A

COMPREHENSIVE PROJECT REPORT

On

“A study on foreign exchange and its risk management ”

Submitted to

GIDC RAJJU SHROFF ROFEL INSTITUTE OF MANAGEMENT STUDIES, VAPI

Institute Code:-716

Under the Guidance of

Prof. Zankhana Atodaria

In partial Fulfilment of the Requirement of the award of the degree of

Master of Business Administration (MBA)

Offered By

Gujarat Technological University

Ahmadabad

Prepared by:

Harshada Balaji Lot Karishma Jain

(Enrollment No.:-197160592029) (Enrollment No.:-197160592020)

MBA (Semester:-IV)

Month & Year:

April 2021

1
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 Certificate of examiner
This is to certify that project work embodied in this report entitled, “A Study on foreign
exchange and it’s risk management” was carried out by, Harshada Balaji Lot (Enrollment
No: 197160592029) of GIDC Rajju Shroff Rofel Institute of Management Studies, Vapi
(Institute code: 716).

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This report is for the partial fulfilment of the requirement of the award of the degree of
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(Enrollment No: 197160592020) of GIDC Rajju Shroff Rofel Institute of Management
Studies, Vapi (Institute code: 716).

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Comments of External Examiner:

This report is for the partial fulfilment of the requirement of the award of the degree of
Master of Business Administration offered by Gujarat Technological University.

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Place:

Executive report
This project report deal with the research topic “A study of foreign exchange and its risk
management in respect with pharmaceutical companies”. The purpose of this research is to
study foreign exchange and its risk management in pharmaceutical companies and also to
study and analyze the revenues of the company when the exchange rates fluctuate.

The main objective of the study is to analyze income statement and find out the revenues
when the dollars are converted into Indian rupees.

This report studied the income effect when the foreign exchange rate fluctuate. The study has
taken income statement of pharma company and analyse the changes in revenue.

The report has taken income statement for analysing purpose with average exchange rate. The
report takes annual reports of the pharmaceutical company.

It also states that there is changes in the net profit of the companies who exposed with foreign
exchange risk.

This research report gives suggestions on the tools to minimize the risk of foreign exchange
exposure.

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 Index
Sr.no Particulars Page no.
1. Introduction to the study

1.1 Foreign exchange

1.2 Foreign exchange market

1.3 Participants of foreign exchange

market

1.4 Structure of foreign exchange

market

1.5 Foreign exchange risk

1.6 Foreign exchange risk management

techniques

2. Literature review

3. Research methodology

4. Data analysis and Interpretation

5. Findings

6. Suggestions

8
List of table:

Sr. No Particulars Page no.

1 Table 1
2 Table 2
3 Table 3
4 Table 4

9
 1. INTRODUCTION

1.1.1 WHAT IS FOREIGN EXCHANGE?

Foreign exchange, or Forex, is the value or price of one country’s currency in comparison
with another. A forex rate is a rate at which you buy foreign currency and is subject to change
continuously. This rate is always interpreted in currency pairs, for example, if the price of
USD/INR is 74.54, then it takes INR 74.54 to buy 1 USD.

Foreign exchange is governed by FEMA. In India Exchange is control is exercised by RBI.

Trade control (Import-Export) is exercised by DGFT (Director general of Foreign Trade).

1.1.2 IMPORTANCE OF FOREIGN EXCHANGE

1.Vital role in international trade: The foreign exchange plays a vital role in making
international trade possible. Through the help of foreign exchange, a country can essential
goods, raw material, machinery and other capital goods, etc. and export its surplus goods and
earn foreign exchange.

2. Trade in Services: With the help of foreign exchange, a country could render services in
different fields like travels, transportation, communication, banking , insurance and can get
services from different parts of the world.

3. Transfer of technology: Foreign exchange also facilitates easy transfer of technology

from one country to another.

4. International Remittance and Payments: From various parties like businessmen,

tourists, NRIS and others huge amount is remitted and all these transactions have become
possible with the help of foreign exchange.

5. Its Facilitates Convertibility of All Currencies: Convertibility of currencies of the world

has become easier under foreign exchange. The majors holding 75% of all market operations
are the EUR/USD. The USD is considered a major currency because it is represented in all
currency pairs.

10
1.2 FOREIGN EXCHNAGE MARKET

Foreign exchange market is a market where buyers and sellers are involved in the sale,
purchase, exchange and speculate on currencies of different countries. Forex market is not a
physical place. It is a system or mechanism or electronic network. The structure of foreign
exchange market constitutes Central banks, Commercial banks, broker, exporter and
importers, investors, tourists, MNC, authorities.

The trading of foreign exchange is done in world currency. Just like share market you can
also trade in forex market. The share market has a physical place to trade but in forex market
trading is done electronically. It has no physical location and operates 24 hours a day. Like
any other market, foreign exchange market is a system, not a place. The transactions in this
market are not confined to only one or few foreign currencies. In fact, there are large number
of foreign currencies which are traded, converted and exchanged in the foreign exchange
market. The market is deepest, or most liquid, early in the European afternoon, when the
markets of both Europe and the U.S East coast are open.

