A

PROJECT REPORT 

ON 

ADVANCED ISSUES IN INTERNATIONAL BUSINESS

FOR 

THE PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE POST

GRADUATE DIPLOMMA IN MANAGEMENT (2019-2021)

SUBMITTED TO:                                                            SUBMITTED BY: 

Dr. Tophan Patra PARAS JINDAL ( BM-019117)

ROHAN CHANDNA ( BM-019138)

 Foreign Exchange Risk Management Practices: A
Study on Ludhiana Textile Exporters

INTRODUCTION
Due to globalization of Indian economy the trade and investments with rest of the
world has increased and firms have come across with different kinds of risk exposures.
Therefore it is essential for the firms to measure risk exposures for the purpose of risk
management. Financial markets have played very crucial role by introducing hedging
tools such as options, futures, forwards and swaps to manage foreign exchange risk by
the corporate sector. The spurts in foreign investments in India have led to
considerable increase in the quantum of inflows and outflows in different currencies.
Business enterprises have had to face the challenges of the shift from low risk to high
risk operations involving foreign exchange. There was increasing alertness of the need
for introduction of financial derivatives to enable hedging against market risk. Earlier
the Indian companies had been entering into forward contracts with banks, but many
firms preferred to keep their risk exposures un-hedged as they found the forward
contracts to be very costly. In the current influential phase of the development of the
foreign exchange market, it will be meaningful that initiatives should be taken by
corporate enterprises in identifying and managing foreign exchange risk.
DEFINATION OF FOREIGN EXCHANGE RISK
Foreign exchange risk is the exposure of business to movements in foreign
exchange rates. Foreign exchange risk arises, where currency mismatches in an
institution’s assets and liabilities and currency cash flow mismatches. This risk may
arise from a variety of sources such as foreign currency retail cash transactions, retail
accounts, investments in foreign currencies and investments in foreign companies. The
amount at risk involved is a result of the change in the magnitude of potential
exchange rate and the size and duration of the foreign currency exposure.

KINDS OF FOREIGN EXCHANGE EXPOSURE:

Risk management techniques differ with the type of exposure and term of
exposure. There are two basic types of exposures which are explained as follows:
 Accounting exposure which is also called translation exposure, results when the
financial statements of a subsidiary company is restated into its parent
company’s currency and its impact on the net income due to variation in the
exchange rate between a foreign subsidiary and its parent.
 Economic exposure is the extent to which a firm's market value, in any
particular currency, is sensitive to unexpected changes in foreign currency.
FRAMEWORK OF FOREIGN EXCHANGE RISK MANAGEMENT
A firm has to organize its resources once it recognizes its exposure. A firm in
order to manage this risk effectively can use some or all of the following tools:
 Forecasts
 Risk Estimation
 Benchmarking
 Hedging
 Stop Loss
 Reporting and Review

HEDGING INSTRUMENTS:
 A derivative is a financial contract whose value is derived from the value of some
other financial asset, such as a stock price, a commodity price, an exchange rate, an
interest rate, or even an index of prices. Following hedging tools are explained as
below:

Forwards: A forward is a made-to-measure agreement between two parties to buy or

sell a specified amount of a currency at a specified rate on a particular date in the
future. The depreciation of the receivable currency is hedged against by selling a
currency forward. If the risk is that of a currency appreciation i.e. if the firm has to
buy that currency in future say for import, it can hedge by buying the currency
forward

Futures: A futures contract is similar to the forward contract but is more liquid
because it is traded in an organized exchange i.e. the futures market. Depreciation of a
currency can be hedged by selling futures and appreciation can be hedged by buying
futures.

Options: A currency Option is a contract giving the right, not the obligation, to buy or
sell a specific quantity of one foreign currency in exchange for another at a fixed
price; called the Exercise Price or Strike Price. The fixed nature of the exercise price
reduces the uncertainty of exchange rate changes and limits the losses of open
currency positions. Call Options are used if the risk is an upward trend in price of the
currency, while Put Options are used if the risk is a downward trend.

