Foreign Exchange Practices & Hedging Tools used by the Software Industry

FOREIGN EXCHNAGE PRACTISES AND HEDGING TOOLS USED BY SOFTWARE INDUSTRY

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF

MASTER’S DEGREE IN BUSINESS ADMINISTRATION COURSE BY

ACKNOWLEDGEMENTS I would like to express my heartfelt gratitude to Principal XYZ M.B.A Programme for having granted me an opportunity to conduct this study.

My sincere thanks to XYZ, for guiding me through the project. Special thanks to XYZ, for his unfailing patience and valuable Inputs, during the course of the project.

My special thanks to the respondents of the study who are been instrumental in the successful completion of this work are Finance Managers, Forex Managers of various software companies at Bangalore City, whom I approached for information and were kind enough to spend time with me irrespective of there busy schedule.

My friends who have been with me at every stage of the project in the form of constant support and encouragement without whom, completion this research work would have remained an unfulfilled dream.

Finally, this project would not have been possible without my parents and sister, who are always there for me in all my endeavors.

XYZ

CERTIFICATE BY THE GUIDE

This is to certify that the dissertation entitled “FOREIGN EXCHANGE PRACTICES AND HEDGING TOOLS USED BY SOFTWRE INDUSTRY” by XYZ bearing Reg.No.XYZ 2008 has been prepared under my guidance and supervision. The work has been satisfactory and is recommended for consideration towards partial fulfillment of requirement for the M.B.A degree of Bangalore University.

Date: Place: Bangalore

Signature (XYZ)

RESEARCHER’S DECLARATION This is to state that the dissertation titled FOREIGN EXCHANGE PRACTISES AND HEDGING TOOLS BY SOFTWARE INDUSTRY is based on the original work carried out by me under the supervision of XYZ towards the partial fulfillment of requirements for the degree of Master of Business Administration of Bangalore University during the IV semester (Apr-2003-Sept-2003). This has not been submitted in part on full towards in part or full towards any other degree or diploma.

Register No: XYZ. Date: 30th July 2003.

Place: Bangalore.

Signature (XYZ)

TABLE OF CONTENTS PARTICULARS

CHAPTER

PAGE NO

Researcher's Declaration Certificate By Principal Certificate By the Guide Acknowledgements Table of contents List of Tables List of Graphs Executive Summary I 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 II 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 III

INTRODUCTION Issue at stake Forex-An overview Online Trading in Forex Market Forex Characteristics The market potential Trading in Forex market Foreign exchange Reserves in India Forex in Software industry export Growth and Trends Forex Trading is one of the best business DESIGN OF THE STUDY Title Background of the study Statement of the Problem Scope of the Study Objectives of the Study Research Design and Methodology Limitation of the Study Operational definition of concepts LITERATURE REVIEW

1 1 3 4 5 7 7 8 9 10 12 12 12 13 13 14 15 16

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.1 3.10.1 3.10.2 3.10.3 3.10.4 3.11 3.12 3.13 3.13.1 3.13.2 3.14 IV 4.1 4.1.1 4.1.2 4.1.3 4.1.4 4.1.5 4.1.6 4.2

Introduction to International Foreign Exchange Foreign exchange at a Glance What Foreign exchange means Why we need Foreign Exchange How Foreign Exchange turnover has grown Role of the exchange rate Introduction to Foreign Exchange Market Forex and Stock Market Market participants,traders and dealers Foreign exchange Risk Management Definition of Foreign Exchange risk What is Exchange Risk Should Firms manage Foreign exchange risk Sources of Foreign exchange risks Risks of Foreign exchange transactions Measures of Foreign exchange risks Foreign Exchange Exposures Definition of Foreign Exchange Exposure Types of Exposures Methods of Hedging PROFILE OF RESPONDENTS Introduction to software industry Indian software industry Indian software industry-Advantages Classification of Software companies Value chain of software industry Critical Success Factors SWOT Analysis of Software industry Introduction to Indian software companies 1. HCL Perot Systems 2. Honeywell 3. IBM 4. i-Flex

20 21 23 25 25 27 29 31 32 33 34 34 36 37 40 42 43 44 47 47 48 48 50 51 52 54 55 56 57

5. Infosys Technologies 6. M-Phasis BFL Software 7. Oracle 8 .Satyam 9 .Texas Instruments 10. Wipro

58 61 61 62 63 64

V

ANALYSIS AND INTERPRETATION

66

VI

FINDINGS AND CONCLUSIONS

84

VII

RECOMMENDATIONS

89

BIBLIOGRAPHY ANNEXURES

1.1THE ISSUE AT STAKE “We realize that (financial) hedging buys us sometime, but from a long term perspective what we really need to do is make structural adjustments in out sourcing and production methods”.

1.2 FOREX-AN OVERVIEW Since the demise of fixed foreign currency exchange rates in the early 1970’s, the world economy has undergone sweeping changes. The collapse of the Breton Woods Agreement in 1971 signaled an increase in currency market volatility and trading Opportunities. What is the lure of the Foreign Exchange markets? What is its power? How does it grow to be the most important market in the World?

How can you benefit from it?

The foreign exchange market dwarfs the combined operations of the New York, London, Tokyo futures and stock exchanges, the daily turnover is approximately 1.5 Trillion (U.S) dollars per day.

The fascination of this market lies in its sheer size, its complexity and almost limitless reach. During the past decade, the foreign exchange market has been the invisible hand guiding the purchase and sale of goods, services and raw materials in every corner of the globe.

The foreign exchange market directly affects every country’s bonds, equities, private property, manufacturing and all assets that are accessible to foreign investors.

Foreign exchange rates play a major role in determining who finances government deficits, who buys equity in companies, who owns real-estate, who hires and fires employees and who owns the bank at which to maintain your corporate or personal account(s).

There is little doubt that this market affects every aspect of our daily personal and corporate financial lives and influences the economic and political destiny of every nation.

The foreign exchange market, then, is the one stabilizing factor in the world’s system of monetary exchange. This market was created not by design but necessity. Traders, bankers, investors, importers and exporters recognized the benefits of hedging risk, or speculating for profit.

The currency in your pocket is literally your stock in your country, like stock, its value fluctuates on the international market providing substantial opportunities for profit or loss.

The market has its own momentum, it follows its own imperatives, and arrives at its own conclusions. Since the conclusions of value, fortunately or unfortunately affect the value of all assets it is crucial that every individual or institutional investor have an understanding of the foreign exchange markets and the forces behind this ultimate free-market system.

