Foreign Exchange Risk Management

Contents: Preface. 1. Risk, uncertainty and exposure. 2. Foreign exchange risk exposure management. 3. Hedging: techniques and alternatives. 4. Exposure management : role of information system. 5. Foreign exchange risk exposure management: select studies. 6. Foreign exchange risk exposure management: Techniques and applications. 7. Developing information system for exposure management. 8. Summary and conclusions. Appendix: India's foreign exchange market: basic facts. References. Index.

"In the early 1990s, the Forex market in India was in the initial stages of development and suffered from several shortcomings. The spot as well as forward markets lacked depth and liquidity. The market was skewed with a handful of public sector banks accounting for bulk of merchant business and foreign banks handling most of inter-bank business. The forward rates reflected demand and supply, rather than interest rate differentials, owing to lack of integration between the money and Forex markets and also due to restrictions on borrowings/lendings in the international markets.

Post-reforms period (1991 onward) has been marked by wide-ranging measures to widen and deepen the foreign exchange market. The impetus for Forex market reforms was provided by recommendations of the (a) Committee on Balance of Payments (Chairman: C. Rangarajan), 1993; (b) Expert Group on Foreign Exchange Markets in India (Chairman (O.P. Sodhani), 1995 and (c) Committee on Capital Account Convertibility (Chairman: S.S. Tarapore), 1997.

In line with the liberalisation measures undertaken in other areas, various reform measures have been introduced in the foreign exchange market to make it liquid, vibrant, open and market-determined.

From a managed floating system under which the exchange rate was officially determined, the regime has passed through several phases to reach the present market-based system under which the exchange rate is determined by forces of demand and supply.

With the introduction of market-determined exchange rate, companies have been exposed to risks of fluctuating rates which divert their attention from day-to-day corporate affairs. Management of risk associated with exchange rate is a new challenge for company managers. What is this risk? What are the perceptions of corporate managers about it? How to cope with it? These are the issues and solutions discussed in this book." (jacket)