FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES - A STUDY IN INDIAN SCENARIO

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1 BRAC Univrsity Journal, vol. V, no. 2, 2008, pp FOREIGN EXCHANGE RISK MANAGEMENT PRACTICES - A STUDY IN INDIAN SCENARIO Sathya Swaroop Dbasish Dpartmnt of Businss Managmnt Fakir Mohan Univrsity Vyasa Vihar, Balasor Orissa, INDIA ABSTRACT Indian conomy in th post-libralisation ra has witnssd incrasing awarnss of th nd for introduction of various risk managmnt products to nabl hdging against markt risk in a cost ffctiv way. This industry-wid, cross-sctional study concntrats on rcnt forign xchang risk managmnt practics and drivativs product usag by larg non-banking Indian-basd firms. Th study is xploratory in natur and aims at an undrstanding th risk apptit and FERM (Forign Exchang Risk Managmnt) practics of Indian corporat ntrpriss. This study focusss on th activity of nd-usrs of financial drivativs and is confind to 501 non-banking corporat ntrpriss. A combination of simpl random and judgmnt sampling was usd for slcting th corporat ntrpriss and th major statistical tools usd wr Corrlation and Factor analysis. Th study finds wid usag of drivativ products for risk managmnt and th prim rason of hdging is rduction in volatility of cash flows. VAR (Valu-at-Risk) tchniqu was found to b th prfrrd mthod of risk valuation by maximum numbr of Indian corporat. Furthr, in trms of th xtrnal tchniqus for risk hdging, th prfrnc is mostly in favour of forward contracts, followd by swaps and cross-currncy options This articl throws light on various concrns of Indian firms rgarding drivativ usag and rasons for non-usag, apart form tchniqus of risk hdging, risk valuation mthods adoptd, risk managmnt policy and typs of drivativs usd. Ky Words: Forign Exchang, Financial Drivativs, Hdging, Risk. I. INTRODUCTION Th Indian conomy saw a sa chang in th yar 1999 whrby it casd to b a closd and protctd conomy, and adoptd th globalisation rout, to bcom a part of th world conomy. In th pr-libralisation ra, markd by Statdominatd, tightly rgulatd forign xchang rgim, th only risk managmnt tool availabl for corporat ntrpriss was, lobbying for govrnmnt intrvntion. With th advnt of LERMS (Libralisd Exchang Rat Mchanism Systm) in India, in 1992, th markt forcs startd to prsnt a rgim with stady pric volatility as against th arlir trnd of long priods of constant prics followd by suddn, larg pric movmnts. Th unifid xchang rat phas has witnssd improvmnt in informational and oprational fficincy of th forign xchang markt, though at a halting pac. In th corporat financ litratur, rsarch on risk managmnt has focusd on th qustion of why firms should hdg a givn risk. Th litratur maks th important point that masuring risk xposurs is an ssntial componnt of a firm's risk managmnt stratgy. Without knowldg of th primitiv risk xposurs of a firm, it is not possibl to tst whthr firms ar altring thir xposurs in a mannr consistnt with thory. Rcnt product innovations in th financial markts and th us of ths products by th corporat sctor ar also xamind. In addition to th traditional "physical" products, such as spot and forward xchang rats, th nw "synthtic" or drivativ products, including options, futurs and swaps, and thir us by th corporat sctor ar considrd. Ths synthtic products hav thir markt valu dtrmind by th valu of a spcific, undrlying, physical product. Th spurts in forign invstmnts in India hav ld to substantial incras in th quantum of inflows and outflows in diffrnt currncis, with varying maturitis. Corporat ntrpriss hav had to fac th challngs of th shift from low risk to highrisk oprations involving forign xchang. Thr