There is approximately one and half trillion-dollar work of average daily 24hour turnover in the global foreign exchange market. 51% is in spot forex transactions, followed by 32% in currency swap transactions, and for ward outright forex transactions represents another 5% of this daily turnover.

Spot transactions and forward outright forex transaction al take place in the inter-bank market with options on inter-bank Forex Transactions making up another 8%, the inter-bank market accounts for 96% of the global foreign exchange market, the remaining 4% is divided among all the global futures exchanges.

Inter-bank currency contracts and options, unlike futures contracts, are not traded on exchanges and are not standardized: rather banks and dealers act principles in these markets, negotiating each transaction on an individual basis. Forward “cash” or “spot” trading in currencies is substantially unregulated; there are no limitations on daily price movements and speculative positions limits are not applicable. During problems of liquidity dealers can place trades through a larger number of market participants for better execution.

Cash markets are the primary markets and futures are the secondary markets.

The cash currency market represents 24 times the volume of currency futures. Cash trading deals in “Real” instruments with volume exceeding one trillion U.S. dollars worldwide daily. Cash markets provide better liquidity, execution and trading hours.

1.3 ONLINE TRADING IN FOREX MARKET Forex (Foreign Exchange) is a market where foreign currencies are exchanged. It is the most significant market in the world, where 1,5 trillion US dollars are transacted every day. The market does not have a precise location, and the transactions are done via telephone, facsimile, and recently via Internet, this situation facilitates the activity of the traders. The prices of the market are established electronically by more than 50 international banks, which carry out exchanges between the large companies and governments these banks constantly issue their prices, and the last quotation issued is considered as the prices of the market.

The Advantages of trading Online Convenience, significant brokerage savings over traditional full services stockbrokers and a growing pool of additional services not available over the phone are all reasons why more people are choosing to invest online.

Now from the comfort of your personal Computer you can place an order to buy or sell approved securities (including warrants) listed on the authorized stock exchanges like BSE, NSE, and etc. orders can be placed outside market hours. These will be queued for execution when the market opens the next trading day.

1.4 FOREX CHARACTERISTIES • Size of the global forex market: 1500 Billion $ per day. For comparison: Bond/Treasury US Market: 300 Billion $ per day. Stock Exchanges Markets: 30 Billion $ per day (estimated).

• The market does not have a precise location, and the transactions are done via telephone, facsimile, and recently via Internet, this situation facilitates the activity of the traders.

• The prices of the market are established electronically by more than 500 international banks, which carry out exchanges between the market companies and governments. These banks constantly issue their prices, and the last quotation issued is considered as the price of the market.

• Forex is opened 24/24, five days a week, therefore, the players have the possibility of an immediate reaction.

• Leverage on deposit is possible due top the small consecutive change in price.

• Forex is characterized by the fact that is cannot be high or low. The potential of profit exists in one direction as in the other.

Table 1:The daily net Foreign Exchange Market turnover in various countries AVERAGE DAILY NET FOREIGN EXCHANGE MARKET TURNOVER IN THE MAIN CENTRES (In US$ billions) United Kingdom 4645 United States 2444 Japan 1613 Singapore 1054 Hong Kong 902 Switzerland Germany France Australia

865 762 58 395

Denmark Canada Sweden

305 298 281

1.5 THE MARKET POTENTIAL  The one line trading market crossed 1.5 million. Today there are more than 3 million, and we expect this number to reach 14 million by the year 2002. With this new trading method the markets become more accessible and attractive for the public. And this is due to all the specificity of the Internet.  Until today this market have been reserved to private investors with enough money to fill the margin account requirements of the brokers or the banks operating on the market.  The genera public market is an enormous potential of customers who want to speculate in the largest and most efficient market in the world. 3 year ago they totaled 15 billion USD daily turnovers.  The speculative profile of those kinds of transactions, make the concept accessible to all kind of speculator.  According to the Gartner Group, a leading business technology advisor, the worldwide B2B E-commerce market is forecast to grow from $ 145 billion in 1999 to $ 7.29 trillion in 2004.

Similarly, the market for foreign exchange in growing rapidly:” The foreign exchange market is by far the largest and most liquid market in the world. The estimated world wide turnover of reporting dealers, at around $1.5 trillion a day, is several times the level of turnover in the U.S. Government securities market, the

world’s second largest market,” according to the 1998 New York Federal Reserve Bank’s published survey.  Greenwich associates a leading research and strategic firm recently published their Annual Survey of Electronic Trading and Internet Use by Foreign Exchange Professionals. Woody Canada, a partner with the firm commented:” the survey concluded that the vast majority of customers world prefer a multi-dealer system for trading online 84% versus 16% single-dealer”  “Online Forex Trading has three major benefits over Forex trading by phone: a competitive auction environment with an audit trail, more efficient use of scarce staff time, and a more secure trade confirmation process.” Greenwich Treasury Advisors, LLC.

1.6 TRADING IN THE FOREX MARKET, SPECULATION AND HEADGING If you are looking for the potential of above average return, consider trading on the Foreign Exchange market as an investment vehicle to profitable diversity your portfolio or to hedge a portion of your foreign currency investment against exchange-rate risks.

If you are a sophisticated investor with discretionary income, are tired of your stock broker pitching flavor of the week or if you are an investor wanting to make short-term profits from fluctuations in exchange rates between currencies through speculation and a around leverage program then trading on the Foreign Exchange interbank FX spot market offers definitely

a challenging opportunity where the reward would be work taking calculated risks.

1.7 FOREIGN EXCHANGE RESERVES IN INDIA Table 2: Foreign Exchange Reserves in India YEAR US $ MN. 1995 17000 1996 19500 1997 25300 1998 25300 1999 32000 2000 42500 2001 48500 2002 53400 Source: International Financial Statistics, IMF.

Graph 1:Foreign Exchange Reserves in India

50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 Year

1.8 FOREX IN SOFTWARE INDUSTRY In May 1998, Indian Prime Minister Vajpayee formed a National Task Force on Information Technology and Software Development to formulate a longterm national information Technology policy6 for the country and also to remove impediments for the growth of the IT industry.

The objective was to help India emerge as an IT superpower, with a target of US$50 billion for software exports by 2008. Adding hardware exports and domestic sector requirements in hardware and software, the total size of the IT industry is projected to reach $100 billion by 2008.

According to the National Association of Software and Service Companies (Nasscom), the apex private sector body of the software, dotcom and IT services industries in India, the IT software and services industry grossed $5.7 billion during 1999-2000. This represented an overall growth of 53 percent, up from $3.9 billion in 1998-99. Out of the total revenue, software exports-the arrowhead of the industry-grossed $4 billion (up 57 percent) and the domestic software market fetched $1.7 billion.

