruments is a feasible solution to this situation.
This report is organised in 6 sections. The next section presents the necessity of foreign exchange risk management and outlines the process of managing this risk. Section 3 discusses the various determinants of hedging decisions by firms, followed by an overview of corporate hedging in India in Section 4. Evidence from major Indian firms from different sectors is summarized here and Section 5 concludes.
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PDF Ebook Corporate Hedging for Foreign Exchange Risk in India
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