2 Sathya Swaroop Dbasish was incrasing awarnss of th nd for introduction of financial drivativs in ordr to nabl hdging against markt risk in a cost ffctiv way. Earlir, th Indian companis had bn ntring into forward contracts with banks, which wr th Authorisd Dalrs (AD) in forign xchang. But many firms prfrrd to kp thir risk xposurs un-hdgd as thy found th forward contracts to b vry costly. In th currnt formativ phas of th dvlopmnt of th forign xchang markt, it will b worthwhil to tak stock of th initiativs takn by corporat ntrpriss in idntifying and managing forign xchang risk. II. SIGNIFICANCE OF THE STUDY India had arlir followd a tightly rgulatd forign xchang rgim. Th libralisation of th Indian conomy startd in Th Budgt providd for partial convrtibility of Indian Rup in currnt accounts and, in March 1993, th Rup was mad fully convrtibl in currnt account. Dmand and supply conditions now govrn th xchang rats in our forign xchang markt. A fast dvloping conomy has to cop with a multitud of changs, ranging from individual and institutional prfrncs to changs in tchnology, in conomic policis, in rgulations tc. Bsids, thr ar changs arising from xtrnal trad and capital account intractions. Ths gnrat a varity of risks, which hav to b managd. Thr has bn a sharp incras in forign invstmnt in India. Multi-national and transnational corporations ar playing incrasingly important rols in Indian businss. Indian corporat units ar also ngaging in a much widr rang of cross bordr transactions with diffrnt countris and products. Indian firms hav also bn mor activ in raising financial rsourcs abroad. All ths dvlopmnts combin to giv a boost to cross-currncy cash flows, involving diffrnt currncis and diffrnt countris. Th corporat ntrpriss in India ar incrasingly aliv to th nd for organisd fund managmnt and for th application of innovativ hdging tchniqus for protcting thmslvs against attndant risks. Drivativs ar th tools that facilitat trading in risk. Th forign xchang markt is still volving and corporat ntrpriss ar going through th movmnts in transition from a passiv to an activ rol in risk managmnt. Thr is no organisd information availabl on how th corporat ntrpriss in India ar facing this challng. It is in this contxt that a rviw of th prcptions and concrns of th corporats, in rlation to drivativs and of thir initiativs in tuning th organisational st up to acquir and adopt th rquisit skills in risk managmnt, assums significanc. Appropriat policy and othr masurs can thn b takn to acclrat th procss of furthr dvlopmnt of forign xchang markt and also upgrad forign xchang risk managmnt (FERM) with highr profssionalism and incrasd ffctivnss. III. OBJECTIVES OF THE STUDY a) To ascrtain th FERM practics, and product usag, of Indian non-financial corporat ntrpriss. b) To know th attituds, prcptions and concrns of Indian firms towards FERM. c) To undrstand th lvl of awarnss of drivativs and thir uss, among th firms. d) To ascrtain th organisation structur, policymaking and control procss adoptd by th firms, which us drivativs, in managing forign xchang xposur. IV. CURRENCY RISK MANAGEMENT TECHNIQUES A firm may choos any on or any st of combinations of th following tchniqus (Figur- 1) to manag forign xchang rat risks. 82

3 Forign Exchang Risk Managmnt Practics Figur-1: Tchniqus of Risk Managmnt/Hdging Matching Mony Markt Hdging Multrilatral Ntting Currncy Options Tchniqus of Hdging Lads and Lags Currncy Swaps Invoicing and Currncy Clauss Currncy Futurs Forward Currncy Transactions i) Matching:-Cash inflows in on of th pairing currncis can b offst against cash flows in th othrs. A firm can balanc its rcivabls and payabls in th sam currncy. Firms may also dlibratly influnc th balanc by arranging short or long trm loans or dposits. ii) Multi-latral Ntting:- Th ntting can b don btwn inflows and outflows of diffrnt currncis arising from cross-bordr transactions of th diffrnt ntitis in th group. This, of