Forecasts for the full year 2000-20001 see growth of more than 50 per5cent with revenues of $8.75 billion. This will include software exports of $6.3 billion and a domestic market of $2.45 billion.

The software industry is not only growing exponentially, it is moving up the value chain. It is evolving, from the initial staffing to software developmentwhere it is currently the world’s major supplier of engineers-to integration and IT business consulting.

For India to achieve its goal of superpower status, it recognizes that it needs to move faster on the value chain ladder and become more involved in strategic consulting, brand management for customers, research and development and in providing more Web-based and e-commerce interactive services. Packaging, too, is an area with potential that it needs to develop.

Research and development spending in the software industry increased from 2.5 percent of total spending in 1999-2000 to about 34 percent during 20002001.

1.9 EXPORT GROWTH AND TRENDS During the year 2001-2002, software exports earned foreign exchange worth $7 billion, during 1999-2000, software exports earned foreign exchange worth $4 billion. Software exports accounted for 10.5 percent of India’s total exports during 1999-2000. Five years ago, they accounted for only 2.5 percent. The top 20 software exporters include TCS, Wipro, Infosys, Satyam, HCL, NIIT, Silverline, and Cognizant, Pent media Graphics, Pentasoft Technologies, Patni Computers, IBM, DSQ, Mastek, MBT, HCL,

Perot, I-Fex, Tata Infotech, Zensar Technologies and Birlasoft. Altogether, there are approximately 1,250 software-exporting companies in the country.

In 1999-2000, e-commerce software solutions worth $500 million were exported; this is expected to increase to $1.4 billion. The IT Enabled Serviced market is poised to grow from the present $10 billion worldwide to $200 billion. From its present low base, by 2008 these services could add an additional 1 million jobs in India, generating annual revenue of $17 billion.

1.10 FOREX TRADING IS ONE OF THE BEST BUSINESSES Forex Margin Trading can be very challenging and exciting for the person who exercises trading discipline and who uses good judgment. The Forex business offers you opportunities even during times of uncertainty and adverse economic developments because of: a) The high volatility in currency markets, By monitoring and keeping abreast of the developments in the world’s financial markets, investors can gain an edge and take action to protect their economic interest b) The existence of floating exchange rates which provide golden opportunities for smart investors and traders since history has proven that fixed exchange rates, cannot work c) Fluctuation of currencies for a host of reasons ranging from disparity in economic performance between countries the planned introduction of the Euro in 1999, monetary and fiscal disciplines, inflation rates, trade imbalances, political stability and speculation.

Foreign exchange trading is not gambling. It is taking a calculated risk, just like any other business. Infect it is one of the best businesses as: a) Start-up cost is negligible compared with most other businesses. b) Overhead costs are negligible. c) It is interesting and challenging and keeps you abreast with internat9onal economic, political and business developments. d) There is better risk control as you can cut out a bad position swiftly and easily. In contrast if you invest in an ordinary business, walking away from a bad decision is not always easy

2.1 TITLE The subject title for the study is “foreign exchange practice and hedging tools used in software industry”.

2.2 BACKGROUND OF THE STUDY Foreign exchange transactions include substantial amount of risk due to fluctuation in exchange rates. Hence, corporates are continuously striving to minimize their risk exposure by the use of various hedging tools like forward contract, option, swaps, off balance sheet netting etc. Foreign exchange risks also may be linked to other types of market risks such as, interest rate risk. Interest rate and exchange rates often move simultaneously. So a bank’s interest rate position indirectly affects its overall foreign exchange earnings.

The majority of Indian corporates has at least 80% of their foreign exchange traction in US Dollars. This is wholly unacceptable from the point of view of prudent risk management. “Don’t put all your eggs in one basket” is the essence of risk diversification. One of the corner stones of prudent risks management.

Like any other business organization, software companies too face risks inherent to the company and the industry in which it exists. No formal study has been done so far on foreign exchange risk management for Indian software companies.

2.3 STATEMENT OF THE PROBLEM Software companies are exposed to a great deal of foreign exchange risk because of the high involvement of foreign exchange receipts and to a lesser degree of foreign exchange out going.

The practice followed for assessing the foreign exchange risk and hedging strategies followed differs widely across companies causing disparities in risk perception. The problem is that there appears to be no uniform model for increasing risk.

2.4 SCOPE OF THE STUDY Foreign exchange is the subject, which has acquired great significance in the current era of liberalization. Banks as authorized dealers in forex have wide discretionary power, which are delegated to them by the RBI. The risk arising from forex exposures of corporate poses a lot of challenges to forex managers. Introductions of newer and flexible hedging tools have given wider choice to forex managers to minimize their risk exposures. This study will focus on forex practices and hedging tool used by software industry.

2.5 OBJECTIVES OF THE STUDY The study was conducted to achieve the following objects Primary objectives ď ś Analyze the software industry in terms of foreign transactions.

To study in detail the hedging practices followed in chosen companies.  To propose changes and improvement, if any to make the practices more effective.

Secondary objectives  To review the prevailing foreign exchange management practices in software industry.  To study the online forex trading and its implementation on software companies.  To propose use of information system to make the practices more effective.  Draw conclusion on the advantages and disadvantages of the strategies used by the software companies.

2.6 RESEARCH DESIGN AND METHOLOGY The study is based on the simplest research methods- the descriptive research in that is a fact- finding investigation with adequate interpretation.

It is focused and aimed on foreign exchange practice in the Indian software industry. The research methodology for the study was based on survey method.

METHODOLOGY ADOPTED

Initially extensive literature survey was carried out from various sources such as books, magazines and Internet. The details of these are given in annexure. Collection of secondary data was obtained from two sources: 1.

Internal sources – in-house publication journals, reports, etc.

2.

External source- trade journals, bank reports, and forex papers.

This gave the author the appreciation of forex risk that companies could be exposed to and to international practices in hedging forex risks.

PRELIMINARY ROUND OF INTERVIEWS WITH REPRESENTATIVES The preliminary round of interviews was followed with five soft ware companies from Indore. This follows the in-depth semi-structured interviews, which was carried out with the finance management from the software companies.

QUESTIONNAIRE The author then proceeded to frame a detail questionnaire (annexure). The questionnaire was prepared to get the primary data. The questionnaire was administered among 15 respondents. Mode of data collection was structured, one–to-one in-depth interviews telephonic interviews via mail with finance managers to enable in obtaining the detailed information regarding foreign exchange practice in soft ware companies.

INTERVIEW Apart from questionnaire, interviews from finance managers of the study.

