FOREIGN EXCHANGE

Foreign Exchange is the exchange of one currency to another, or the conversion

of one currency into another currency. Foreign exchange also refers to the global market
where currencies are traded virtually around the clock. The largest trading centres are
London, New York, Singapore and Tokyo. The term foreign exchange is usually
abbreviated as “Forex” and occasionally as “FX”. Trade exchange is the simultaneous
buying of one currency and selling of another. Currencies are traded in pairs, for
example, Euro/US dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY).

Foreign Exchange transaction encompass everything from the conversion of

currencies by a traveller at an airport kiosk to billion dollar payments made by
corporations, financial institutions and governments. Transactions range from imports
and exports to speculative positions with underlying goods or services. Increasing
globalization has led to a massive increase in the number of foreign exchange
transactions in recent decades. Market share of 23 countries increased to 14 per cent in
April 2011 from 12.3 in the same month 3 years ago, the largest increases in emerging
market currencies were in Turkish Lira, Brazilian Real and Singapore Dollar.
The global foreign exchange market is the largest financial market in the world
with average daily volumes in the trillions. In a free economy a country’s currency is
valued accordingly to factors of supply and demand. In other words, a currency’s value
can be pegged to another, country’s currency such as the United States dollar or even
to a basket of currencies.
A county’s currency value also may be fixed by the country’s government. However,
most countries float their currencies freely against those of other countries, which keeps
them in a constant fluctuation.
The value of any particular currency is determined by market forces based on
trade, investment, tourism and geo-political risk. Every time a tourist visits a country,
for example, he or she must pay for goods and services using the currency of the host
country, currency exchange of this kind is one of the demand factors for a particular
currency. Another important factors of demand occurs when a foreign company seeks
to do business with a company in a specific country.

1
 Functions of Trade and Foreign Exchange Market
The trade and exchange market- is a market in which trade and exchange
transactions take place. In other words, it is market in which national currencies are
bought and sold against one another.
1. Transfer of Purchasing power
2. Provision of credit
3. Provision of hedging facilities

Features of foreign Exchange Market

 It’s a huge trading volume i.e. it represents the largest asset class in the world
leading to high liquidity.
 It has geographical dispersion
 It has continuous operation, i.e. 24 hours a day except weekends trading from
22:00 GMT Friday (New York)
 It has low margins of relative profit compared with other markets of fixed
income.

Objective of the Study

 To understand the trade and exchange rate
 Studying and analysing the revenues of companies when the exchange rate
fluctuate
 Studying and understanding the different types of trade and exchange rate
 Will it help the market fluctuations like flexible and fixed exchange rate

2
 REVIEW OF LITERATURE

In recent years, there is little published research on the competitiveness of

international banks in the trade and exchange market. Holmes et al. (1991) firstly
published the paper in which they categorized the banks’ competitiveness in the trade
and exchange market into two segments: Banks’ endowment factors and acquired
factors. Their study addressed important claims regarding whether competitiveness of
international banks in the trade and exchange market is due to endowment factors or
acquired factors. They suggest that endowment factors consist of characteristics of its
home economy, which include legal and regulatory framework, workforce’s training
and education and firm’s traditional client base and line of business. The acquired
characteristics include the branch network, the firm’s capitalization and perceived
creditworthiness, the degree and history of internationalization, the scale, and the scope
of trade and exchange operations, penetration into finance and current service offerings
of capital market instruments and attitudes towards innovation and product
development.

Following Holme et al, Tschoegl (1997) classify the factors into country-specific
and firm-specific factors. Country factors are factors that are available to or affect all
national firms. The firm with firm-specific factors distinguishes itself from other firms
from the same country. Country-specific factors influence the firms from specific
countries in the global market. Firm-specific factors influence the firms from any given
country will be particularly competitive in the global market. He mentions that the two
sets of factors are not regarded independent variables.

In addition, Hu (1995) considers that a firm’s advantages are always relative to

its competitors. For example, its superiority at home does not necessarily mean
superiority abroad and superiority abroad does not guarantee its superiority in its home
country. Hu also suggested that the differences between countries are probably greater
than the differences between firms of the same nationality. It shows that country factors
would dominate firm-specific factors in importance as sources of advantage. Several
studies have suggested the factors of competitiveness of international banks in the trade
and exchange market. The study I present is in an attempt to supplement the finding of
these earlier studies.