Foreign exchange rate is determined by 2 forces Demand and supply. Usually there are large
number of foreign currencies which are traded, converted and exchanged in the foreign
exchange market. Foreign exchange market helps in international trade and investment
because Forex market provides us the currency of another nation. It is the largest market for
trading or we can say that foreign exchange market is global market for trading. Worldwide
market which connected electronically.

The foreign exchange market in India is located in Delhi, Mumbai, Chennai and Calcutta.
And with allots of efforts done by RBI there are center for Forex market in Goa, Cochin,
Bangalore and Ahmedabad.

Following are the major foreign exchange markets-

• Spot Markets
• Forward Markets
• Future Markets
• Option Markets
• Swaps Markets

11
Swaps, Future and Options are called the derivative because they derive their value from the
underlying exchange rates.

1.2.1Spots Market

A spot market is the immediate delivery market, representing the segment of foreign
exchange market where in the transaction of currency are settled within two days of the deal.
The price is based on the ongoing exchange rate i.e., the current value of one country is
currency relative to the another.

The foreign exchange spot market is the largest market in the world with a transaction of
more than us $ 1 trillion in a single day. The forex future market is a minor derivative of this
market and its size is 1/100th of that of the foreign exchange spot market.

Rate at which transaction is settled is called spot exchange rate. A currency’s spot rate is
expressed as its value relative to the US dollar i.e., the number of US dollars needed to buy
one unit of the other currency. A foreign exchange spot market allows a company to buy or
sell a foreign currency according to its requirement. So those operating in this market are
speculators rather than trend-followers.

Spot market handles only spot or current transaction of foreign exchange. These are the
quickest transactions involving currency in foreign exchange market. The payments are done
immediate to buyers and sellers according to the current exchange rate.

1.2.2 Forward Market

Markets of foreign exchange which deals with purchase and sale of foreign exchange which
are contracted today but are implemented in future usually after 90 days of the deal.

The exchange rate at which the buyer or seller settle the transactions in forward market is
called forward exchange rate. The functions of forward market are transaction, credit and
hedging function.

1.2.2.1 Transaction function:

It is the basic function of foreign exchange market which convert one currency into another.
The function is performed through credit instrument like bills of foreign exchange bank, draft
and telephonic transfer. It facilitates transfer of purchasing power across different countries
of the world.

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The basic function of foreign exchange market is to facilitate the conversion of one currency
into another i.e., to accomplish transfers purchasing power between two countries.

1.2.2.2 Credit function:

It provides credit for foreign trade. Bills of exchange, with maturity period of 3 months, are
generally used for international payments. It facilitates credit for international trade.

1.2.2.3Hedging functions:

A third function of the foreign exchange market is to hedge foreign exchange risks. Hedging
means the avoidance of a foreign exchange risk. i.e. the price of one currency in terms of
another currency, change, there may be a gain or loss to the party concerned.

Under this condition, a person or a firm undertakes a great exchange risk if there are huge
amounts of net claims or net liabilities which are to be met in foreign money. Exchange risk
as such should be avoided or reduced. For this the exchange market provides facilities for
hedging anticipated or actual claims or liabilities through forward contracts in exchange. A
forward contract which normally for three months is a contract to buy or sell foreign
exchange against another currency at some fixed date in the future at a price agreed upon
now.

When exporters and importers enter into an agreement to sell and buy goods some future date
at current prices and exchange rate is called hedging. The purpose of hedging is done to avoid
losses. That might be caused due to exchange rate variations in the future.

1.3 Participants of foreign exchange market

Foreign exchange market needs dealers to facilitate foreign exchange transactions. Bulk of
foreign exchange transaction are dealt by Commercial banks & financial institutions. RBI has
also allowed private authorized dealers to deal with foreign exchange transactions i.e. buying
& selling foreign currency.

The major participants in foreign exchange markets are

1. Retail clients: Retail clients deal through commercial banks and authorized agents.
They comprise people, international investors, multinational corporations and others
who need foreign exchange.

13
 2. Commercial Banks: Commercial banks carry out buy and sell orders from their
retail clients and of their own account. They deal with other commercial banks and
also through foreign exchange brokers.
3. Foreign Exchange Brokers: Each foreign exchange market center has some
authorized brokers. Brokers act as intermediaries between buyers and sellers, mainly
banks. Commercial banks prefer brokers.
4. Central Banks: Under floating exchange rate central bank does not interfere in
exchange market. Since 1973, most of the central banks intervened to buy and sell
their currencies to influence the rate at which currencies are traded.