This gave a details overview of the prevailing foreign exchange practice in software companies. It also revealed lot of information to the author.

2.7 LIMITATIONS OF THE STUDY Forex Trading is a risk and is an area of financial management that is highly uncertain and unpredictable Following are the hurdles that will obstruct the course of the study: Foreign Exchange is too vast an area and any attempt to confine its study to a short span of time will not reveal an accurate and appropriate picture of the true state of affairs.

Modern day financial markets are highly volatile being subject to frequent changes in inflation rates, interest rates, exchange rates and commodity prices.

Today’s software industry is highly competitive with new players entering the field everyday. Hence the degree of forex transactions varies directly with number of entrants in the field.

The time frame being a highly limiting factor narrows down the scope of the study; thereby adequately meeting only the objectives distinct to the study, rather than straying to other resourceful and potential areas of research and study.

The study very limitedly claims the level of completeness matching itself with efficiency expected depending on the researchers academic background.

2.8 OPERATIONAL DEFINITION OF CONCEPTS American deposit receipt (ADR): A negotiable certificate (receipt) representing a given number of shares of stocks in a foreign corporation; it is bought and sold in the American securities marketing, just as is traded. Also known as American depository share.

Asked price: the price at which sellers offer securities, futures contracts, or other financial instrument to buyers. Also called offer price.

Balance of payment (BOP): an international accounting record of all transaction made by one particular country with others during a certain time period. The difference between receipts and payments is directly reflected in the foreign exchange reserves held by the country .A negative balance of payments will result in the country’s foreign currency reserves, unless the country borrows additional foreign currency on the international markets.

Balance of trade: the difference between a country’s imports and export during a specific time period. The Largest component of a country’s balance of payments; it concerns the export and import of merchandise (not services).

Bank rate: the minimum rate at which a bank, either alone or in conjunction with other banks in a market to other banks.

Beta: a measure of an investment’s volatility. The lower the beta, the less risky the investment.

Bills of exchange: a common term for bank bills, trade, note issuance facilities (NIFs), and promissory notes.

Bond yield: the rate of return on a bond, calculated by using the purchase price and the coupon rate.

Buying hedge (or long hedge): buying futures contracts (or other financial instruments) to protect against possible increased cost of inputs slated for futures uses.

Call option: publicly traded contract granting the owner the right, but not the obligation, to buy a specific amount of foreign currency or other financial instrument at a specified price at a stated future date. The buyer of a call option acquires the right but the obligation to purchase a particular market at a stated price on or before a particular date.

Cross rate: an exchange rate between two foreign currencies. Two different currencies compared to the same third currency.

Currency funtrue: Publicly traded contracts involving the sale or purchase of a standardized amount of foreign currency at stated rice with delivery at a stated future date.

Currency option: Publicly traded contract giving the over the right, but not the obligation, to sell or buy a standardized amount of foreign currency at a price at a stated future date.

Delivery rice: The official settlement price of the trading session during which the buyer of future contracts receives, through the clearinghouse, a notice of the seller’s intention to deliver and the price at which the buyer must pay for the commodities represented by the futures contract.

Electronic trading: The computerized matching of buyers and sellers of financial instruments. GLOBEX, Project A, and Access are examples.

Euro bonds: Bonds issued by a borrower outside its own country. The bonds are denominated in a currency foreign to the borrower or the purchaser or both.

Exercise price: The prices at which the buyer of a call (put) options many choose to exercise his or her right to purchase (Sell) the underlying futures contract. Also called strikes price or strike.

Exposure: A possible loss of value caused by changes in market value, interest rates or exchange rates.

Floating rate: An interest rate for a debt instrument that will change as interest rates change.

Foreign currency: Any currency other than the local currency. With in the spectrum of flow of payments, foreign currencies are all currencies, with the exception of the currency of the home country.

Forward market: A market for foreign exchange involving delivery of currency at some date in the future.

Forward spread: The premium or discount of forward (i.e., future) foreign exchange swap contracts and the forward spot rates.

Forward trading: Trading in which actual delivery and settlement is made at a future data. Forward trade occurs in the commodity, foreign exchange, stock, bond, and futures markets.

Fundamental analysis: An approach to the analysis of markets that examines the underlying factors that will affect5 the supply and demand of the market, overall economy, industry conditions, etc.

Hedge: An investment made in order to reduce the risk of an adverse price movement.

Purchasing power parity (PPP): The theory stating that prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange-rate changes.

Put spread: The selling of a put or puts at a lower strike price to pay for a put or puts at a higher strike.

Quantitative analysis: A research technique that deals with measurable assets, such as the value of assets and the cost of capital.

Quotation: the actual price, or the bid or ask price, of a security, commodity, futures, option, currency, or other financial instrument at a particular time.

Settlement price: The closing price of a price within the range of closing prices, which is used as the official price in determining net gains or losses at the close of each trading session payment of any amount of money under a contract.

Strike price: A specified price at which an inventory can buy or sell an option’s underlying financial instrument. The exchange rate, interest rate, or market price that is guaranteed by an option transaction.

Structural Hedging: The process of reducing or eliminating currency exposure by archiving receivable and payables in each currency or currency block to minimize the net exposure.

Swap: An agreement between two parties to exchange a series of future payments. In a currency swap, the exchanges of payments (cash flows) are in two currencies, on of which is often the US dollar.

Swift: The Society for Worldwide International Fund Transfers is a multinational facility for fund transfers based in Belgium and the Netherlands.

Technical Analysis: Analysis based on market action through chart study, moving averages volume- Open interest oscillators, formations, and stochastic and other technical indications.

Time value: In options, the value of the premium is based on the amount of time left before the contract expires and the volatility of 6the underlying contract. Time value represents that portion of the premium in excess of intrinsic value. Time value diminishes as the expiration of the option draws near and/or if the underlying contract’s price development becomes less volatile.

3.1 INTRODUCTIONTO INTERNATIONAL FOREIGN EXCHANGE International business is facilitated by markets that allow for the exchange of foreign currencies and the flow of funds between the countries. Due to growth in international business, various international financial markets have been developed.

Five widely used international markets are:

1. Foreign Exchange market The foreign exchange market allows currencies to be exchanged in order to buy the products or invest in securities denominated in foreign currency.

2. Eurocurrency Market The Eurodollar market, which is now referred as Eurocurrency market was created as corporations in the U.S deposited U.S dollar in European banks.

These European banks were willing to accept dollar deposit, since they could then lend dollars to corporate customers based in Europe. Because the U.S dollar deposited is placed in banks located in Europe and other continents became know a Eurodollars.

