Profit/Loss on Account of Forex Exposure• The Company enters into Foreign Exchange Forward Contracts and Currency Option Contracts to offset the foreign currency risk arising from the amounts denominated in currencies other than the Indian rupee.• The counter party to the Company’s foreign currency Forward Contracts and Currency Option Contracts is generally a bank.• These contracts are entered into to hedge the foreign currency risks of certain forecasted transactions.
The following are the outstanding GBP: USD Currency Exchange Contracts enteredinto by the company which have been designated as Cash Flow Hedges as at March31, 2010:
The following are the outstanding GBP: USD Currency ExchangeContracts entered into by the company which have beendesignated as Cash Flow Hedges as at March 31, 2010:
Hedging Policy of the companyForeign currency transactions:• Transactions in foreign currencies are recorded at the exchange rates prevailing on the date of transaction. Monetary items are translated at the year end rates.• The exchange difference between the rate prevailing on the date of transaction and on the date of settlement as also on translation of monetary items at the end of the year/period is recognised as income or expense
Split of RevenueDuring the year, 58.6% of the Company’s revenue came from Europe, 29.4%came from USA and 12.0% came from Rest of the World (ROW) in which 4.6% came from India.As the country operates majorly in UK and rest of Europe, the 2 currencieswhich dominate are GBP and EURO.
Oracle• Foreign currency exchange rates in comparison to the U.S. Dollar weakened by 10%, the amount of cash, cash equivalents and marketable securities are reported in U.S. Dollars which increased by approximately $695 million, assuming constant foreign currency cash, cash equivalent and marketable securities balances.
Hedging Policy of the company• Company transact business in various foreign currencies and are subject to risks associated with the effects of certain foreign currency exposures.• They have a program that primarily utilizes foreign currency forward contracts to offset these risks associated with foreign currency exposures.
Foreign Currency Translation Risk• Fluctuations in foreign currencies impact the amount of total assets and liabilities that is reported for the foreign subsidiaries upon the translation of these amounts into U.S. Dollars.• In particular, the amount of cash, cash equivalents and marketable securities that is reported in U.S. Dollars for a significant portion of the cash held by these subsidiaries is subject to translation variance caused by changes in foreign currency exchange rates as of the end of each respective reporting period
Foreign Currency Net Investment Risk• Company hedge net assets of their international subsidiaries using foreign currency forward contracts to offset the translation and economic exposures related to their foreign currency-based investments in these subsidiaries.• These contracts have been designated as net investment hedges pursuant to ASC 815. They entered into these net investment hedges for all of fiscal 2009 and the majority of fiscal 2010
Conclusion• Derivative use for hedging is only to increase global linkages and volatile exchange rates. Firms need to look at instituting a sound risk management system and also need to formulate their hedging strategy that suits their specific firm characteristics and exposures.• In India, regulation has been steadily eased and turnover and liquidity in the foreign currency derivative markets has increased, although the use is mainly in shorter maturity contracts of one year or less. Forward and option contracts are the more popular instruments.