cours, rquirs a comprhnsiv information systm concrning forign xchang dalings of th group companis. iii) Lads and Lags:- Within th boundaris of th trms of th trading contracts or in kping with prvailing commrcial practics and within th xisting rgulations, paymnts to trading partnrs or forign subsidiaris, in currncis whos valus ar xpctd to apprciat or dprciat, can b acclratd or dlayd. iv) Invoicing and Currncy Clauss:- Trading companis may, somtims, hav options to invoic thir cross-bordr sals or purchass, in domstic currncy, so that th othr party absorbs xchang rat risk. Similar choics of invoicing in third country currncis may also b ngotiatd with trading partnrs. Thr ar instancs of invoicing in trms of currncy baskts, comprising a composit indx of diffrnt national currncis that hav bn allottd prdtrmind wights. Judiciously mployd, this can hlp in rducing th impact of volatility of xchang rats. v) Forward Currncy Transactions:- This involvs an agrmnt btwn two partis, a buyr and a sllr, to buy/sll a currncy at a latr dat at a fixd pric. Forward currncy contracts can b asily arrangd with banks, which ar ADs in forign xchang. A forward contract has th advantag of locking in th xchang rat at an agrd lvl, protcting from advrs movmnt in xchang rats. vi) Currncy Futurs:- This involvs an agrmnt btwn two partis, a buyr and a sllr, to purchas/sll a currncy at a latr dat at a fixd pric, and that it trads on th futurs xchang and is subjct to a daily sttlmnt procdur to guarant ach party that claims against th othr party will b paid. In India, w ar yt to hav a 83

4 Sathya Swaroop Dbasish futurs xchang and claring hous for financial futurs. vii) Currncy Options:- Currncy options offr th holdr th right, but not th obligation, to buy or sll forign currncy at an agrd pric, within a spcifid priod of tim. Gnrally, on most xchangs, options ar not constructd on th undrlying markt, but rathr convy th right to buy or sll th futurs contract. Thr can b xchang-tradd options as also OTC options. viii) Currncy Swaps:- A financial swap is a transaction in which two partis agr to an xchang of paymnts ovr a spcifid tim priod. It is ordinarily markd by an xchang of principals, which may b actual or notional. In a cross currncy swap, th countr-partis xchang principals in diffrnt currncis at an xchang rat that is usually th currnt spot rat and rvrs th xchang at a latr dat, usually at th sam xchang rat. ix) Mony Markt Hdging:- Companis that hav nd to rais mdium trm forign currncy loans should xplor th possibility of rducing currncy risk by raising thm in currncis in which thy hav mdium trm xposur in trms of rcivabls and assts in ths currncis. V. REVIEW OF LITERATURE Collir and Davis (1985) in thir study about th organisation and practic of currncy risk managmnt by U.K. multi-national companis. Th findings rvald that thr is a dgr of cntralisd control of group currncy risk managmnt and that formal xposur managmnt policis xistd. Thr was activ managmnt of currncy transactions risk. Th prfrnc was for risk-avrs policis, in that automatic policis of closout wr applid. Battn, Mtlor and Wan (1992) focussd on forign xchang risk managmnt practic and product usag of larg Australia-basd firms. Th rsults indicatd that, of th 72 firms covrd by th Study, 70% of th firms tradd thir forign xchang xposurs, acting as forign xchang risk barrs, in an attmpt to optimis company rturns. Transaction xposur mrgd as th most rlvant xposur. Jsswin t al, (1993) in thir study on us of drivativs by U.S. corporations, catgoriss forign xchang risk managmnt products undr thr gnrations: Forward contracts blonging to th First Gnration; Futurs, Options, Futurs- Options, Warrantis and Swaps blonging to th Scond Gnration; and Rang, Compound Options, Synthtic Products and Forign Exchang Agrmnts blonging to th Third