1.4 Structure of foreign exchange markets

Foreign Exchange Market structure consist of:

1. Retail market: The retail market is a secondary price maker. Here travelers, tourists
and people who are in need of foreign exchange for permitted small transactions,
exchange one currency for another.
2. Wholesale Market: The wholesale market is also called interbank market. The size
of transactions in this market is very large. Dealers are highly professionals and are
primary price market. The main participants are Commercial banks, Business
corporations and Central banks. Multinational banks are mainly responsible for
determining exchange rate.
3. Other Participants:
a) Brokers: Brokers have more information and better knowledge of market. They
provide information to banks about prices at which there are buyers and sellers of a
pair of currencies. They act as middlemen between the price makers.
b) Price takers: Price takers are those who buy foreign exchange which they require and
sell what they earn at the price determined by primary price makers.
c) Indian foreign exchange market: It is made up of three tiers. Dealing take place
between RBI and Authorized dealers. Authorized dealers deal with their corporate
customers.

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1.5 Foreign exchange risk
1. Foreign exchange risk is a financial risk that exists when a financial transaction is
denominated in a currency other than that of the base currency of the company.
2. Foreign exchange risk also exists when the foreign subsidiary of a firm maintains
financial statements in a currency other than the reporting currency of the
consolidated entity.
3. The risk is that there may be an adverse movement in the exchange rate of the
denomination currency in the relation to the base currency, before the date when
the transaction is completed.
4. Investors and businesses exporting or importing goods and services or making
foreign investments have an exchange rate risk which can have severe financial
consequences, but steps can be taken to reduce the risk.

1.5.1 Types of foreign exchange risk

1. Transaction risk:
This is the risk of an exchange rate changing between the transaction date and
the subsequent settlement date, i.e., it is the gain or loss arising on conversion.
This type of risk is primarily associated with imports and exports. If a
company exports goods on credit then it has a figure for debtors in its
accounts. The amount it will finally receive depends on the foreign exchange
movement from the transaction date to the settlement date.
As transaction risk has a potential impact on the cash flow of a company, most
companies choose to hedge against such exposure. Measuring and monitoring
transaction risk is normally an important component of treasury risk
management.

2. Economic risk:
Transaction exposure focuses on relatively short-term cash flow effects;
economic exposure plus the longer-term effects of changes in the exchange rates
on the market value of the company. There are two ways in which a company
is exposed to economic risk.

15
 Directly: If your firm’s home currency strengthens then the foreign
competitors are able to gain sales at your expenses because your products have
become more expensive in the eyes of customers both abroad and at home.
Indirectly: Even if your home country does not move vis-à-vis your
customer’s country you may lose competitive position.

3. Translation Risk:
The financial statements of overseas subsidiaries are usually translated into the
home currency in order that they can be consolidated into the group’s financial
statements. The reported performance of an overseas subsidiary in home-based
currency terms can be severely distorted if there has been a significant foreign
exchange movement.

1.6 Foreign exchange risk management techniques

(Hedging Transaction Risk)
A. INTERNAL TECHNIQUES
1. Invoice in home currency: One easy way is to insist that all foreign customers pay in
your home currency and that your company pays for all imports in your home
currency. However, the exchange- rate risk has not gone away, it has just been passed
onto the customers. Your customers may not be too happy with your strategy and
simply look for an alternative supplier.
2. Leading and lagging: If an importer expects that the currency it is due to pay will
depreciate, it may attempt to delay payments. This may be achieved by agreement or
by exceeding credit terms.
If an exporter expects that the currency it is due to receive will be depreciate over the
next three months it may try to obtain payments immediately. This may be achieved
by offering a discount for immediate payment.

B. EXTERNAL TECHNIQUES
1. Forward contracts: The forward market is where you can buy and sell a currency, at
a fixed future date for a predetermined rate, i.e., the forward rate of exchange. This is
effectively fixed the future rate.
16
2. Future contracts: Future contracts are standard sized, traded hedging instruments.
The aim of currency future contract is to fix an exchange rate at some future date,
subject to basis risk.
3. Options: A currency option is a right, but not an obligation, to buy or sell a currency
at an exercise price on a future date. If there is a favorable movement in rates of the
company will allow the option to lapse, to take advantage of the favorable movement.
The right will only be exercised to protect against an adverse movement, i.e., the
worst-case scenario.
4. Forex swaps: In a forex swap, the parties agree to swap equivalent amounts of
currency for a period and then re-swap them at the end of the period at an agreed
swap rate. The swap rate and amount of currency is agreed between the parties in
advance. Thus, it is called fixed rate swap.