Swaps: A swap is a foreign currency contract whereby the buyer and seller exchange
equal initial principal amounts of two different currencies at the spot rate. The buyer
and seller exchange fixed or floating rate interest payments in their respective
swapped currencies over the term of the contract. At maturity, the principal amount is
effectively re-swapped at a predetermined exchange rate so that the parties end up
with their original currencies.

Factors affecting the decision to hedge foreign currency risk:

Following section describes the factors that affect the decision to hedge and then
the factors affecting the degree of hedging are considered.
 Firm size: Firm size acts as a proxy for the cost of hedging or economies of
scale. Risk management involves fixed costs of setting up of computer systems
and training/hiring of personnel in foreign exchange management. Moreover,
large firms might be considered as more creditworthy counterparties for
forward or swap transactions, thus further reducing their cost of hedging. The
book value of assets is used as a measure of firm size.
 Leverage: According to the risk management literature, firms with high
leverage have greater incentive to engage in hedging because doing so reduces
the probability, and thus the expected cost of financial distress. Highly levered
firms avoid foreign debt as a means to hedge and use derivatives.
 Liquidity and profitability: Firms with highly liquid assets or high
profitability have less incentive to engage in hedging because they are exposed
to a lower probability of financial distress. Liquidity is measured by the quick
ratio, i.e. quick assets divided by current liabilities). Profitability is measured as
EBIT divided by book assets.
 Sales growth: Sales growth is a factor determining decision to hedge as
opportunities are more likely to be affected by the underinvestment problem.
For these firms, hedging will reduce the probability of having to rely on
external financing, which is costly for information asymmetry reasons, and thus
enable them to enjoy uninterrupted high growth. The measure of sales growth is
obtained using the 3-year geometric average of yearly sales growth rates.
 Analysis and Interpretation:


No. of textile products manufacturers & exporters in Ludhiana

Products Yarn Fabric Garment
No. of responses 38 34 50
No. of respondents 100 100 100
Percentage 38% 34% 50%

Interpretation: From above table we can interpret that the garment
manufacturers & exporters are more than the yarn & fabric manufacturers. This
shows there is increasing demand for garments which attracted more players in
the market where as fabric and yarn manufacturers are less.

 Annual turnover of the manufacturers& exporters in the year

 Annual turnover of the manufacturers& exporters in the year

Interpretation: It can be inferred that majority number of exporters have their
turnover between 1-25crores & there are 30% of big exporters having turnover
above 100crores.

 Proportion of exports out of total turnover

Proportion of exports out of total turnover

Interpretation: Only few respondents are exporting 100% of their production.

Respondents incurred loss due to change in the foreign exchange rate

Percentage of respondents incurred loss due to change in the foreign

exchange rate Interpretation: It can be concluded that majority number of
 exporters have incurred a losses due to change in the
foreign exchange rate.

Percentage of exporters aware about hedging tools

 Percentage of exporters aware about hedging tools

Interpretation: It can be concluded from the above data that majority no. of
respondents are aware about hedging tools that are used to manage foreign
exchange risk due to change in the foreign exchange rate.
 Hedging tools used by the exporters

Hedging tools used by the exporters

Interpretation: It can be inferred that majority no of respondents are using
hedging tools.

 Degree of management of foreign exchange risk

 Degree of management of foreign exchange risk

Interpretation: It can be inferred that from the above data that majority no
exporters try to minimize their foreign exchange risk either partially or fully.

Rating of satisfaction level of the exporters from their foreign exchange

 management practices
 Rating of satisfaction level of the exporters from their foreign exchange
management practices Interpretation: It can be inferred that majority no of
respondents are satisfied with the practices that they are using.