3.Euro credit Market Loans of one year or longer extended by Euro banks are commonly called Euro credits or Euro credit loans. Such loans in the Euro credit Market have become popular since corporations and government agencies often desire to borrow for a term exceeding one year, and a common maturity for Euro credit loans in five years.

4. Eurobond market While the Euro currency and Euro credit loans help to accommodate short and medium-term borrowers, they do not accommodate the long-term borrower. To fill this gap, the Euro bond market was created. This market

facilitates the transfer of long-term funds form surplus units to deficit units around the world.

5. International Stock Market When MNC’s issue stock, they often consider placing some in foreign stock markets to increase the probability that investors will absorb the entire issue.

MNC’s with access to foreign stock markets may be able to issue stock at a higher price, which reflect a lower cost of capital.

3.2 FOREIGN EXCHANGE AT A GLANCE DEFINITION OF FOREIGN EXCHANGE “The means and methods by which rights to wealth expressed in terms of currency of one country are converted into rights to wealth in terms of currency of another country are known as ‘Foreign Exchange. The term cover the method by which the currency of one country is exchanged for that of another, the causes, which rend3er such exchanges necessary, the forms in which such changes are conducted and the ratio or equivalent values at which they are reflected.”

A foreign exchange transaction is still a shift of funds, or short-term financial claims, from one country and currency to another. “ Foreign exchange refers to money denominated in the currency of another nation or group of nations. Any person who exchanges money denominated in his own nation’s currency for money denominated in another nation’s currency acquires foreign exchange.”

-----Federal Reserve

Foreign Exchange Regulations Act, 1973 (FERA) defines Foreign Exchange as “Foreign currency and any drafts, travelers cheques, letter of credit and bill of exchange, expressed and drawn in Indian currency but payable in any6 foreign currency.”

“Trading one country’s currency for another country’s currency. Money instrument used to make payments between countries. Trading derivatives of foreign currencies such as forwards, options, and swaps. Also known as FX or Forex.”

------Forexcompass.com Thus, Foreign Exchange is concerned with the exchange of foreign currency for another. The demand for foreign currency arises out of indebtedness incurred in International trade; investment in another country; tourism and business travel; speculation concerning changes in exchange rates; and various governmental needs.

There are three main types of foreign exchange system: a) The gold standard in its various forms; b) Freely fluctuating exchange rates; and c) The several varieties of exchanges control.

The fact that each country has its own monetary system is one of the principle complications of international trade and balances of payments.

3.3 WHAT “FOREIGN EXCHANGE” MEANS “Foreign exchange” refers to money denominated in the currency of another nation or group of nations. Any person who exchanges money denominated in his own nation’s currency for money denominated in another nation’s currency acquires foreign exchange. That holds true whether the person involved is a tourist cashing a traveler’s check in a restaurant abroad or an investor exchanging hundreds of millions of dollars for the acquisition of a foreign company; and whether the form of money being acquired is foreign currency notes, freeing currency-denominated bank deposits, or other shortterm claims denominated in foreign currency. A foreign exchange transaction is still a shift of funds, or short-term financial claims, from one country and currency to another.

The foreign exchange market is the market in which currencies are bought and sold against each other. Today, it is the largest market in the world with a turnover of about $1.5 trillion approximately every day. The reason is the organizations like International banks, multi-national corporations, and large brokerage houses trade in huge volumes of currencies. The major currencies traded in this market are the US dollar, Deutschemarkt (DM), yen, Pound Sterling, Swiss franc, Canadian dollar, Dutch guilder, Italian Lira and the Belgian franc.

Traditionally, the foreign exchange market has only been available to banks, money manager, and large financial institutions. Over the years, these institutions, including the U.S Federal Reserve Bank, have realized large gains via currency trading. This growing market is now liked to a worldwide network or currency traders, including banks, crystal banks, brokers, and

customers, such as importers and exporters. Today, the foreign exchange market offers opportunities for profit not only to banks and institutions, but to individual investors as well.

The foreign exchange market is a cash inter-bank or inter-dealer market. It is called as ‘over the counter market’. This means that there is no single market place or an organized exchange (like a stock exchange) where traders meet and exchange currencies. The traders sit in the offices (Foreign exchange dealing rooms) of major commercial banks around the world and communicate over the telephone and through computer terminals at thousand of locations worldwide.

Geographically, the markets span all the times ones from New Zealand to the west cost of the United States. The time New York is staring to wind down at 3.00 p.m., it is noon in Los Angeles. By the time it is 3.00 p.m., in Los Angeles it is 9.00 a.m. or the next day in Sydney. Thus the market functions virtually 24-hours enabling a trader to offset a position created in one market using another market.

The direct6 inter-dealer market consists of dealers with currency settlement capabilities trading as principals. It is this dealer segment of the market that is responsible for generating a large portion of the overall foreign exchange volumes. Trading between dealers create the largest turnover in the market, making foreign exchange the most liquid of all markets. The genesis of Foreign Exchange market can be traced to the need for foreign currencies arising from:  International Trade;  Foreign investments; and  Lending to and borrowing from Foreigners.

Thus, within India, any money denominated in any currency other than the Indian Rupee is, broadly known as “Foreign Exchange.”

Foreign exchange can be cash, funds available on credit cards and debit cards, traveler’s checks, bank deposits, or other short-term claims. It is still “foreign exchange” if it is a short-term negotiable financial claim denominated in a currency other than the Indian Rupee.

But, in the foreign exchange market, foreign exchange transactions almost always take the form to an exchange of bank deposits of different national currency denominations. If one bank agrees to sell dollars for Deutsche marks to another bank, there will be an exchange between the two parties of a dollar bank deposit for a DEM bank deposit. In this way, “foreign exchange” means a bank balance denominated in a foreign (non-Indian Rupee) currency.

3.4 WHY WE NEED FOREIGN EXCHANGE Almost every nation has its own national currency or monetary unit-its dollar, its peso, its rupee-used for making and receiving payments within its own borders. But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transaction with person in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for “foreign exchange”transactions-eschanges of one currency for another.

3.5 HOW FOREIGN ESCHANGE TURNOVER HAS GROWN In 1998, the Federal Reserve’s most recently published survey of reporting dealers in the United States estimated that foreign exchange turnover in the U.S.market was $351 billion a day, after adjustments for double counting.

That total is an increase of 43% above the estimated turnover in 1995 and more than 60 times the turnover in 1977, the first year for which roughly6 comparable survey data are available.