17
 2. LITERATURE REVIEWS

Sr. Name of the Title of the study Factors of Findings of the study
no. publisher study
1 Nance R. Dean et al Hedging as tool for In their study The study provided
(1993) cost minimization they used evidence on the
survey data on hypothesis that hedging
firms use of increases firm value by
forwards, reducing expected
futures, swaps taxes, expected costs of
and options financial distress, or
combined with other agency costs.
COMPUSTAT
data on firm
characteristics.
2 Joarden kamruzzaman Forecasting of In their study Results demonstrate
And Currency Exchange they used three that ANN based model
Rahul A. Sarkar Rates using ANN: A ANN can forecast the forex
Case Study forecasting rates closely. Among
Forecasting of models to the three ANN based
Currency Exchange predict six models, SCG based
Rates using ANN: A foreign model yields best
Case Study currencies results measured on
Forecasting of against two popular metrics
currency exchange Australian and shows results
rates using ANN dollars using comparable to BPBR
historical data based models when
and moving measured on three
average as other metrics.
technical
indicator and a
comparison was

18
 made with
traditional
ARIMA model.
3 Alayannis et all Analysed the The authors In the study they found
(2001) effectiveness of used various out that on an average
operational and measures of the operational hedging
financial hedging by geographical does not reduce
U.S non-financial dispersion of the exchange rate exposure
multinationals. firm’s on its own. Financial
operations as a hedges are effective on
proxy for their own, and so is a
operational combination of
hedging. financial and
operational hedging.
4 Phillips (1995) Derivative practices The study The finding of the
& instruments focused on study is that
survey. derivative organisations of all
securities and sizes faced financial
derivative risk exposures,
contracts. indicating a valuable
opportunity for using
risk management tools.
The treasury
professionals exhibited
selectivity in their use
of derivatives for risk
management.
5 Howton and Perfect Currency and They studied the The study indicated
(1998) interest-rate pattern of use of that 60% of firms used
derivatives use in derivatives by a some type of
US firms large number of derivatives contract and
U.S. firms. only 36% of the
randomly selected

19
 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.
6 Spremann & Currency The study In the findings of the
Gantenbein (2002) derivatives examined that study, it was found that
German the firm using hedging
companies are experience an increase
traditionally in market value over
export-oriented; those companies that
therefore, they do not hedge at all or
use mostly choose to stop using
currency hedging policy.
inflows
protective
policies.
7 Financial supervision Foreign exchange Banks foreign In this study it was
commission risk management exchange risk propounded that to
minimise the
possibility of financial
loss, it is therefore
essential that banks
identify, measure and
manage their foreign
exchange risk
effectively.
8 Dohrin (2008) Hedging & In this study it The paper argues that
invoicing strategies was discussed domestic-currency
exchange rate invoicing and hedging

20
 to reduce exchange exposure in with exchange rate
rate exposure terms of derivatives allow a
transaction risk, fairly straightforward
translation risk management of
and broader transaction and
economic risk. translation risk and
discusses under which
circumstances their use
is optimal.
9 Masoud Nassimi Trading in the This study aims Findings shows that the
, Yasha Foreign Exchange to identify majority of the
SazmandAsfaranjan Market (Forex): A factors affecting respondents had
, Alireza Keshvarsima Study on Purchase the agreed that they trust to
, Fatemeh Baradar Intention consumers' their FOREX market
(India) purchase provides (Brokers),
intention in the and they are likely to
foreign invest and trade in this
exchange market.
market
among
expatriates who
live in Kuala
Lumpur. This
study is
looking for
measuring the
level of
purchase
intention related
to trust, context
, content,
internet usage

21
 and
infrastructure of
website in
FOREX market.
10 Berk, Peterlin & Mitja Corporate Risk The article It was founded in study
Co. (2009) Management in reviews some of that even Slovenian
Slovenian Firms the most blue-chip firms still
interesting have room to improve
characteristics as they have only
and practices of recently started to use
modern derivatives.
Slovenian
financial risk
management
departments
11 Mbabazize, Daniel & The Role of Foreign The study It is recommended that
Ekise Exchange Risk examined that exporting firms should
(2014) Management on there is constantly assess their
Performance moderate exposure to foreign
Management of applicability exchange risk, which
Exporting Firms in level of FERM, can guide them towards
Developing low level of a suitable currency risk
Countries: A Case financial management.
Study of Uganda’s performance
Exporting Firms and a significant
positive relation
between FERM
and
performance of
exporting firms.
12 Chen and Narala Analysing They have Finding shows that by
(2017) forecasting of the used monthly using the
data of foreign

22
 foreign exchange exchange rates six major factors which
rate of the Indian of the Indian effect exchange rate
rupee by the rupee and the and six neural networks
Feedforward US dollar for they have concluded
Backpropagation the that prediction was
Neural Network period 2001 to great for first seven
(FBNN) model. 2014 and months of the year
prognosticated 2015 but in the later
the foreign five
exchange rate months the deviation
for 2015. was significant, which
shows that forecasting
was good enough in
short run than in long
run.
13 Chojnowski and Improve the They have They Observed
Dybka (2017) prediction of the extracted these monthly data on the
foreign unobserved exchange rate for
exchange rate fundamentals Polish zioty (Poland)
forecasting by from Google and Euro
including the Trends from 2004 to 2016 and
unobserved included UNF in an
fundamentals (UNF) extended form of VAR
(credit– (Vector
market, financial- Autoregressive) model,
market and price- found that including
market sentiments) the market sentiments
along with actually improved
observable forecasting capabilities.
fundamentals (OF).
14 Sharma, Hota and Analysing foreign They have In study it was found
Handa (2017) exchange rate examined that ensemble
forecasting by