3
Firm-specific factors: firm size and international reach of branches

Firm Size
Tschoegl (1997) identifies that a bank with larger asset scale is more competitive
in the trade and exchange market and that size matters more than international spread
for bank’s competitiveness. However, his research does not indicate that large banks
have absolute advantages over small banks. For example, Japanese banks have the
largest asset size in the world but their rankings in the Euromoney’s annual survey are
not impressive from 1996 to 2007. The most noticeable example is Mitsubishi UFJ
Financial Group. The merge was completed on October 1, 2005 and then created the
Mitsubishi UFJ Financial Group which is the world’s second biggest bank measured by
assets. The asset of Mitsubishi UFJ Financial Group is 1.7 trillion U.S. Dollars. Its firm
size was just behind Citigroup with 2.4 trillion U.S. Dollars in assets on merger date.
Citigroup has dominated the top 3 ranking in the Euromoney magazine annual survey
for a long time but Mitsubishi UFJ Financial Group did not perform well at the top
rankings of Euromoney survey with its asset scale.

Competitiveness of banks in the trade and exchange market, there might be a

relationship between bank’s competitiveness and its size. However, it does not imply
directly that large banks are more competitive than median or small banks. Size releases
mixture of signals instead of pure information but it is still an indicator to measure the
competitiveness of banks in the trade and exchange market. Although size is not a
perfect indicator of competitiveness. Size might still consist of some useful information
such as the client pools of the banks.

Rhodes (1982) found that large banks might have higher probability to have
more customers, especially large international clients favour large banks. In addition,
Jagtiani (1996) finds that large banks would give customers the safety signal and have
ability to diversify their client pool to enhance risk control. Large banks would be the
‘Too large to fail’ stereotype since governments and regulators are afraid that
bankruptcy of large banks might result in financial instability, even financial crisis.
Therefore, banks’ customers would choose large banks because of comfortable feel or
psychological reasons.

4
International Spread of Branches in Major Financial Centres

In a related strain of research, international spread of branches in major financial

centres have been critically important in laying the groundwork for understand the
impact of competitiveness of banks in the trade and exchange market. With
globalization and economic and financial market growth, banks began to modify their
strategies to relocate their branches and subsidiaries.

Choi et al (2002) indicated the trend from 1990 to 2000 that the number of banks and
number of offices in some centres has fallen by over 20% since 1990. Banks
investigated many aspects, as a branch operates in a country or a city. There are three
reasons that banks chose to open more branches or not.
First, regulatory environment is a key factor. Celutti el al (2007) found that banks are
more likely to operate as branches in countries that have higher taxes, with low
regulatory restrictions on bank entry. In other words, subsidiary operations are preferred
by banks seeking to penetrate host markets by establishing large retail operations.
Celutti el al also indicated that economic and political risks have opposite effects on
subsidiary operations which suggested that legal differences in parent banks’
responsibilities associated with branches and subsidiaries are important determinants of
banks’ organizational form.
Secondly, the importance of financial centres has changed. Choi el al (2002) also
indicated that Tokyo has lost its importance as a leading financial centre in Asia-Pacific
region while Hong Kong and Singapore have continued to gain importance and
influence. It implied that in Asia-Pacific financial market. They suggest that Hong Kong
and Singapore play more important roles than before.
Third, competitors’ responses and strategies are important factors for branch operations.
Kim el al (2001) indicated that there is evidence that banks act strategically in their
branching decisions, taking into consideration the future response from rival banks.
Furthermore, they found that a bank specific branch-network doesn’t confer externality
on other banks. As a result, branch network affects only market shares but not market
size.

5
Country-Specific Factors: legal System and Home Currency

Legal System
Tschoegl (1997) suggests that legal and regulatory systems are important factors
for banks to compete in the trade and exchange market. Common law of 15 countries
such as the UK and US use the following principle to monitor their banks: what is not
forbidden is permitted. Banks and other financial service companies could gather for
themselves any first-mover advantages that may result in offering innovations. Firms
may even develop reputation for operating aggressively in certain areas. Therefore,
common law offered better financial environment for banks and other financial
intermediates to compete in the trade and exchange market.
Tschoegl also indicates that regulatory authorities in civil law countries are amending
their laws and regulations and begin to permit their institutions to develop new
instruments due to the pressure of competition.
Firms from those countries begin to adapt and learn. One of the strategies is that firms
from civil law countries are purchasing other firms and hiring individuals from common
law countries. Therefore, international banks may have been regulated under common
law and civil law systems. The line between the common law and the civil law for
international bank regulations blurs in recent years.
The differentiation of regulation and law systems has been controversial for a long time.
After Enron Scandal, United States government passed the Sarbanes-Oxley Act in 2002.
In comparison United States, Financial Service Authority in the United Kingdom is
much looser in financial sector regulation.
Jack and Roe indicate that foreign institutions would choose alternative countries such
as United Kingdom for investment, trading and financing. However, they also argue
that United Kingdom puts many efforts to enforcement of Laws. The number of
businesses relocating from New York Wall Street to City of London is ambiguous, legal
system is crucial factor to the organization of the financial services, Industry and degree
of local competition.
Holmes indicates that firm’s acquired characteristics are sharpened by past management
decisions, including the branch networking, the firm’s capitalization and perceived
creditworthiness, degree and history, internationalization, scale and scope of existing
trade and exchange operations, penetration into finance and current service offerings of
capital market instruments and attitudes towards innovation and product development.

