Risk Management in Foreign Exchange Name- Gauri Srivastava Roll Number- 11
INTRODUCTION Foreign Exchange- The exchange of one currency for another, or theconversion of one currency into another currency. Foreignexchange also refers to the global market where currenciesare traded virtually around-the-clock.It works 24 hours a day except weekends. The daily share of Indian Currency in global exchangemarket is 0.9%.In India we have direct exchange rate system.
Research Methodology• Objective-• To get the knowledge about the hedging tools used in foreign exchange.• To know about the various concept and technicalities in foreign exchange.
Exchange Rate System The Gold Standard Bretton Wood System Floating Rate System Prchasing Power ParityMethods Of Quoting Rate- Direct method In direct method
Risk InvolvedCash inflows and outflows, as measured in home currency equivalents, associated with foreign operations can be adversely affected. • Revenues (profits) and CostsSettlement value of foreign currency denominated contracts, in home currency equivalents, can be adversely affected. • For Example: Loans in foreign currencies.The global competitive position of the firm can be affected by adverse changes in exchange rates. • Influence on required return.
HEDGING TOOLS• FORWARD CONTRACT – Forward points/ forward differential – Farward rate = Spot rate + Premium/ - Discount• Risk in forward differential – Premium when currency is costlier in future than spot – Discount when currency is cheaper in future than Spot
HEDGING TOOLS• OPTION CONTRACT – Call option – Put option – American option – European option• Strike price• IN, OUT, AT the money – In the money – Out the money – At the money
CONCLUSION• According to the Bank for International Settlements as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion The $3.98 trillion break-down is as follows: $1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in foreign exchange swaps $43 billion currency swaps $207 billion in options and other products• Forex trading is very profitable and also can be very risky, but there are various foreign exchange risk management strategies, that can be used to limit risk and financial exposure.