23
 comparing the two their models on regression technique
models: regression the foreign with both bagging and
and ensemble exchange rate boosting perform better
regression. data of the than regression
Indian rupee technique solely. Also,
against the US with an increase of N
dollar days, the prediction
and the Euro for becomes more accurate
the period for ensemble
November 2016 technique.
to July 2017
15 Ashima Goyal (2015) Foreign Exchange The study The study describes the
Markets, describes that, institutional features of
Intervention and bounds on the these markets, with
Exchange Rate volatility of the special emphasis on the
Regimes exchange rate process of
can lower noise liberalization and
trading in FX deepening in Indian FX
markets, markets, in the
decrease context of global
variance, integration.
improve
fundamentals
and give more
monetary policy
autonomy.

16 Somnath Sharma An Empirical This study The results show that

(2011) Analysis of The focuses at the there is a two-way
Relationship relation between causality between the
between volatility in the volatility in the spot
exchange rate in exchange rate and the
the spot market trading activity in the

24
 Currency Futures and trading currency futures
and Exchange Rates activity in the market.
Volatility in India currency
futures.
17 Dr. G. Nagarajan* AN EMPIRICAL Macro- In study it was found
Nagaraj Subburao** ANALYSIS OF economic that the main
Lasya K R (2017) THE factors affect contributing factors
RELATIONSHIP the Foreign which affect the USD
BETWEEN exchange rates. rate include money
CURRENCY supply, Sensex,
FUTURES business
ANDCURRENCY confidence index and
EXCHANGE the exports.
RATE,
ECONOMICAL
FORMULAS,
PREDICTION
MODELS AND
VOLATILITY IN
INDIA
WITH
REFERENCE TO
US DOLLAR,
GREAT BRITAIN
POUNDAND
EURO
CURRENCY
18 Chaitanya Ch.et al Impact of exchange An analysis of the data
(2015) rate on select Indian revealed that foreign
IT exchange rate had
Companies, Market significant impact on
Price of Share market as a whole.
(MPS) and the tools

25
 and techniques used
by Indian IT majors
to net their foreign
exposures.
19 Vasumathy S (2015) The risk A descriptive The
management approach was results indicated
practices of Indian adopted for extensive usage of
small and medium getting a deeper forward contracts,
sector. insight into the existence of risk
practices. management systems in
some firms and
comparatively less
awareness about
derivatives among the
firms and insisted that
the firms should
monitor exchange rates
on a regular basis.
20 Mittal S (2015) How forwards are The study Findings shows that
used by selected conducted on majority of the
Indian companies secondary data companies were using
for minimising with a forward as their widely
currency exchange sample of top used technique for
risk in an efficient 100 companies hedging their foreign
manner involved in exchange
international fluctuation risk as it
trade helped to stabilise total
risk.
21 Goodhart Marc et all Identify the factors Portfolio risks, They emphasised that
(2015) which determine structural risks managers should focus
how currency and transaction on those currency risks
risks were that
highlighted.

26
 rates affect a could lead to financial
business’s cash disruption or distress.
flows.
22 Khademalomoom, S Intraday patterns in Factor studied It was founded that
and Narayan, P the currency market in this study is currencies’ behaviour
(2019), for hourly exchange liquid currency induced by these
rates of the six in respect of intraday effects had
most liquid intraday trade. implications for
currencies (i.e., the investors
Australian Dollar,
British Pound,
Canadian Dollar,
Euro,
Japanese Yen, and
Swiss-Franc) vis-à-
vis the United States
Dollar over the
period 2004-2014
23 Kunkler, M and The multilateral Factors studied It was found that that
MacDonald, R (2019) relationship between in this study are the global price of oil
oil and G10 prices of oil and moves
currencies during currencies. multilaterally with a
from 31st group of “oil”
December 1985 to currencies: the
31st December 2017 Norwegian krone, the
Australian dollar, the
Canadian dollar and the
British pound and also
it were clearly noted
that the Japanese Yen
and
the Swiss Franc move
multilaterally against

27
 the group of oil
lcurrencies and not
against the
global price of oil.
24 Yamani, E (2019), The diversification Factors studied It was found that the
role of currency in this study combined strategy was
momentum for carry currency a good hedge with
trade momentum desirable
crashes during the during crashes. diversification merits in
turbulent periods times of financial
surrounding the stress.
1997-1998 Asian
financial crisis and
the
2007-2008 global
financial crisis by
used 24 global
currencies from
December 31, 1996
to May
11, 2017
25 International Journal EXCHANGE Factor studied It was found that the
of Management (IJM) RATE here is Asian results of
VOLATILITY currencies with GARCH Model only
AND respect to US two sample currencies
CAUSALITY dollar. i.e., Indonesia (IDR/
EFFECT OF SRI USD) and
LANKA (LKR) Philippines (PHP/
WITH ASIAN USD) was recorded
EMERGING low volatility during
COUNTRIES the study period. At
CURRENCY the same time, the
AGAINST USD remaining 8 counties

28
currency were highly
volatile and it good for
speculators to make
their better investment.