6
Home Currency

US dollar has dominated the trade and exchange market for a long time. Holme indicate
that US Dollar became the main reserve currency and the currency against other
currencies trade in that time. Therefore, US financial institutions have been forced to
develop expertise in variety of currencies in that time. Governments and central banks
of non-US countries hold US dollar dominated assets as their reserves or investments.
A recent surge of research on the Euro or European Union’s economic development has
given new opportunities and challenges. Cohen argues that Euro is still behind the US
dollar as an international currency because of monetary behaviour, cost of doing
business in Euro, anti-growth bias built into EMU, and ambiguous structure of EMU. It
appears that introduction of Euro does not undermine the US dollar leading position
around the world. However, we can hardly ignore that Euro plays a crucial role in
issuance of securities. Bishop indicated that the total issue of euro-denominated bonds
amounts to 812 billion compared to 643 billion dollar-denominated bonds international
bonds in 1999.
The total euro-dominated issue of bonds is 28 percent larger than the issue of dollar-
denominated international bonds. Trade and exchange volumes expanded in recent
years according to BIS Quarterly Review (2007) especially in Euro related trades from
three reasons: Hedge funds facilitated substantial trading in the use of prime brokerage
institutional investor pursued more diversified portfolio, and the technical trading such
as algorithmic trading is likely to have boosted the turnover. According to IMF currency
composition of official trade and exchange reserve survey (1995-1999, 2006) and ECB
the accumulation of foreign reserves (1999-2005) survey, the official government trade
and exchange reserves in US Dollar declined from 70.9% in 1999 to 65.7% in 2006.

Euro began to increase its share after introduction from 17.9% to 25.5%. These surveys
here are of importance in explaining the impact of introduction of Euro. In addition,
Corvoiseir and Gropp test the concentration in Euro areas and found that for loans and
demand deposits increasing concentration may have resulted in less competitive pricing
by banks. Their study suggests increases in contestability and efficiency in European
markets.

7
 METHODOLOGY

Primary Data:
The desired information is obtained using a questionnaire, the questionnaire would
compromise of structured questions based on the information needed. The questionnaire
will be pre-tested with the respondents to identify and eliminate potential problems. All
the aspects of the questionnaire including question content, wording, sequence, form
and layout, question difficulty, instructions and time required for administering the
questionnaire shall be tested.

Sample Size:
In this study the sample size is taken in the form of income statement of the company.

Secondary Data:
Exploratory Research
Exploratory Research will be carried out to get Qualitative data in order to gain a
qualitative understanding of the research topic.

Sources of the Data:

The data has been collected from various secondary sources like books and the internet.
The data has been collected online with the objective of the study.
Conclusions have been drawn after the detailed study of the market policies of the
broking company as to know what are the most widely used hedging instruments for
minimizing trade and exchange risk.

Analysis Beat:
Hedging exposures, sometimes called market is widely resorted by financial directors,
corporate treasurers and portfolio managers.
The practice of covering exposure is designed to reduce the volatility of a firm’s profits
and/or cash management and it presumably follows that this will reduce the volatility
of the value of the firm.
There are wide range of methods available to minimize trade and exchange market
which is classified as internal and external techniques of exposure management.

8
Internal Technique:
Internal Technique of exposure management help to resolve exposure risks through
regulating the firm’s financial position. Thereby, they ensure that the firm is not
endangered through exposures. The fundamental stress minimizing of not complete
elimination of exchange losses that are likely to accrue as a result of exposure.

They use methods of exposure management which are a part of a firm’s regulatory
financial management and do not resort to special contractual relationship outside the
group of companies concerned. They aim at reducing exposed position or preventing
them from arising. They embrace netting, matching, leading and lagging, pricing
policies and asset/liability management.