Conclusion
The increasing demand for garments in export market has attracted many players
in the market & many exporters have incurred losses due to change in the foreign
exchange rate. To overcome the risk of loss due to change in foreign exchange rate the
exporters in order to manage the risk either partially or fully, are using hedging tools
but other practices are also like L/C, Currency trading, Bullion trading, Derivatives,
Advance payment, Escalation clause, Benchmarking & Insurance. Majority exporters
are satisfied with what they are practicing & prefer using the same in order to
minimize their foreign exchange risk. But according to the opinion of majority of the
exporters forecasting & risk estimation are the most important practices than hedging
& factors like profitability, sales growth & leverage are more affecting the decisions to
minimize foreign exchange risk. In order to manage risk exporters are more dependent
on In-house expertise & taking less help from the consultancies which has increased
their risk of loss.
FORECASTING OF FOREIGN EXCHANGE RUPEES AND
DOLLARS:

Dollar to indian rupee forecast from Sep 2020 to Oct 2022

Month Open Low-High Close Mo,% Total,%
2020
Sep 73.25 72.75-74.99 73.88 0.9% 0.9%
Oct 73.88 72.96-75.18 74.07 0.3% 1.1%
Nov 74.07 71.35-74.07 72.44 -2.2% -1.1%
Dec 72.44 70.75-72.91 71.83 -0.8% -1.9%
2021
Jan 71.83 70.68-72.84 71.76 -0.1% -2.0%
Feb 71.76 70.88-73.04 71.96 0.3% -1.8%
Mar 71.96 70.97-73.13 72.05 0.1% -1.6%
Apr 72.05 72.05-75.32 74.21 3.0% 1.3%
May 74.21 73.76-76.00 74.88 0.9% 2.2%
Jun 74.88 73.93-76.19 75.06 0.2% 2.5%
Jul 75.06 73.53-75.77 74.65 -0.5% 1.9%
Aug 74.65 74.33-76.59 75.46 1.1% 3.0%
Sep 75.46 74.84-77.12 75.98 0.7% 3.7%
Oct 75.98 73.55-75.98 74.67 -1.7% 1.9%
Nov 74.67 74.67-78.06 76.91 3.0% 5.0%
Dec 76.91 75.67-77.97 76.82 -0.1% 4.9%
2022
Jan 76.82 74.98-77.26 76.12 -0.9% 3.9%
Feb 76.12 74.91-77.19 76.05 -0.1% 3.8%
Mar 76.05 75.40-77.70 76.55 0.7% 4.5%
Apr 76.55 73.68-76.55 74.80 -2.3% 2.1%
May 74.80 73.52-75.76 74.64 -0.2% 1.9%
Jun 74.64 74.64-77.12 75.98 1.8% 3.7%
Jul 75.98 72.59-75.98 73.70 -3.0% 0.6%
Aug 73.70 73.70-76.25 75.12 1.9% 2.6%
Sep 75.12 75.12-78.12 76.97 2.5% 5.1%
Month Open Low-High Close Mo,% Total,%
2022 Continuation
Oct 76.97 76.97-80.47 79.28 3.0% 8.2%
Nov 79.28 78.17-80.55 79.36 0.1% 8.3%
Dec 79.36 79.33-81.75 80.54 1.5% 10.0%
2023
Jan 80.54 80.52-82.98 81.75 1.5% 11.6%
Feb 81.75 81.75-84.68 83.43 2.1% 13.9%
Mar 83.43 82.06-84.56 83.31 -0.1% 13.7%
Apr 83.31 83.31-86.77 85.49 2.6% 16.7%
May 85.49 83.82-86.38 85.10 -0.5% 16.2%
Jun 85.10 82.98-85.50 84.24 -1.0% 15.0%
Jul 84.24 82.63-85.15 83.89 -0.4% 14.5%
Aug 83.89 81.95-84.45 83.20 -0.8% 13.6%
 Sep 83.20 83.20-86.28 85.00 2.2% 16.0%
Oct 85.00 83.36-85.90 84.63 -0.4% 15.5%
Nov 84.63 82.80-85.32 84.06 -0.7% 14.8%
Dec 84.06 82.94-85.46 84.20 0.2% 14.9%
2024
Jan 84.20 83.24-85.78 84.51 0.4% 15.4%
Feb 84.51 82.50-85.02 83.76 -0.9% 14.3%
Mar 83.76 80.23-83.76 81.45 -2.8% 11.2%
Apr 81.45 79.27-81.69 80.48 -1.2% 9.9%
May 80.48 78.74-81.14 79.94 -0.7% 9.1%
Jun 79.94 78.00-80.38 79.19 -0.9% 8.1%
Jul 79.19 79.19-82.68 81.46 2.9% 11.2%
Aug 81.46 80.40-82.84 81.62 0.2% 11.4%
Sep 81.62 79.89-82.33 81.11 -0.6% 10.7%
Oct 81.11 80.30-82.74 81.52 0.5% 11.3%