Gnration. Th findings of th Study showd that th us of th third gnration products was gnrally lss than that of th scond-gnration products, which was, in turn, lss than th us of th first gnration products. Th us of ths risk managmnt products was gnrally not significantly rlatd to th siz of th company, but was significantly rlatd to th company s dgr of intrnational involvmnt. Phillips (1995) in his study focusd on drivativ scuritis and drivativ contracts found that organisations of all sizs facd financial risk xposurs, indicating a valuabl opportunity for using risk managmnt tools. Th trasury profssionals xhibitd slctivity in thir us of drivativs for risk managmnt. Howton and Prfct (1998) in thir study xamins th pattrn of us of drivativs by a larg numbr of U.S. firms and indicatd that 60% of firms usd som typ of drivativs contract and only 36% of th randomly slctd firms usd drivativs. In both sampls, ovr 90% of th intrst rat contracts wr swaps, whil futurs and forward contracts comprisd ovr 80% of currncy contracts. Hntschl and Kothari (2000) idntify firms that us drivativs. Thy compar th risk xposur of drivativ usrs to that of nonusrs. Thy find conomically small diffrncs in quity rturn volatility btwn drivativ usrs and nonusrs. Thy also find that currncy hdging has littl ffct on th currncy xposur of firms' quity, vn though drivativs us rangs from 0.6% to 64.2% of th firm's assts. Our findings ar vry important sinc no prvious work has xamind th FERM practic in Indian contxt. This study will b a pionring attmpt in Indian scnario and first of its kind to survy th Indian companis and thir risk managmnt practics. VI. METHODOLOGY OF THE STUDY An xploratory survy, by way of xtnsiv litratur rviw of books, journals and othr 84

5 Forign Exchang Risk Managmnt Practics publishd data rlatd to th focus of th study, as also concrnd wbsits, was carrid out to gathr background information about th gnral natur of th rsarch problm. A. Sourcs of Data Th main part of th Study dals with Indian corporat ntrpriss awarnss of and attituds to forign xchang risk xposur. Th rquird data was collctd through th pr-tstd qustionnair administrd on a judgmnt sampl of 501 corporat ntrpriss, locatd in diffrnt parts of th country. Th administration of th qustionnair was don through multipl channls, which includd surfac mail, -mail and prsonal involvmnt. Information rlating to contmporary practics abroad was obtaind from publishd sourcs such as journals, rports, and from rlatd wbsits. B. Sampl for th Study Th survy was accomplishd with th pr-tstd qustionnair administrd on 501 corporat ntrpriss in India (banks and subsidiaris of forign multi-nationals not includd), having forign xchang xposur. A combination of simpl random and judgmnt sampling was usd for slcting th corporat ntrpriss for th xploratory Study. As against th 850 qustionnairs circulatd, 588 rsponss wr rcivd. Of ths, 37 had to b liminatd, as thy wr incomplt in many rspcts. Th rspondnts ar sprad ovr 18 diffrnt major industry classifications. Th sampl covrs both old conomy corporats lik Manufacturing, Minrals, Trad, Oil tc., and nw conomy corporats including Information Tchnology (IT), Information Tchnology Enabld Srvics (ITES), Businss Procss Outsourcing (BPO) tc., and thy vary notably in siz. Th rspondnts to th qustionnair ar financial xcutivs with rsponsibility for FERM and for hdging forign xchang risk xposur by us of drivativs. Th Study is xploratory in natur and aims at an undrstanding of th risk apptit and FERM practics of Indian corporat ntrpriss. It also mbracs an undrstanding of th policy or othr constraints or impdimnts facd by th ntrpriss in managing forign xchang xposur. Th Study has its focus on th activity of ndusrs of drivativs and, hnc, is confind to nonbanking corporat ntrpriss. Sinc banks both us and sll