Internal technique of exposure management do not rely on third party contracts to

manage exposed positions. Rather, it depends on internal financial management.

External Technique:

These refer to the use of contractual relationship outside the group of companies so as
to minimize the market of trade and exchange losses. They insure against the possibility
the exchange losses will result from an exposed position which internal measures have
not nee able to eliminate. They include forward contracts, borrowing short terms,
discounting bills receivable, factoring, and government exchange market guarantees
currency options.
External technique of trade and exchange exposure management use contractual
relationship outside the group to reduce market of exchange rate changes. Several
external techniques are available for trade and exchange management. The firm can
make a choice of that technique which is most suitable of it.

9
Tools for trade and Exchange Market management
Forward exchange Contract
A forward exchange contract is a mechanism by which one can ensure the value
of one currency against another by fixing rate of exchange in advance for a transaction
expected to take place at a future date.
Forward exchange rate is a tool to predict the exporters and importers against exchange
market under trade and exchange contract. Two parties are one being a banker
compulsorily in India, enter into a contract to buy or sell a fixed amount of foreign
currency on a specific future date or future period at a predetermined rate. The forward
exchange contracts are entered into between a banker and a customer or between two
bankers.

Indian exporters for instance instead of grouping in the dark or making a wild
guess about the future rate would be, enter into a contract with his banker immediately.
He agrees to sell trade and exchange of specified amount and currency at a specified
future date. The banker on his part agrees to buy this at a specified rate of exchange is
thus assured of his price in the local currency. For example, an exporter may enter into
a forward contract with the bank for 3 months deliver at Rs. 49.5. This rate as on the
date of contract is known as three month forward rate. When the exporter submits his
bill under the contract the baker would purchase it at the rate of Rs.50 irrespective of
the spot rate then prevailing.
When rupee was devaluated about 18% in July 1991, many importers found their
liabilities had increased overnight. The devaluation of the rupee had effect of
appreciation of foreign currency in terms of rupees. The importers who had booked
forward contracts to cover their imports were happy lot.

Date of Delivery

According to Rule 7 of FEDAI, a forward contract is deliverable at a future date

during of the contract being computed from the spot value date of the transaction. Thus
if a 3 months forward contract is booked on 12th February, the period of two months
should commence from 14th February and contract will fall on 14th April.

10
Fixed and option forward contracts

The forward contract under which the delivery of trade and exchange should
take place on a specified future date is known as “Fixed Forward Contract”. For
instance if on 5th March a customer enters into a three month forward contract with his
bank to sell GBP 10,000, it means the customer would be presenting a bill or any other
instrument on 7th June to the bank for GBP 10,000. He can’t deliver trade and exchange
prior to or later than the determined date.
Forward exchange is a device by which the customer tries to cover the exchange
risk. The purpose will be defeated if he is unable to deliver trade and exchange exactly
on the due date. In real situations, it is not possible for any exporter to determine in
advance the precise date on which he is able to complete shipment and present
document to the bank. At the most, the exporter can only estimate the probably date
around which he would able to complete his commitment.
With a view to eliminate the difficulty in fixing the exact date of delivery of trade
exchange, the customer may be given a choice of delivery the trade and exchange during
a given period of days.
An arrangement whereby the customer can sell or buy from the bank trade and
exchange on any day during a given period of time at a predetermined rate of exchange
is known as “Option Forward Contract”. The rate at which the deal takes place is the
option forward sale contract with the bank with option over November. It means the
customer can sell trade and exchange to the bank on any day between 1 to 30 th
November is known as the “The Option Period”.
Forward contract is an effective and easily available tool for covering exchange
risk. New instruments like options, futures and swaps can also be used to cover
exchange risks. These instruments are called financial derivatives as their value is
derived from the value of some other financial contract or asset. When there instrument
are bought or sold for covering exchange market they are used for “Hedging” the
exchange risk. When they are dealt in with a view to derive profit from unexpected
movements in their prices or other changes in the exchange market, they are being used
for speculative purposes. The scope of using these instruments for speculative purposed
is very much limited in India.
Some other strategies may also be adapted to avoid exchange risk. These consist in
deciding on the currency of invoicing, maintaining in foreign exchange and deciding on
the setting the debt.