29
 3. RESEARCH METHODOLOGY
Introduction:

In this chapter the research methodology used in the study is described. The geographical
area where the study is conducted, the study design and the population and the sample are
described. The instrument used to collect data, including methods implemented to maintain
validity of the instrument, are described.

Problem statement:

To study the foreign exchange and its risk due to fluctuations in currencies on the
pharmaceutical companies.

Research objectives:

1. To study and understand the foreign exchange.

2. To study and analyze the revenues of the company when the exchange rates fluctuate.
3. To analyze income statement and find out the revenues when the dollars are converted
into Indian rupees.

Research design:

Descriptive research method is used in this study.

In this study the data is collected from the secondary sources. In this study the sample size is
taken in the form of income statement of company for the year 2019- 2019-2020.

The data has been collected from various secondary sources like books and internet.

The data has been collected inline with the objectives of the study.

Data collection tool:

Quantitative method of data collection has been chosen. By various websites and from the
official website of company’s data were collected. Data like income statement and balance
sheet were taken in to account for analysis purposes.

30
The presentations of study of the pharmaceutical companies provide an insight in knowing
the foreign exchange risk policies adopted by them. This data has been collected from the
2019-2020 annual reports of the companies.

Method of data analysis:

Quantitative method of data analysis has been taken in to consideration.

For data analysis Microsoft excel has been used.

For data analysis purpose firm’s income statement has taken in to consideration with respect
to foreign exchange rates.

The revenues of the companies are divided into 35:75.

The rates which are used for the study are taken as mid value and it is compared with
minimum & maximum exchange rates.

Assumption of the study:

1. The total revenues are assumed 35% as domestic & 75% as foreign revenues.
2. The exchange rates are taken averagely.
3. The information collected from various websites are assumed to be accurate and true.
4. Risk management is an integral part of an organization policy and is inevitable.
5. It is assumed that the same risk is faced by all the pharmaceutical companies having
foreign trades in various countries.

Limitations of the study:

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

2. This study is limited for the year 2019 – 20.
3. It does not take into consideration all Indian companies foreign exchange risk.
4. The exchange rates are taken average.

31
 4. DATA ANALYSIS AND INTERPRETATION

Dr. Reddy Laboratories

Taking Dr. Reddy’s Laboratories as firm to analysis foreign exchange rates on its income
statement.

According to exchange rates UK average exchange rate in 2020 was 74.13.

72.17 foreign exchange rate was during March 2020.

Table:1 Currency exchange between two rates.

Income statement of Dr. Reddy’s Laboratories as on 30-03-2020

Particulars Amount Income and expenses 75% from foreign
Average If exchange If exchange
exchange rate @ rate @ 72.17
rate @ 74.13
74.13
Total revenue 174600000 130950000 130950000 127487677.1
Cost of revenue 80591000 60443250 60443250 58845128.2
Gross profit 94009000 70506750 70506750 68642548.9
Operating
expenses
Research 15410000 11557500 11557500 11251919.3
development
Selling general 50129000 37596750 37596750 36602690.51
and
administration
Total operating 61239000 45929250 45929250 44714878.89
expenses
Operating 32770000 24577500 24577500 23927669.97
income and loss
Interest 983000 737250 737250 717757.1
expenses
Total other -14648000 10986000 10986000 10695529.74
income/expenses
Income before 18032000 13524000 13524000 13166424.93
tax
Income tax -1466000 1099500 1099500 1070429.18
expenses
Income from 19498000 14623500 14623500 14236854.107
continuing
operations
Net income 19498000 14623500 14623500 14236854.107

32
 Chart Title
140000000

120000000

100000000

80000000

60000000

40000000

20000000

0
Total revenue Gross profit net profit

Exchange rate @74.13 Exchange rate @72.17

Interpretation:
As given above total revenue is decreased as the exchange rate goes down. when the
exchange rate was 74.13 total revenue could be 13095000 but because of change in foreign
exchange total revenue goes down to 127487677.1. And gross profit also decreased from
70506750 to 68642548.9. Because of 5he foreign exchange rate overall net income also
changed. If the exchange rate was fixed at 74.13 then the net effect on income will be
different.