drivativs, thy hav not bn includd in th scop of th Study. Risk managmnt practics of Indian subsidiaris of MNCs ar dtrmind by thir parnt companis and, hnc, thy do not form part of this Study. In analysing th rsponss, th Microsoft Excl Spradsht and th Statistical Packag for Social Scincs (SPSS) hav bn usd. Factor Analysis, using Principal Componnt Mthod, was don whrvr thr was nd to rduc variabls into factors. Corrlation analysis was also don, as ndd. Figur 2 :Profil of Survy Rspondnts 10% 10% 8% 10% 11% 2% 19% 2% Automobils Information Tchnology Cmnt Mining Elctricals & Elctronics Oil Industry Entrtainmnt Frtilizrs & Chmicals Pharmacuticals 85

6 Sathya Swaroop Dbasish VII. RESULTS AND FINDINGS OF THE STUDY A. Profils of Rspondnts Th ntrpriss covrd in th sampl ar from 18 catgoris of industris(figur-2). Four sctors including Paints, Print Mdia, Gms and Jwllry, and Txtils did not rspond. Thus, th Study covrs rsponss from 501 ntrpriss. Th sizs of th ntrpriss, in trms of turnovr as wll as intrnational involvmnt (xprssd as th sum of valus of imports and xports and xtrnal commrcial borrowings) varid considrably. Maximum numbr of rsponss cam from th IT catgory, rflcting th dominanc of intrnational transactions in that sctor. Th forign transactions wr mostly dnominatd in US dollars, with Euro, Pound Strling, Japans Yn, Swiss Franc and Dutsch Mark following in that ordr. B. Us of Drivativs Among th 501 rspondnts (Figur-3), 266 companis (53%) rportd using drivativs and th othrs ar not using drivativs. Quit a fw rturnd th qustionnair blank, with th apology that thy ar not using drivativs. It sms many ntrpriss ar yt to tun in to th nd for plannd managmnt of xchang risk xposur. Factor Analysis rvals that th main factor rsponsibl for non-us of drivativs is confusd prcptions of drivativs us, with its componnts, concrns about th appropriatnss of drivativs in spcific situations, risk of th products and gnral rluctanc and far. Thn coms th tchnical and administrativ factor comprising difficulty in pricing and policy constraints, followd by th cost ffctivnss factor which qustions th utility of drivativs, givn th high costs involvd. As to th natur of th transactions that ar considrd for hdging, th rsponss indicat that hdging is rsortd to mostly in rspct of transactions involving contractual commitmnts, rathr than forign rpatriations. Thr also sms to b a prfrnc to rstrict th hdging horizon to lss than a yar. Evn among th usrs of drivativs (Figur-4), th concrns or anxitis about thir us aris on 86

7 Forign Exchang Risk Managmnt Practics svral counts. Factor analysis of ths, rducd thm to four factors: (i) Confusd prcption, including lack of clarity about invstor xpctations, difficultis in pricing and valuing, difficultis in valuating th risk and lack of undrstanding as to how to monitor and valuat hdging outcom. (ii) Policy and lgal issus, covring assssmnt of crdit risk, inadquat support from th Board, tax and lgal considrations and disclosur rquirmnts. (iii) Montary considrations, concrnd with transaction costs and liquidity problms. (iv) Lack of adquat knowldg about th us of drivativs. 65% of th rspondnts wr of th viw that nough rang of drivativ instrumnts ar not availabl yt. This has th ffct of rstricting arbitrag opportunitis. A good majority flt th nd for Rup-Dollar Options (not in vogu at th tim thy rspondd to th qustionnair, but subsquntly introducd in July 2003), whil othrs wishd that Exchang-Tradd Futurs wr availabl. From th abov, it can b sn that th Indian corporat ntrpriss ar somwhat halting in thir approach to th us of drivativs. Figur-5 :-Concrns Rgarding Usag of Drivativs Monitoring and Evaluating hdgs 9% Pricing and valuing drs 10% Prcptions of invstors 7% Difficulty Quantifying xposurs 6% Evaluating th risk 10% Crdit Risk 8% Company Board Support 9% Tax