11
 DATA ANALYSIS
Table: 1 CURRENCY EXCHANGE BETWEEN TWO RATES
PROFIT & LOSS A/C FOR THE YEAR ENDED JUNE 2007
Particulars (Rs. In Income and Expenses@ 60% from foreign in $s
crores)
Average Exchange If the Exchange If the exchange
rate @Rs.41 rate @Rs.41 rate @Rs.40
Income

Net operating Income 3768.62 2261.17 2261.17 2206.02

Expenses

Material Consumption 0 0.00 0.00 0.00

Manufacturing expenses 577.24 346.34 346.34 337.89

Personal Expenses 1322.59 793.55 793.55 774.20
Selling Expenses 17.82 10.69 10.69 10.43

Administrative Expenses 913.89 365.55 365.55 365.63

Capitalized Expenses 0 0.00 0.00 0.00

Cost of Sales 2831.54 1516.14 1516.14 1479.16

Reported PBDIT 937.08 745.03 745.03 726.86

Other Recurring income 16.07 9.64 9.40

Adjusted PBDIT 953.15 754.03 736.26

depreciation 178.21 106.93 104.31

Other write offs 0 0.00 0.00

Adjusted PBDIT 774.94 647.75 631.95

Financial expenses 20.6 12.36 12.06

Adjusted PBDIT 754.34 635.39 619.89

Tax Charges 75.87 45.52 44.41

Adjusted PBDIT 678.47 589.87 584.26

Nonrecurring items 423.35 254.01 247.81

Other non-cash 0 0.00 0.00

adjustments
Reported PAR 1101.82 843.8 823.30

12
GRAPH: 1

Chart Title
2500

2000

1500
Exchange rate @41
Exchange rate @40
1000

500

INTERPRETATION:
This graph showing total revenues are alteration together total revenues are decreased
Rs. 2261.17 crores to 2206.02, and gross profit also decreased Rs. 745.03 to 726.86.
Simultaneously all these values are changing the net income if the exchange rate had
fixed @Rs. 41, the revenues would have been same.

13
Table: 1 CURRENCY EXCHANGE BETWEEN TWO RATES
PROFIT & LOSS A/C FOR THE YEAR ENDED JUNE 2007
Particulars (Rs. In Income and Expenses@ 60% from foreign in $s
crores)
Average Exchange If the Exchange If the exchange
rate @Rs.41 rate @Rs.41 rate @Rs.40
Income

Net operating Income 3768.62 2261.17 2261.17 2206.02

Expenses

Material Consumption 0 0.00 0.00 0.00

Manufacturing expenses 577.24 346.34 346.34 337.89

Personal Expenses 1322.59 793.55 793.55 774.20
Selling Expenses 17.82 10.69 10.69 10.43

Administrative Expenses 913.89 365.55 365.55 365.63

Capitalized Expenses 0 0.00 0.00 0.00

Cost of Sales 2831.54 1516.14 1516.14 1479.16

Reported PBDIT 937.08 745.03 745.03 726.86

Other Recurring income 16.07 9.64 9.40

Adjusted PBDIT 953.15 754.03 736.26

depreciation 178.21 106.93 104.31

Other write offs 0 0.00 0.00

Adjusted PBDIT 774.94 647.75 631.95

Financial expenses 20.6 12.36 12.06

Adjusted PBDIT 754.34 635.39 619.89

Tax Charges 75.87 45.52 44.41

Adjusted PBDIT 678.47 589.87 584.26

Nonrecurring items 423.35 254.01 247.81

Other non-cash 0 0.00 0.00

adjustments
Reported PAR 1101.82 843.8 823.30

14
GRAPH: 2

Chart Title
2500

2000

1500
Exchange rate @41
Exchange rate @39
1000

500

INTERPRETATION:
This graph showing total revenues are alteration together total revenues are decreased
Rs. 2261.17 crores to 2150.87, and gross profit also decreased Rs. 745.03 to 708.69.
Simultaneously all these values are changing the net income if the exchange rate had
fixed @Rs. 41, the revenues would have been same.

15
Table: 1 CURRENCY EXCHANGE BETWEEN TWO RATES
PROFIT & LOSS A/C FOR THE YEAR ENDED JUNE 2007
Particulars (Rs. In Income and Expenses@ 60% from foreign in $s
crores)
Average Exchange If the Exchange If the exchange
rate @Rs.41 rate @Rs.41 rate @Rs.40
Income

Net operating Income 3768.62 2261.17 2261.17 2206.02

Expenses

Material Consumption 0 0.00 0.00 0.00

Manufacturing expenses 577.24 346.34 346.34 337.89

Personal Expenses 1322.59 793.55 793.55 774.20
Selling Expenses 17.82 10.69 10.69 10.43