33
According to exchange rate UK the lowest exchange rates or the worst exchange rate was
70.72.

Table:2 Currency exchange between two rates

Income statement of Dr. Reddy’s Laboratories as on 30-03-2020

Particulars Amount Income and expenses 75% from foreign
Average If exchange If exchange
exchange rate @ rate @ 70.72
rate @ 74.13
74.13
Total revenue 174600000 130950000 130950000 124926264.67
Cost of revenue 80591000 60443250 60443250 57662844.19
Gross profit 94009000 70506750 70506750 67263420.47
Operating
expenses
Research 15410000 11557500 11557500 11025851.88
development
Selling general 50129000 37596750 37596750 35867289.35
and
administration
Total operating 61239000 45929250 45929250 43816492.108
expenses
Operating 32770000 24577500 24577500 23446928.36
income and loss
Interest 983000 737250 737250 703336.3
expenses
Total other -14648000 10986000 10986000 10480641
income/expenses
Income before 18032000 13524000 13524000 12901892.35
tax
Income tax -1466000 1099500 1099500 1048922.70
expenses
Income from 19498000 14623500 14623500 13950815.05
continuing
operations

34
 Net income 19498000 14623500 14623500 13950815.05

Chart Title
140000000

120000000

100000000

80000000

60000000

40000000

20000000

0
Total revenue Gross profit Net profit

Exchange rate @74.13 Exchange rate @70.72

Interpretation:

As given above total revenue is decreased as the exchange rate goes down. when the
exchange rate was 74.13 total revenue could be 13095000 but because of change in foreign
exchange total revenue goes down to 124926264.67 And gross profit also decreased from
70506750 to 67263420.47. Because of the foreign exchange rate overall net income also
changed. If the exchange rate was fixed at 74.13 then the net effect on income will be
different.

35
 Table:3 Currency exchange between two rates

Income statement of Dr. Reddy’s Laboratories as on 30-03-2020

Particulars Amount Income and expenses 75% from foreign
Average If exchange If exchange
exchange rate @ rate @ 73.06
rate @ 74.13
74.13
Total revenue 174600000 130950000 130950000 129059854.3
Cost of revenue 80591000 60443250 60443250 59570805.94
Gross profit 94009000 70506750 70506750 69489048.36
Operating
expenses
Research 15410000 11557500 11557500 11390677.86
development
Selling general 50129000 37596750 37596750 37054074.66
and
administration
Total operating 61239000 45929250 45929250 45266302.507
expenses
Operating 32770000 24577500 24577500 24222745.85
income and loss
Interest 983000 737250 737250 726608.46
expenses
Total other -14648000 10986000 10986000 10827426.951
income/expenses
Income before 18032000 13524000 13524000 13328793.2
tax
Income tax -1466000 1099500 1099500 1083629.704
expenses
Income from 19498000 14623500 14623500 14412422.9
continuing
operations
Net income 19498000 14623500 14623500 14412422.9
73.06 foreign exchange rate was during December 2020.

36
 Chart Title
140000000

120000000

100000000

80000000

60000000

40000000

20000000

0
Total revenue Gross profit Net profit

Exchange rate @74.13 Exchange rate @73.06

Interpretation:
As given above total revenue is decreased as the exchange rate goes down. when the
exchange rate was 74.13 total revenue could be 13095000 but because of change in foreign
exchange total revenue goes down to129059854.3. And gross profit also decreased from
70506750 to 69489048.36. Because of 5he foreign exchange rate overall net income also
changed. If the exchange rate was fixed at 74.13 then the net effect on income will be
different.

37
 Table:4 Currency exchange between two rates

Income statement of Dr. Reddy’s Laboratories as on 30-03-2020

Particulars Amount Income and expenses 75% from foreign
Average If exchange If exchange
exchange rate @ 74.13 rate @ 76.97
rate @ 74.13
Total revenue 174600000 130950000 130950000 135966835.28
Cost of revenue 80591000 60443250 60443250 62758895.89
Gross profit 94009000 70506750 70506750 73207939.39
Operating
expenses
Research 15410000 11557500 11557500 12000280.25
development
Selling general 50129000 37596750 37596750 39037121.91
and
administration
Total operating 61239000 45929250 45929250 47688848.947
expenses
Operating income 32770000 24577500 24577500 25519090.44
and loss
Interest expenses 983000 737250 737250 765494.84
Total other -14648000 10986000 10986000 11406885.47
income/expenses
Income before tax 18032000 13524000 13524000 14042118.979
Income tax -1466000 1099500 1099500 1141623.027
expenses
Income from 19498000 14623500 14623500 15183742.007
continuing
operations
Net income 19498000 14623500 14623500 15183742.007

This foreign exchange rate was (76.97) higher in 2020.