USD to INR forecast for September 2020.

In the beginning rate at 73.25 Indian Rupees. High exchange rate 74.99, low 72.75. The average for
the month 73.72. The USD to INR forecast at the end of the month 73.88, change for September
0.9%.
Dollar to Indian Rupee forecast for October 2020.
In the beginning rate at 73.88 Indian Rupees. High exchange rate 75.18, low 72.96. The average for
the month 74.02. The USD to INR forecast at the end of the month 74.07, change for October 0.3%.
USD to INR forecast for November 2020.
In the beginning rate at 74.07 Indian Rupees. High exchange rate 74.07, low 71.35. The average for
the month 72.98. The USD to INR forecast at the end of the month 72.44, change for November
-2.2%.
Dollar to Indian Rupee forecast for December 2020.
In the beginning rate at 72.44 Indian Rupees. High exchange rate 72.91, low 70.75. The average for
the month 71.98. The USD to INR forecast at the end of the month 71.83, change for December
-0.8%.
USD to INR forecast for January 2021.
In the beginning rate at 71.83 Indian Rupees. High exchange rate 72.84, low 70.68. The average for
the month 71.78. The USD to INR forecast at the end of the month 71.76, change for January -0.1%.
Dollar to Indian Rupee forecast for February 2021.
In the beginning rate at 71.76 Indian Rupees. High exchange rate 73.04, low 70.88. The average for
the month 71.91. The USD to INR forecast at the end of the month 71.96, change for February 0.3%.
USD to INR forecast for March 2021.
In the beginning rate at 71.96 Indian Rupees. High exchange rate 73.13, low 70.97. The average for
the month 72.03. The USD to INR forecast at the end of the month 72.05, change for March 0.1%.
Dollar to Indian Rupee forecast for April 2021.
In the beginning rate at 72.05 Indian Rupees. High exchange rate 75.32, low 72.05. The average for
the month 73.41. The USD to INR forecast at the end of the month 74.21, change for April 3.0%.
USD to INR forecast for May 2021.
In the beginning rate at 74.21 Indian Rupees. High exchange rate 76.00, low 73.76. The average for
the month 74.71. The USD to INR forecast at the end of the month 74.88, change for May 0.9%.
Dollar to Indian Rupee forecast for June 2021.
In the beginning rate at 74.88 Indian Rupees. High exchange rate 76.19, low 73.93. The average for
the month 75.02. The USD to INR forecast at the end of the month 75.06, change for June 0.2%.
USD to INR forecast for July 2021.
In the beginning rate at 75.06 Indian Rupees. High exchange rate 75.77, low 73.53. The average for
the month 74.75. The USD to INR forecast at the end of the month 74.65, change for July -0.5%.
Dollar to Indian Rupee forecast for August 2021.
In the beginning rate at 74.65 Indian Rupees. High exchange rate 76.59, low 74.33. The average for
the month 75.26. The USD to INR forecast at the end of the month 75.46, change for August 1.1%.
USD to INR forecast for September 2021.
In the beginning rate at 75.46 Indian Rupees. High exchange rate 77.12, low 74.84. The average for
the month 75.85. The USD to INR forecast at the end of the month 75.98, change for September
0.7%.
Dollar to Indian Rupee forecast for October 2022.
In the beginning rate at 76.97 Indian Rupees. High exchange rate 80.47, low 76.97. The average for
the month 78.42. The USD to INR forecast at the end of the month 79.28, change for October 3.0%.