or Lgal Issus 9% Disclosur Rquirmnts 8% Transaction Costs 8% Liquidity Risk 8% Lack of Knowldg 8% Crdit Risk Company Board Support Tax or Lgal Issus Disclosur Rquirmnts Transaction Costs Liquidity Risk Lack of Knowldg Difficulty Quantifying xposurs Prcptions of invstors Pricing and valuing drs Monitoring and Evaluating hdgs Evaluating th risk C. Why do Companis Hdg? Rsponding to th qustion as to why companis hdg, th most important rason adducd is to rduc th volatility of th cash flows. Nxt in importanc coms, maximising shar holdr valu and thn, rducing volatility of rportd accounting arnings. D. What Risks ar Hdgd? Prdominantly drivativs ar usd to hdg currncy risk. Nxt in importanc coms intrst rat risk and to a small xtnt quity risk. E. Typs of Drivativs Usd Th First gnration drivativs instrumnts ar th most popular, th gratst prfrnc bing for simpl Forward contracts. This is followd by Scond-gnration instrumnts, namly Swaps and Futurs. Som corporats also usd structurd drivativs, which com in th Third Gnration catgory. Th Rup-Dollar Options would hav bn largly prfrrd, but thy wr not availabl at th tim of rspons to th qustionnair. 87

8 Sathya Swaroop Dbasish F. Tchniqus of Hdging Among th intrnal tchniqus, th natural hdg is th most chosn option indicating th dsir of th corporats, to match to th xtnt possibl, thir forign currncy outflows and inflows. To a lssr xtnt, intrnal tchniqus of lads and lags ar also usd. As for th xtrnal tchniqus, th prfrnc is mostly in favour of forward contracts, followd by swaps and cross-currncy options. (It may b notd that at th tim th qustionnair was administrd, Rup-Dollar Options was not in xistnc). G. Risk Managmnt Policy and Guidlins On th qustion of th choic btwn hdging partially, hdging fully, or not hdging at all, th majority of th corporats (71%), ar in favour of an opn-ndd hdging policy (hdg partially) prfrring to watch and tak action. 20% of th rspondnts say thy hdg fully and 9% of thm choos not to hdg at all. Rgarding risk managmnt policy and guidlins, 50% of th rsponss confirm that thy hav a writtn policy. Among th othrs, many stat that thy ar in th procss of framing a writtn policy and rlvant guidlins. In most cass, th policis ar volvd and approvd by th Board of Dirctors (BOD), or by a spcially appointd Excutiv Committ (EC). In a larg numbr of instancs (42%), th risk managmnt dcisions ar takn at th lvl of th EC and, in most othr instancs (35%), ths dcisions ar takn by th Trasurr. Only in a limitd numbr of instancs (19%), dos th BOD gt involvd in th day-to-day dcisions on risk managmnt. 70% of th rspondnts say that thir risk managmnt policis ar structurd in a stratgic framwork and almost th sam prcntag of rspondnts confirm that th risk managmnt policy is framd indpndntly, without rfrnc to th hdging policy of th comptitors. Howvr, 30% of th rspondnts do tak not of th policis of th comptitors, whil framing thir own risk managmnt policis. 50% of th rspondnts hav a flxibl postur on th rol of th top managmnt in analysing th forign xchang xposur. Thy ract to mrgncis as and whn ndd. 40% of th rspondnts mt formally vry quartr to analys and tak not of thir undrlying xposurs. 46% of th rspondnts prfr to rviw thir risk managmnt policy on an ad-hoc basis, as and whn ndd. 2 of thm hav a quartrly rviw and 20%, a monthly rviw. 60% of th rspondnts prscrib an uppr limit up to which a trasurr can trad in drivativs. A majority of th rspondnts mak changs in thir hdging stratgis, in rspons to fluctuations in th xchang rats. H. Rol of th Trasury Dpartmnt Th Trasury Dpartmnt plays a significant rol in ovrsing and/or xcuting th risk managmnt function. 40% of th rspondnts considr thir trasury dpartmnt to b srvic cntrs. 