Administrative Expenses 913.89 365.55 365.55 365.63

Capitalized Expenses 0 0.00 0.00 0.00

Cost of Sales 2831.54 1516.14 1516.14 1479.16

Reported PBDIT 937.08 745.03 745.03 726.86

Other Recurring income 16.07 9.64 9.40

Adjusted PBDIT 953.15 754.03 736.26

depreciation 178.21 106.93 104.31

Other write offs 0 0.00 0.00

Adjusted PBDIT 774.94 647.75 631.95

Financial expenses 20.6 12.36 12.06

Adjusted PBDIT 754.34 635.39 619.89

Tax Charges 75.87 45.52 44.41

Adjusted PBDIT 678.47 589.87 584.26

Nonrecurring items 423.35 254.01 247.81

Other non-cash 0 0.00 0.00

adjustments
Reported PAR 1101.82 843.8 823.30

16
GRAPH: 3

Chart Title
2500

2000

1500
Exchange rate @41
Exchange rate @42
1000

500

INTERPRETATION:
This graph showing total revenues are alteration together total revenues are decreased
Rs. 2261.17 crores to 2316.3, and gross profit also decreased Rs. 745.03 to 763.20.
Simultaneously all these values are changing the net income if the exchange rate had
fixed @Rs. 41, the revenues would have been same.

17
Table: 1 CURRENCY EXCHANGE BETWEEN TWO RATES
PROFIT & LOSS A/C FOR THE YEAR ENDED JUNE 2007
Particulars (Rs. In Income and Expenses@ 60% from foreign in $s
crores)
Average Exchange If the Exchange If the exchange
rate @Rs.41 rate @Rs.41 rate @Rs.40
Income

Net operating Income 3768.62 2261.17 2261.17 2206.02

Expenses

Material Consumption 0 0.00 0.00 0.00

Manufacturing expenses 577.24 346.34 346.34 337.89

Personal Expenses 1322.59 793.55 793.55 774.20
Selling Expenses 17.82 10.69 10.69 10.43

Administrative Expenses 913.89 365.55 365.55 365.63

Capitalized Expenses 0 0.00 0.00 0.00

Cost of Sales 2831.54 1516.14 1516.14 1479.16

Reported PBDIT 937.08 745.03 745.03 726.86

Other Recurring income 16.07 9.64 9.40

Adjusted PBDIT 953.15 754.03 736.26

depreciation 178.21 106.93 104.31

Other write offs 0 0.00 0.00

Adjusted PBDIT 774.94 647.75 631.95

Financial expenses 20.6 12.36 12.06

Adjusted PBDIT 754.34 635.39 619.89

Tax Charges 75.87 45.52 44.41

Adjusted PBDIT 678.47 589.87 584.26

Nonrecurring items 423.35 254.01 247.81

Other non-cash 0 0.00 0.00

adjustments
Reported PAR 1101.82 843.8 823.30

18
GRAPH: 4

Chart Title
2500

2000

1500
Exchange rate @41
Exchange rate @43
1000

500

INTERPRETATION:
This graph showing total revenues are alteration together total revenues are decreased
Rs. 2261.17 crores to 2371.47, and gross profit also decreased Rs. 745.03 to 781.73.
Simultaneously all these values are changing the net income if the exchange rate had
fixed @Rs. 41, the revenues would have been same.

19
THE RUPEE-DOLLAR EXCHANGE RATES OVER THE LAST FIVE YEARS

Market is the possibility that the actual result from an action will deviate from
the expected levels of result. The greater the magnitude of deviation and greater the
probability of tis occurrence, the greater is the risk.
A business has to take step to minimize the market by adopting appropriate technique
or policies. Markets focuses on identifying and implementing these techniques or
policies, lest the business should be left exposed to uncertain outcomes.

Markets:
Market is a process to identify loss exposure faced by an organization and to select the
most appropriate technique such exposures. Market tools measure loss and potential
gain. It enables us to stay with varying degree of certainty and confidence levels, that
our potential loss will not exceed a certain amount if we adopt a particular strategy.
Market enables us to confront uncertainty head on acknowledge its existence, try to
measure its extent and finally control it.

Market makes sense for two reasons. One, a business entity generally wishes to reduce
risks to acceptable levels. Two, a business entity is generally keen on avoiding
particularly kind of risks for it may be too great for the business to bear. For each
situation where one wishes to avoid a risk-a loss by fire. For example, three is perhaps
a counter party who may be willing such risk. For market reduction a business entity
can adopt the following methods.