Indian rupee to dollar forecast from Sep 2020 to 0ct 2022

Month Open Low-High Close Mo,% Total,%
2020
Sep 1.37 1.33-1.37 1.35 -1.5% -1.1%
Oct 1.35 1.33-1.37 1.35 0.0% -1.1%
Nov 1.35 1.35-1.40 1.38 2.2% 1.1%
Dec 1.38 1.37-1.41 1.39 0.7% 1.8%
2021
Jan 1.39 1.37-1.41 1.39 0.0% 1.8%
Feb 1.39 1.37-1.41 1.39 0.0% 1.8%
Mar 1.39 1.37-1.41 1.39 0.0% 1.8%
Apr 1.39 1.33-1.39 1.35 -2.9% -1.1%
May 1.35 1.32-1.36 1.34 -0.7% -1.8%
Jun 1.34 1.31-1.35 1.33 -0.7% -2.6%
Jul 1.33 1.32-1.36 1.34 0.8% -1.8%
Aug 1.34 1.31-1.35 1.33 -0.7% -2.6%
Sep 1.33 1.30-1.34 1.32 -0.8% -3.3%
Oct 1.32 1.32-1.36 1.34 1.5% -1.8%
Nov 1.34 1.28-1.34 1.30 -3.0% -4.8%
Dec 1.30 1.28-1.32 1.30 0.0% -4.8%
2022
Jan 1.30 1.29-1.33 1.31 0.8% -4.0%
Feb 1.31 1.30-1.33 1.31 0.0% -4.0%
Mar 1.31 1.29-1.33 1.31 0.0% -4.0%
Apr 1.31 1.31-1.36 1.34 2.3% -1.8%
May 1.34 1.32-1.36 1.34 0.0% -1.8%
Jun 1.34 1.30-1.34 1.32 -1.5% -3.3%
Jul 1.32 1.32-1.38 1.36 3.0% -0.4%
Aug 1.36 1.31-1.36 1.33 -2.2% -2.6%
Sep 1.33 1.28-1.33 1.30 -2.3% -4.8%
Month Open Low-High Close Mo,% Total,%
2022 Continuation
Oct 1.30 1.24-1.30 1.26 -3.1% -7.7%
Nov 1.26 1.24-1.28 1.26 0.0% -7.7%
Dec 1.26 1.22-1.26 1.24 -1.6% -9.2%
2023
Jan 1.24 1.21-1.24 1.22 -1.6% -10.6%
Feb 1.22 1.18-1.22 1.20 -1.6% -12.1%
Mar 1.20 1.18-1.22 1.20 0.0% -12.1%
Apr 1.20 1.15-1.20 1.17 -2.5% -14.3%
May 1.17 1.16-1.19 1.18 0.9% -13.6%
Jun 1.18 1.17-1.21 1.19 0.8% -12.8%
 Jul 1.19 1.17-1.21 1.19 0.0% -12.8%
Aug 1.19 1.18-1.22 1.20 0.8% -12.1%
Sep 1.20 1.16-1.20 1.18 -1.7% -13.6%
Oct 1.18 1.16-1.20 1.18 0.0% -13.6%
Nov 1.18 1.17-1.21 1.19 0.8% -12.8%
Dec 1.19 1.17-1.21 1.19 0.0% -12.8%
2024
Jan 1.19 1.17-1.20 1.18 -0.8% -13.6%
Feb 1.18 1.18-1.21 1.19 0.8% -12.8%
Mar 1.19 1.19-1.25 1.23 3.4% -9.9%
Apr 1.23 1.22-1.26 1.24 0.8% -9.2%
May 1.24 1.23-1.27 1.25 0.8% -8.4%
Jun 1.25 1.24-1.28 1.26 0.8% -7.7%
Jul 1.26 1.21-1.26 1.23 -2.4% -9.9%
Aug 1.23 1.21-1.24 1.23 0.0% -9.9%
Sep 1.23 1.21-1.25 1.23 0.0% -9.9%
Oct 1.23 1.21-1.25 1.23 0.0% -9.9%