28% of thm viw th trasury dpartmnt as a cost cntr. Only 20% of th rspondnts considr thir trasury dpartmnts to b profit cntrs. Thos who rgard thir trasury dpartmnt as profit cntrs, trad almost all in forward contracts, prfrring to book th contracts, wait and watch th movmnts of th xchang rats, cancl th bookings and thn rbook again. This may undrgo a chang, with th currnt availability of rupdollar options. Cross-currncy options and swaps ar also oftn utilisd for spculation. Only 20% of th rspondnts, who dfin thir trasury dpartmnt as profit cntrs, ngag in pur spculation involving positions unrlatd to thir undrlying xposurs. Th othrs maintain thir positions rlatd to thir undrlying xposurs, watch th xchang rat movmnts and hdg with an y on profits. Th xprincs on Trasury Dpartmnt s functioning as a profit cntr prsnt a mixd pictur. Many firms hav rportd modrat to substantial gains du to trasury dpartmnt s actions and dcisions with an y on incom / walth gnration. Som hav also concdd that thir positioning provd wrong occasionally, but thy wr succssful in timing th markt on svral occasions, rsulting in handsom profits. Ovr 90% of th rspondnts hav lss than 5 popl in charg of risk managmnt in thir trasury dpartmnt. I. Dpndnc on Extrnal Srvics Markt quot srvics appar to b th major rfrnc point for xchang risk managmnt dcisions. Thr is also notabl dpndnc on th dalrs from whom th drivativs wr bought, for guidanc in risk managmnt. Accounting firms 88

9 Forign Exchang Risk Managmnt Practics sm to b th last prfrrd. 90% of th rspondnts ar happy with th xprtis that is outsourcd. This may b an indication of th inadquacy of in-hous talnt, in managing xchang rat xposur. Or, it may b that outsourcing advic is found to b lss xpnsiv and mor ffctiv. Factor analysis has short-listd thr factors as th sourcs of guidanc in xchang risk managmnt. Thy ar, in th ordr of priority, drivativs dalrs, consultancis and thn, in-hous xprtis. Banks, by virtu of thir activ involvmnt in slling drivativ products, hav an dg ovr othr agncis, in bing abl to provid spcialisd information, rlvant to forign xchang risk managmnt. J. Rviw and Prformanc Masurmnt As shown in Figur- 6, about 60% of th rspondnts hav a working systm of rviw of th prformanc of th trasury dpartmnt. Valuat-Risk (VAR), Strss or Scnario Tst and Pric Valu of a Basis Point ar among th tools widly usd for valuating th risk associatd with usag of spcific drivativs. 3 of th rspondnts that us drivativs do not hav a systm of valuating risks. VAR tchniqu was th prfrrd mthod of risk valuation by maximum numbr of Indian corporat. Providing information on th us of drivativs, in th publishd financial statmnts, is not yt mandatory in India. 51% of th rspondnts do not mak any mntion about th us of drivativs, in thir annual rports. 22% of thm provid a brif summary, 19% of thm mak a mr mntion and 8% of th rspondnts rport in dtail. Furthr, 93% of th rspondnts fl happy with thir rspctiv risk managmnt practics. Figur- 6 :-Mthods of Evaluating Risk y c12 n 10 u q 8 r F R A V r o s tr S t s T rio a n c S 2 n tio p O 6.25 ity s r itiv u s s n a S M 7 f o lu a V ric P t in o P is s a B a 11 d o th M o N rs th O g ta n rc P Sris2 Sris1 VIII. CONCLUSIONS Th advnt of Globalisation has witnssd a rapid ris in th quantum of cross bordr flows involving diffrnt currncis, posing challngs of shift from low-risk to high-risk oprations in forign xchang transactions. Th Study covrs a sampl of 501 corporat falling in 18 diffrnt catgoris. 53% of th rspondnts ar using drivativs. Th non-usrs of drivativs hav citd Confusd Prcptions of drivativs us, Tchnical and Administrativ Constraints, and Far of High Costs of drivativs as rasons for not using drivativs. Evn th usrs of drivativs hav concrns arising from Confusd Prcptions rgarding invstor xpctations, Pricing and Hdging; thy hav Policy and Lgal issus to b sortd out; Montary considrations involving transaction costs and liquidity problms also pos som anxity. Quit a fw do not hav adquat knowldg of th us of drivativs. Rduction in th volatility of cash flows is th main rason for hdging. Hdging is mostly with 89