In some ways, this estimate understates the growth and the present size of the U.S foreign exchange market. The $351 billion estimated daily turnover covered only the “over-the counter” (OTC) market-spot, outright forwards, and foreign exchange swaps; it did not include OTC currency options and currency swaps traded in the OTC market, which totaled about $32 billion a day in notional value (or face value) in 1998. Nor did it include the two products traded, not “over-the-counter”, but in organized exchangescurrency futures and exchange-traded currency options, for which the notional value of the turnover was perhaps $10 billion per day.

The global foreign exchange market also has shown phenomenal growth. In 1998, in a survey under the auspices of the Bank for International Settlements (BIS), global turnover of reporting dealers was estimated at about $1.49 trillion per day for the tr5aditional products, plus an additional $97 billion for over-the-country currency options and currency swats, and a further $12 billion for currency instruments traded on the organized exchanges. In the traditional products, global foreign exchange turnover, measured in current exchange rates, increased by more than 80 percent between 1992 and 1998.

The expansion in foreign exchange turnover, in the United States and globally, reflects the continuing growth of international trade and the prodigious expansion in global finance and investment during recent years.

With respect to trade, the dollar value of United States international transactions in goods and services-the sum of exports and imports-striped between 1980 and 1995 to around 15 times its 1970 level. International trade in the global economy also has expanded at a rapid pace. World merchandise trade is now more than 21/2 times its 1980 level.

3.6 ROLE OF THE EXCHANGE RATE The exchange rate is price-the number of units of one nation’s currency that must be surrendered in order to acquire one unit of another nation’s currency. There are also various “trade-weighted” or” effective” rates designed to show a currency’s movements against an average of various other currencies. Quite apart from the spot rates, there are additional exchange rates for other delivery dates, in the forward markets. Accordingly, although we talk about the Rupee exchange rate in the market, and it is useful to do so, there is no single or unique Rupee exchange rate in the market, just as there is no unique rupee interest rate in the market.

A market price is determined by the inter-action of buyers and sellers in that market and a market exchange rate between two currencies are determined by the interaction of the official and private participants in the foreign exchange rate market. For a currency with an exchange rate that is fixed, or set by the monetary authorities, the central bank or another official body is a

key participant in the market, standing ready to buy or sell the currency as necessary to maintain the authorized pegged rate or range.

The participants in the foreign exchange market are thus a heterogeneous group. Some of the buyers and sellers may be involved in the “goods” market.

Conducting international transactions for the purchase or sale of merchandise. Some may be engaged in “direct investment” in plant and equipment, or in “portfolio investment”, dealing across borders in stocks and bonds and other financial assets, while other may be in the “money market,” trading short-term debt instruments internationally. The various investors, hedgers, and speculators may be focused on any time period, from a few minutes to several years. But, where either official or private, and whether their motive be investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the trade, they are all part of the aggregate demand for and supply of the currencies involved, and they all play a role in determining the market exchange rate at that instant.

Given the diverse views, interests, and time frames of the participants, redacting the future course of exchange rates in a particularly complex and uncertain business. At the same time, since the exchange rate influences such a vast array of participants and business decisions, it is a pervasive and singularly important price in an open economy, influencing consumer prices, investment decisions, interest rates, economic growth, the location of industry, and must else. The role of the foreign exchange market in the determination of that price is critically important.

How the exchange rates are quoted?

An exchange rate between currencies A and B is simply the price of one in terms of the other. It can be stated either as units of B per unit of A or unit of A per unit of B. In stating prices of goods and services in terms of money, the most natural format is to state them as units of money per unit of the good rather than as units of a good per unit of money. When it is two monies, either way would be equally natural. The choice of a “unit� is also a matter of convenience. (Price of rice is given in rupees per Kilogram in the retail market and rupees per quintal in wholesale markets.

In foreign exchange literature one comes across a variety of terminology such as direct quotes and indirect quotes, which can occasionally lead to unnecessary confusion about simple matters. In a country, direct quotes are those that given units of the currency of that country per unit of a foreign currency. Thus Rs. 43.57/$ is a direct quote in India and $0.0093/JPY is direct quote is US. Indirect or reciprocal quotes are stated as number of units of a foreign currency per unit of the home currency. Thus $2.2952/100 Rs. Is an indirect quote in India. The notational confusion can get further compounded when we have to deal with two-way, bid-ask quotes for each exchange rate.

3.7

INTRODUCTION

TO

FOREIGN

EXCHANGE

MARKET The Forex Market The vast currency market is a foreign concept to the average individual.

However, once it is broken down into simple terms, the average individual can begin to understand the foreign exchange market and use it

as a

financial instrument for future investing. The market for foreign exchange is

the largest market in the world. Transactions in the foreign exchange market are estimated to exceed $ 1.5 billion daily. The market operates almost twenty-four hours a day, so that somewhere in the world, at any given time, there is a market open in which you can trade foreign exchange.

Whether or not you are aware, you already play a role in the foreign exchange market, also known as the Forex market. The simple fact that you have money in your pocket makes you an investor of currencies, and more particularly, an investor, the cash in your wallet and money in your savings account are in rupees. The value of your mortgage stocks, bounds, and other investments are expressed in rupees. In other words, unless you are among the few investors who have foreign bank accounts or have bought a modest amount of foreign currencies of securities, you are an investor of rupees.

By holding rupees, you have basically elected not to hold the currencies of other nations. Your purchase of stocks, bounds and other investments, along with money deposited into your bank account represent investments, which rely heavily on the integrity of the value of the currency in which it is denominated the rupees. Due to the increasing and decreasing value of the U.S.Dollar and the resultant fluctuation in exchange rates; your investment portfolio may have experienced changes in value, thus affecting your overall financial status. With this in mind, it should be no surprise that many shrewd investors have taken advantage of the fluctuation in exchange rates using the volatility of the foreign exchange market to trade currencies and put more money in their pockets.

The foreign exchange market has experienced many changes since its inception. Today, supply and demand for a particularly currency, or its relative value, is the driving factor in determining exchange rates, increasing trade and foreign investment have made the economies of all nations more

and more interrelated. Regularly reported economic figures around the world, such as inflation or unemployment levels, as well as unexpected news, such as natural disasters or political instability, alters the desirability of holding a particular currency, thus influencing international supply and demand for they currency. The rupee therefore, fluctuates constantly against the currencies of the rest of the world. The current web of international trade and the resultant fluctuations in exchange rates have created the world’s largest market-the foreign exchange market, a market whose vast size makes it the most efficient, fairest, and liquid of all market.

Trading approximately $1.5 trillion every day, the foreign exchange market is the largest financial market in the world. Traditionally, the foreign exchange market has only been available to banks, money managers, and large financial institutions. Over the years, there institutions, including the U.S.S Federal Reserve Bank, have realized large gains via currency trading.