INR to USD forecast for September 2020.

In the beginning rate at 1.37 Dollars. High exchange rate 1.37, low 1.33. The average for the month
1.36. The INR to USD forecast at the end of the month 1.35, change for September -1.5%.
Indian Rupee to Dollar forecast for October 2020.
In the beginning rate at 1.35 Dollars. High exchange rate 1.37, low 1.33. The average for the month
1.35. The INR to USD forecast at the end of the month 1.35, change for October 0.0%.
INR to USD forecast for November 2020.
In the beginning rate at 1.35 Dollars. High exchange rate 1.40, low 1.35. The average for the month
1.37. The INR to USD forecast at the end of the month 1.38, change for November 2.2%.
Indian Rupee to Dollar forecast for December 2020.
In the beginning rate at 1.38 Dollars. High exchange rate 1.41, low 1.37. The average for the month
1.39. The INR to USD forecast at the end of the month 1.39, change for December 0.7%.
INR to USD forecast for January 2021.
In the beginning rate at 1.39 Dollars. High exchange rate 1.41, low 1.37. The average for the month
1.39. The INR to USD forecast at the end of the month 1.39, change for January 0.0%.
Indian Rupee to Dollar forecast for February 2021.
In the beginning rate at 1.39 Dollars. High exchange rate 1.41, low 1.37. The average for the month
1.39. The INR to USD forecast at the end of the month 1.39, change for February 0.0%.
INR to USD forecast for March 2021.
In the beginning rate at 1.39 Dollars. High exchange rate 1.41, low 1.37. The average for the month
1.39. The INR to USD forecast at the end of the month 1.39, change for March 0.0%.
Indian Rupee to Dollar forecast for April 2021.
In the beginning rate at 1.39 Dollars. High exchange rate 1.39, low 1.33. The average for the month
1.37. The INR to USD forecast at the end of the month 1.35, change for April -2.9%.
INR to USD forecast for May 2021.
In the beginning rate at 1.35 Dollars. High exchange rate 1.36, low 1.32. The average for the month
1.34. The INR to USD forecast at the end of the month 1.34, change for May -0.7%.
Indian Rupee to Dollar forecast for June 2021.
In the beginning rate at 1.34 Dollars. High exchange rate 1.35, low 1.31. The average for the month
1.33. The INR to USD forecast at the end of the month 1.33, change for June -0.7%.
INR to USD forecast for July 2021.
In the beginning rate at 1.33 Dollars. High exchange rate 1.36, low 1.32. The average for the month
1.34. The INR to USD forecast at the end of the month 1.34, change for July 0.8%.
Indian Rupee to Dollar forecast for August 2021.
In the beginning rate at 1.34 Dollars. High exchange rate 1.35, low 1.31. The average for the month
1.33. The INR to USD forecast at the end of the month 1.33, change for August -0.7%.
INR to USD forecast for September 2021.
In the beginning rate at 1.33 Dollars. High exchange rate 1.34, low 1.30. The average for the month
1.32. The INR to USD forecast at the end of the month 1.32, change for September -0.8%.
Indian Rupee to Dollar forecast for October 2022.
In the beginning rate at 1.30 Dollars. High exchange rate 1.30, low 1.24. The average for the month
1.28. The INR to USD forecast at the end of the month 1.26, change for October -3.1%.