Hedging:

Hedging is a technique that enables one party to minimize the effect of adverse
outcomes in a given situation. Parties come together to minimize the effect of which
market of one party gets cancelled by the market of another. It is not that market
minimization is the only strategy. An entity may even choose to remain exposed in
anticipation of reaping profits from its market taking position.

20
TRADE AND EXCHANGE EXPOSURE

Exposure:

Exposure is defined as the possibility of a change in the assets or liabilities or

both of a company as result in the exchange rate. Trade and exchange exposure thus
refers to the possibility of loss or gain to a company that arises due to exchange rate
fluctuations.
The value of a firm’s assets, liabilities and operating income vary continually in
response to changes in a myriad economic and financial variable such as exchange rates,
interest rates, inflation rates, relative price and so forth. We can these uncertainties as
macroeconomic environment risks. These risks affect all firms in the economy.
However, the extent and nature of impact of even macroeconomic risks crucially depend
upon the nature of firm’s business. For instance, fluctuation of exchange rate will affect
net importers and exporters quite differently. The impact of interest rate fluctuation will
be very different from that on a manufacturing firm.

The nature of macroeconomic uncertainty can be illustrated by a number of

commonly encountered situations. An appreciation of a value of a foreign currency,
increase the domestic currency value of a firm’s assets and liabilities denominated in
the foreign currency-foreign currency receivables and payables, banks deposits and
loans, etc. it will also change domestic currency cash flows from exports and imports.
An increase in interest rates reduces the market value of a portfolio of fixed-rate in
threat of inflation may increase value of unsold stocks. The revenue from nature sales
as well as the future costs of production. Thus the firms exposed to uncertain changes
in a numbers of variables in its environment. These variables are sometimes called
market factors.

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The nature of Exposure and Market

Exposure are a measure of the sensitivity of the value of a financial items (assets,
liabilities or cash flow) to changes in the relevant market actor while market is a
measurable of the variability of the item attributable to the market factor.
Corporate treasurers have become increasingly concerned about exchange rate and
interest rate exposure and market during the last ten to fifteen years or so. In the case of
exchange rate risk. The increased awareness is firstly due to tremendous increase in the
volume of cross border financial transactions (which create exposure) and secondly due
to the significant increase in the degree of volatility in exchange rates (which, given the
exposure creates risk).

Classification of trade and exchange exposure and market

Since the advent of floating exchange rates in 1973, firms around the world have
become acutely aware of the fact that fluctuation in exchange rates expose their
revenues, costs, operating cash flows and thence their market value to substantial
fluctuations. Firms which have cross-border transactions exports and imports of goods
and services, foreign borrowings and lending, foreign portfolio and direct investment
etc, are directly exposed: but even purely domestic firms which have absolutely no cross
border transactions are also exposed because their customers, suppliers and competition
are exposed. Considerably effort has since been devoted to identifying and categorizing
currency exposure and developing more and more sophisticated methods to quantity it.

Trade and exchange exposure can be classified into three broad categories:

 Transaction exposure
 Translation exposure
 Operating exposure
Of these, the first and third together are sometimes called “Cash Flow Exposure” while
the second is referred to as “Accounting Exposure” or “Balanced Exposure”.

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Transaction Exposure

When firms has a payable or receivable denominated in a foreign currency a change in

the exchange rate will alter the amount of local currency receivable or paid. Such a
market or exposure is referred to as transaction exposure.
For example, if an Indian exporter has a receivable of $100,100 due three months hence
and if in the meantime the dollar depreciates relative to the rupee a cash loss occurs.
Conversely, if the dollar appreciates relative to the rupee a cash gain occurs. In the case
of payable, the outcome is of an opposite kind: a depreciation of the dollar relative to
the rupee results in a gain, where as an appreciation of the dollar relative to the rupee
result in a loss.

Translation Exposure

Many multinational companies require that their accounts of foreign subsidiaries and
branches get consolidated with those of it. For such consolidation assets and liabilities
expressed in foreign currencies have to be translated into domestic currencies at the
exchange rate prevailing on the consolidation dates. If the value of foreign currencies
change between a two or successive consolidation dates, translation exposure will arise.

Operating Exposure

Operating Exposure, like translation exposure involve an actual or potential gain or loss.
While the former is specific to the transaction, the letter relates to entire investment.
The essence of this operating exposure is that exchange rate changes significantly and
alter the cost of firm’s inputs along with price of it output and thereby influence its
competitive position substantially.
For example, Volkswagen had a highly successful export market for its ‘beetle’ model
in the US before 1970. With the breakdown of Bretten-Woods of fixes exchanged rates,
the deutschemark appreciated significantly against the dollar.
This created problem for Volkswagen as its expenses were mainly in Deutschmark but
its revenue in dollars. However, in a highly price-sensitive US market such an action
caused a sharp decreased in sales volume from 600,000 vehicles in 1968 to 200,000 in
1976. Incidentally Volkswagen’s 1973 losses were the highest as of that year suffered
by any company anywhere in the world.