This growing market is now linked to a worldwide network of currency traders, including banks, central banks, brokers, and customers, such as importers and exporters. Today, the foreign exchange market offers opportunities for profit not only to banks and institutions, but to individual investors as well.

3.8 FOREX AND THE STOCK MARKET  Forex worked 24 hours a day. The stock market in India works only from 12 to 3 p.m. if you are working you can’t participate in day trading on the stock market.  There are always the same 5 major currencies traded on the Forex market, whereas in the stock market there are thousands of securities

to trade, and it is hard to understand why each particular stock will go up or down today. Choosing the right stocks from thousands to make a portfolio is not easy thing either.  The minimum amount needed in order to open a trading account on the Forex market-$1000-2000. This relatively small amount of money gives you an opportunity to ear $300-800 per day or even greater. To have an opportunity to ear $300-800 per day on the stock market, you have to put up $15000-20000 for your account. Certainly you can lose on both markets, but on forex you can win using a much smaller amount of trading capital.  The forex market is the largest market in the world whereas the stock market, which is much smaller, tens of millions of unprofessional investors greatly affects this market by their often-chaotic trades, making the possibility to predict its movement harder.  There is no “bull” or “bear” market on Forex. On the other hand in the stock market, you can earn money mostly during a period of booming economy. When the stock market goes up. But economy development is cyclical-and periods of growth will eventually be replaced by periods of recession. And in this case, when stock market is going down, you can’t win as a day trader.  On the forex market you have a unique feature- a so-called” demo account” or simulated account, which allows you to participate in trading using real-time prices on the deal station with the same interface and functions as on real trading, using the same news and technical analysis tools to predict market, movements, from the comfort of your home and via the internet.

Now you can understand why more and more people vote for the forex trading. It is convenient and inexpensive. It gives you the opportunity and the time to develop your personal trading system. The most important participants in the market are banks. Foreign Exchange is traded” over the counter” via telephone and computer communications among banks, and not in organized exchanges such as stock exchanges.

The three common types of transactions are spot, outright forward, and swap transaction. Spot transaction involves buying or selling at today’s exchange rate (the deposit transfer between the buyer’s bank and seller’s bank actually occurs two business days later). Outright forward transaction involves agreement to buy or sell in the spot market, with a simultaneous agreement to reverse the trade in the outright forward market. Approximately 65% of trades take place in the spot markets, 33% in the swap markets, and only about 2% in the outright forward markets.

3.9 MARKET PARTICIPANTS-DEALERS AND TRADERS There are four types of market participants: Banks-Commercial DealersPrivate Investors-Central Banks are the biggest participants. Mostly large banks are market makers. They earn enormous profits by buying currencies from, and selling to, customers and to each other. Roughly tow-thirds of forex transactions involve banks dealing directly with each other. In fact, banks are increasingly relying on trading in the forex market for profits while reducing the amount of loans they make since currency risk is easier to manage and measure than is default risk.

Forex prices quoted between banks are referred to as Interbank Rates.

Commercial Dealers, Private investors and Currency Hedgers are large companies, who require foreign currency in the course of doing business of

making investments.

Some large commercial Dealers are also Market

makers. Companies with large foreign exchange needs will sometimes have their own trading desks to manage their currencies. Central Banks, which act on behalf of their governments, sometimes participate in the Forex market to influence the value of their currencies, also known as Central Bank intervention. The five major centers of Forex Interbank trading, which handle more than two thirds of all Forex transactions, are London, New York, Zurich, Frankfurt and Tokyo. Transactions in Hong Kong, Singapore, France and Australia account for the rest of the market. The market itself is actually a worldwide network of Inter-bank traders, consisting primarily of Banks.

3.10 FOREIGN EXCHANGE RISK MANAGEMENT 3.10.1 DEFINITION OF FOREIGN EXCHANGE RISK Michael Adler and Bernard Dumas define foreign exchange risk in terms of the variance of unanticipated change in exchange rates. That is, they define exchange rate risk in terms of the unpredictability of exchange rates as reflected by the variance. From this, it is clear that unpredictability is paramount in the measurement of exchange-rate risk.

Thus, the author

defines foreign exchange risk as follows: “Foreign Exchange risk is measured by the variance of the domesticcurrency value of an asset, liability income that is attributable to unanticipated changes in exchange rates.

3.10.2 WHAT IS EXCHANGE RISK Exchange risk is simple in concept: a potential gain or loss that occurs as a result of an exchange rate change. Not just gains or losses on current transactions for the firm’s value consists of anticipated future cash flows but also current contracted ones. shareholder’s wealth.

Modern finance tells us to increase the

Moreover the shareholder who has a diversified

portfolio may find that the negative effect of exchange rate changes on one firm is offset by gains in other words, that exchange risk is diversifiable.

Finally, risk is not risk if it is anticipated. In most currencies there are futures or forward exchange contracts whose prices give firms an indication of where the market expects currencies to go. And these contracts offer the ability to lock in the anticipated change. So perhaps a better concept of exchange risk is unanticipated exchange rate changes.

3.10.3 SHOULD FIRMS MANAGE FOREIGN EXCHANGE RISK? Many firms refrain from active management of their foreign exchange exposure, even though they understand the exchange rate fluctuations can affect their earnings and value. They make this decision for a number of reasons.

First, management does not understand it. They consider any use of risk management tools, such as forwards, futures and options, as speculative. Or they argue that such financial manipulations lie outside the firm’s field of expertise. “We are in the business of manufacturing slot machines, and we should not be gambling on currencies. “ Perhaps they are right to fear buses of hedging techniques, but refusing to use forwards and other instruments may expose the firm to substantial speculative risks.

Second, they claim that exposure cannot be measured.

They are right

currency exposure is complex and can seldom be gauged with precision.

But as in many business situations, imprecision should not be taken as an excuse for indecision.

Third, they say that the firm is hedged. All transactions such as imports or exports are covered, and foreign subsidiaries finance in local currencies.

This ignores the fact that the bulk of the firm’s value comes from transactions not yet completed, so that transaction hedging is a very incomplete strategy.

Fourth, they say that the firm does not have any exchange risk because it does all its business in dollars (or yen, or whatever the home currency is).

But a moment’s thought will make it evident that even if you invoice German customers in dollars, when the mark drops your prices will have to adjust or you’ll be undercut by local competitors.

So revenues are

influenced by currency change.

Finally, they say that the balance sheet is hedged on an accounting basis— especially when the “functional currency” is held to be the dollar. The misleading signals that balance sheet exposure measure can give are documented in later sections.