10 Sathya Swaroop Dbasish rfrnc to Currncy risk, nxt in importanc bing Intrst Rat risk and, marginally, Equity risk. Th gratst prfrnc is for simpl Forward Contracts. Swaps, and Cross Currncy Options ar modratly usd. 40% of rspondnts considr th trasury dpartmnt as a Srvic Cntr, 28% as a Cost Cntr, and 20% as a Profit Cntr. Thr is a noticabl prfrnc for outsourcing advic for managing currncy risk xposur. In most cass, Banks provid th ncssary xprtis and advic. A majority of th rspondnts hav in us, a working systm of prformanc rviw. Thy mploy tools such as Valu-at-Risk, Strss or Scnario Tst, tc., for valuating risk associatd with usag of spcific drivativs. Th Currncy Risk Managmnt practics in India ar volving at a slow pac. At th Policy, Rporting, and Oprational lvls, thr is nd for a gratr sns of urgncy in dvloping forign xchang markt fully and using th hdging instrumnts ffctivly. Th framwork dvlopd in this rsarch is basd on a mntal modl of a mdium-to-larg manufacturing company producing industrial componnts, as prcivd by th rsarchr. Th complx natur of th rlationship btwn th risk lmnts and dcision variabls may oftn b byond human comprhnsion without th aid of spcial diagnostic and analytical tools. Dcisions and actions in th ara of FERM may hav impact on othr sgmnts and activitis in th ntrpris. A largr intractiv modl capabl of mbracing all facts of ntrpris-wid risk managmnt nds to b dvlopd. This is an ara of furthr nquiry. REFERENCES [1] Apt, P. G : Intrnational Financial Managmnt, Nw Dlhi: Tata McGraw-Hill (2006). [2] Baril, Charls P.: Managing Risks with Drivativs Managmnt Accountant, Novmbr p ( 1996) [3] Battn, Jonathan; Mllor, Robrt and Wan, Victor : Forign Exchang Risk Managmnt Practics and Products Usd by Australian Firms, Journal of Intrnational Businss Studis, Third Quartr, pp (1993) [4] Bauman, Josph; Sarator, Stv and Liddl, William : A Practical Framwork for Corporat Risk Managmnt Journal of Applid Corporat Financ, Vol. 7, No. 3, Fall (1994) [5] Bodnar, M. Gordon, Hayt, S. Grgory and Marston, C. Richard : 1998 Wharton Survy of Financial Risk Managmnt by US Non- Financial Firms, Financial Managmnt, Wintr, Vol. 27, No. 4, pp (1998) [6] Buckly, Adrian : Multinational Financ, Nw Dlhi: Prntic Hall of India Privat Limitd, (1998) [8] Collir, P. and Davis, E. W. : Th Managmnt of Currncy Transaction Risk by UK Multi-national Companis, Accounting and Businss Rsarch, Autumn, pp (1985) [9] Cornl and Shapiro : Intrnational Financial Managmnt, Nw York: John Wily & Sons, (1985) [10] Copland, Tom and Copland, Maggi: Managing Corporat Forign Exchang Risk: A Valu Maximising Approach Financial Managmnt, Vol. 28, No. 3, pp 68-75, Autumn (1999) [11] Cummins, David J.; Phillips, Richard D. and Smith, Stphn D. : Drivativs and Corporat Risk Managmnt: Participation and Volum Dcisions in th Insuranc Industry Journal of Risk & Insuranc, Vol. 68, Issu 1, pp 51-90, March ( 2001) [12] Dash, Shridhar Kumar: Efficincy of Indian Forign Exchang Markt, Journal of Forign Exchang and Intrnational Financ, Vol. 12, No. 1, pp (1998) [13] D Custr, Marc J.K., Durinck, Edward, Lvrn, Eddy and Lodwyckx, Jozf : A Survy into th Us of Drivativs by Larg Non-financial Firms Oprating in Blgium, Europan Financial Managmnt, Sp, Vol. 6, Issu 3, pp (2000) [14] Hntschl, L. and S.P. Kothari : Ar Corporations Rducing or Taking Risks with Drivativs? Massachustts Institut of Tchnology Working Papr July (2000) [15] Howton, D. Shawn and Prfct, B. Stvn : Currncy and Intrst-Rat Drivativs Us in US Firms, Financial Managmnt, Wintr, Vol. 27, No. 4, pp (1998) 90

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