38
 Chart Title
160000000
140000000
120000000
100000000
80000000
60000000
40000000
20000000
0
Total revenue Gross profit Net profit

Exchange rate @74.13 Exchange rate @76.97

Interpretation:
As given above total revenue is decreased as the exchange rate goes down. when the
exchange rate was 74.13 total revenue could be 13095000 but because of change in foreign
exchange total revenue goes down to135966835.281. And gross profit also decreased from
70506750 to73207939.39. Because of 5he foreign exchange rate overall net income also
changed. If the exchange rate was fixed at 74.13 then the net effect on income will be
different.

39
Table 5 Average exchange rates of IND/USD from 2001- 2002 to 2019-2020

IND/USD

80
60
40
20
0 IND/USD
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
IND/USD

2013-14
2014-15
2015-16
2016-17
2017-18
2018-19
2019-20
Source: Reserve bank of India, Average for the year.

Above given chart is the representation of the exchange rates during 2001-2002 to 2019-
2020. It shows the past average exchange rates of IND/USD. Because of the exchange rate
there is known risk of exchange rates and it affect the financial earnings of organizations
which are having their operations in foreign countries.

There are techniques which can be used to overcome the risk of foreign exchange rate on the
organizations net income.

40
 5. FINDINGS

In this study the organizations which are taken is just for the purpose of taking it as
sample to estimate or to be assume that all the organizations which are in the
pharmaceutical companies are exposed with the same kind of risk.
The company has to hammer out its approach to risk management taking into
account its specific circumstances.

Here is brief description of company in India have fashioned its strategy towards
foreign exchange risk management.

1. As per the data analysis in the first table if the foreign exchange rate was the same
then the organization would not have been exposed to the foreign exchange rate risk.
If the foreign exchange rate was fixed then the organization would have benefited in
the first analysis. It wouldn’t reduced its net income.
2. As per the data analysis in the second table Average foreign exchange rates is 74.13
and alter exchange rate was 70.72. If foreign exchange rate was the same i.e.,74.13
then the organization would not have been exposed to the foreign exchange rate risk.
If the foreign exchange rate was fixed then the organization would have benefited in
the first analysis. It wouldn’t reduced its net income.
3. As per the data analysis in the second table Average foreign exchange rates is 74.13
and alter exchange rate was 73.06. If foreign exchange rate was the same i.e.,74.13
then the organization would not have been exposed to the foreign exchange rate risk.
If the foreign exchange rate was fixed then the organization would have benefited in
the first analysis. It wouldn’t reduced its net income.
4. As per the data analysis in the second table Average foreign exchange rates is 74.13
and alter exchange rate was 76.97. If foreign exchange rate was the same i.e.,74.13
then the organization would not have been exposed to the foreign exchange rate risk.
If the foreign exchange rate was fixed then the organization would have benefited in
the analysis. It wouldn’t have exposed with the risk.

41
 6. SUGGESTIONS

• In the present day economies are globalized and the stabilities of them is really at
stake, the only rescue for the pharmaceutical companies is to improve their
responsiveness to the changing scenarios.
• Companies have to develop their services to the bench mark level or global standards
so that they can have acceptance all over the world.
• The troubles of many exporters are not a result of the volatility of the rupee but the
unfavorably high-cost structure. Exporters are viable only when foreign exchange
earnings get converted into more and more rupees. To improve rupee viability and
preserve profits, exporters need to be efficient and productive and bring down
aggregate rupee cost.
• Poor viability will not be resolved by hedging. Considering an inefficient exporter, it
requires a breakeven exchange rate of Rs.74.13 dollar to show profit. It will dazzle at
a rate above Rs.74.13. It will fizzle at any exchange rate below Rs.74.13.
• To overcome these problems exporters should make good governance by making
available superior human, social and business infrastructure even if the tax rates are
high. Good governance lower the costs of operations and lowers the aggregate costs
of doing business.

42
 Bibliography

Reference

Annual report of Dr. Reddy’s Laboratories (2019-2020)

• Average exchange rate:

https://en.m.wikipedia.org/wiki/Exchange_rate_history_of_the_Indian_ru
pee
• https://m.rbi.org.in//scripts/PublicationsView.aspx?id=17923

Articles:

• https://www.investopedia.com/terms/f/foreign-exchange.asp
• https://corporatefinanceinstitute.com/resources/knowledge/finance/foreig
n-exchange/
• https://theintactone.com/2018/07/20/ifm-u2-topic-1-foreign-exchange-
market-nature-structure-types-of-transactions/
• https://www.yourarticlelibrary.com/economics/foreign-
exchange/techniques-to-manage-foreign-exchange-risk/77056
• https://www.yourarticlelibrary.com/forex-management/4-main-
participants-of-foreign-exchange-market/98272

Research paper:

• Impact of foreign exchange exposure on profitability: A study on select it

and Ites companies in India
• A RESEARCH STUDY ON FOREIGN EXCHAGE AND ITS RISK
MANAGEMENT
• Measurement of Foreign Exchange Exposure for Selected Indian Firms

43
• An Empirical Study on Dynamics of Foreign Exchange Market in India

44