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 AVERAGE DAILY TURNOVER BY INSTRUMENT

$1,765
1800
$ 1,490
1600

1400

1200
billions

1000

800

600 $475

400 $43
200

0
Foreing Exchange Spot Transactions Outright Forwards Options and othe
Swaps Products

Sources: BIS Triennial Survey 2013

AVERAGE DAILY TURNOVER COUNTERPARTY

Sales

39% 48$ 3rd Qtr

Sources: BIS Triennial Survey 2013

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 SCOPE OF THE STUDY

 To reduce the still dominant role of the United States dollar as an international
reserve currency, the so-called “Exorbitant Privilege”

 To enhance the use of the renminbi as an international currency above its

inclusion in the Special Drawing Right (SDR) basket; and

 To boot the global role of the SDR through bigger new issues and a bigger role
in the IMF lending

LIMITATION OF THE STUDY

 The study is confined just to the trade and exchange market but not the total
risk

 The analysis of this study is mainly done on the income statements

 The study is limited for the year 2016-2017

 It does not take into consideration all Indian companies trade and exchange risk

 The Hedging techniques are studies only which the company adopted to
minimize trade and exchange risk

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 FINDINGS OF THE STUDY

The company has to hammer out its approach to market taking into account its
specific circumstances.
Here is a brief description of company in India have fashioned its strategy towards
trade and exchange market.
As its operation in many countries, the company is exposed to currency risk. Here is
the description.

1. They transact a major portion of their business in USD and the lesser extent
other currencies and is thus exposed to currency risk. The company manages
market on account of foreign currency fluctuations through treasury operations.
2. To mitigate the market of changes in trade and exchange rates on cash flows
denominated in USD. India Bulls ltd purchases trade and exchange forward
contracts and the company does not speculate the currency exchange.
3. Trade and exchange transaction of their revenues were generally in US. He
Average exchange rate of INR to USD in fiscal 2017 was Rs. 41 against Rs. 44
in fiscal 2016

The above description of Market in HDFC BANK LTD is based on the information
provided in the annual report of HDFC BANK LTD for the year 2017.

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 CONCLUSION
In a universe with a single currency, there would be no trade and exchange
market, no trade and exchange rates, and no trade exchange. But in our world of mainly
national currencies, the trade and exchange market plays the indispensable role of
providing the essential machinery for making payments across borders, transferring
funds and purchasing power from one currency to another, and determining that
singularity important price the exchange rate. Over the past twenty-five years, the way
the market has performed those tasks has changed enormously.

Trade and exchange market plays a vital role in integrating the global economy.
It is a 24-hours in over the counter market made up of many different types of players
each with it set of rules, practice and disciplines. Nevertheless, the market operates no
professional bases and this professionalism is held together by the integrity of the
players.

The Indian trade and exchange market is no expectation to this international

market requirement, with the liberalization, privatization and globalization initiated in
India, Indian trade and exchange markets have been reasonably liberated to play there
efficiently. However much more need to be done to make market vibrant, deep in liquid.

Derivative instrument are very useful in managing risk. By themselves, they do

not have any value nut when added to the underline exposure, they provide excellent
hedging mechanism. Some of the popular derivative instruments are forward contract,
option contract, swap, future contract and forward rate agreement. However, they have
to be handling very carefully otherwise they may throw open more risk than in
originally envisaged.

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 SUGGESTIONS

1. The trade and exchange market should be useful to each and every part of the
world; this facility should be supplied to the semi urban and rural population

2. Outcry system is obsolete; since a fast face of life, caught up with trading activity
electronic media as simplified with trading procedures. The advantages
obviously are speed, accuracy and memory.

3. It is advisable to have both outcry and online trading to supplement each other
as and when need arises

4. The advantages of the trade and exchange market should be made now to
everyone and day to day information should publish in newspapers about online
trading.

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 REFERENCE
Websites:

www.google.com
www.mecklai.com
www.wipro.com
www.infosys.com
www.hdfcbank.com

Books:

1. Trade and Exchange Arithmetic by M.jeevanandam

2. International financial management by Prasanna Chandra
3. International financial management by P.G. Apte

Newspapers:

The economic times

Business Line

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