Modern principles of the theory of finance suggest prima facie that the management of corporate foreign exchange exposure may neither be an important nor a legitimate concern. It has been argued, in the tradition of the Modigliani-Miller Theorem, that the firm con not improve shareholder value by financial manipulations: specifically, investors themselves can hedge corporate exchange exposure by taking out forward contracts in accordance with their ownership in affirm. Managers do not serve them by secondguessing what risk shareholders want to hedge.

One counter-argument is that transaction costs are typically greater for individual investors than firms. Yet there are deeper reasons why foreign exchange risk should be managed at the firm level. Operating managers can make such estimates with much more precision than shareholders who typically lack the detailed knowledge of competition, markets, and the relevant technologies. Furthermore, in all but the most perfect financial markets, the firm has considerable advantages over investors in obtaining relatively inexpensive debt at home and abroad, taking maximum advantage of interest subsidies and minimizing the effect of taxes and political risk.

Another line of reasoning suggests that foreign exchange risk management does not matter because of certain equilibrium conditions in international markets for both financial and real assets. These conditions include the relationship between price of goods in different markets, better known as Purchasing Power Parity (PPP), and between interest rates and exchange rates, usually referred to as the International Fisher Effect.

3.10.4 SOURCES OF FOREIGN EXCHANGE RISK Foreign exchange rate fluctuation affect banks both directly and indirectly.

The direct effect comes from banks’ holdings of assets (or liabilities) with net payment streams denominated in a foreign currency. Foreign exchange rate fluctuations alter the domestic currency of such assets. This explicit source of foreign exchange risk is the easiest to identify, and it is the most easily hedged.

The indirect sources of risk are subtler but just as important. A bank without foreign assets or liabilities can be currency risk because the exchange rate can be affecting the profitability of its domestic banking operations. For example consider the value of a banks’ loan to an U.S. exporter. An

appreciation of the dollar might make it more difficult for the U.S. exporter to compete against foreign firms. If the appreciation thereby diminishes the exporter’s profitability, it also diminishes the probability of timely loan repayment and, correspondingly, the profitability of the bank, in this case, the bank is exposed to foreign exchange risk; a stronger dollar decreases its profitability. In essence, the bank is” short” dollars against foreign currency.

Any time the value of the exchange rate is linked to foreign competition, to the demand for loans, or to other aspects of banking conditions, it will affect even “domestic” banks.

Foreign exchange risk also may be linked to other types of market risk, such as interest rate risk. Interest rates and exchange rates often move simultaneously. So, a bank’s interest relates position indirectly affects its overall foreign exchange exposure. The foreign exchange rate sensitivity of a bank with an open interest rate position typically will differ from that of a bank with no interest rate exposure, even if the two banks have the same actual holding of assets denominated in foreign currencies. Against, the vulnerability of the bank as a whole to foreign exchange fluctuations depends on more than just is its holdings of foreign exchange.

3.11 RISKS OF FOREIGN EXCHANGE TRANSACTIONS Foreign exchange transactions include substantial amount of risk due to fluctuations in exchange rates. Hen corporate are continuously striving to minimize their risk exposure by the use of various hedging tools like forward contract, options, swaps, Off Balance Sheet netting etc. The various risks of Foreign Exchange Transactions are: 1. Open Position or Exchange Rate Risk (Risk from market movement)

It is the risk of change in exchange rates, which affects imports/ exports; this risk prevails from the data of order till the date of payment.

For ex-when a dealer buys or sells foreign currency the bank gets in to a position and if purchases are more the sales, it is said to have overbought/long/plus position, if sales are more than purchases it is said to have oversold/sold/minus position. In simple terms an excess of assets over liabilities is called net long position and conversely, liabilities in excess of assets results in to a short position. Since these positions are taken at the particular rate and if the rate moves adversely then the bank can sufferer a loss. To illustrate if a bank has gone in to long position in a currency which is depreciating it will result in exchange loss because when foreign currency assets are converted in to local currency the bank realize lesser amo9unt as compared to the amount paid for acquiring these assets. Similarly if a bank has; gone in to short position currency, which is appreciating, it will result in exchange loss because when the liability so created is to be paid, the bank will have to shell out more amount of local cu8rrency. In these days when exchange rates are fluctuating continuously, from moment to moment times wild, it is prudent on the part of bank to have some checks and balances so that loss incurred in such a situation is manageable.

2. Cash Balance Risk The balances maintained in the foreign accounts (EEFC) at the end of each day are referred to as cash balances. The balances in the EEFC account do not earn any interest.

3.Maturity Mismatch/Liquidity/Gap/Interest Rate Risk (Risk due to improper transaction) The risk arises out of the fact that maturity period of purchase and sale of foreign currency in case of imports and exports don’t match. Liquidity risk is

the risk that bank will be unable to meet its funding requirements or execute a transaction at a reasonable price. Market liquidity risk is the risk that bank not being able to exit or offset positions quickly at a reasonable price.

4. Credit or counter party Risk (Risk from customers) This is a risk due to inability or unwillingness of the counterpart to meet its obligations. Over this kind of risk bank has not proper control but bank cash avoid or minimize the risk by taking following actions: .

By fixing counterpart limits

.

By appropriate measurements of exposure

.

Credit evaluation and monitoring

.

By following sound operating procedure

This risk can be classified into two ways: I. PRE-SETTLEMENYT RISK Pre settlement risk is the risk of less due to counter party defaulting on a contract during the life of a transaction. This exposure is also referred to as the replacement cost. A key tool for effective management of this risk is the fixation of exposure limits on counter parties.

II. SETTLEMENT RISK Settlement risk is the risk arising when a bank performs on its obligation under a contract prior to the counter party does so. This risk frequently arises in international transactions because of the time zone differences.

The credit risk can also be classified in to: a) Contract Risk If before the performance of the contract, the counter party fails the contract has to be canceled. In the mean time if rate has moved against it, then the

loss is to be born by the bank as the contract is to be closed at the on going market rates. b) Clean risk In an exchange contract the currencies are to be exchanged on the value dates. The time zone difference between various center sometimes results in situations when one bank has already paid the amount of currency to be given before receiving the amount the currency to be received the counter party fails, it may result in total loss. c) Sovereign risk If the counter party bank is situated in different country then there is a possibility of having sovereign risk. Also because of the political and economic factors in that country. If a country suspends the foreign currency payments the bank may stand to lose, although the counter party have performed its part of the contract in local currency. The bank while fixing counter party limits for the overseas bank has to give due weight age to the political stability, health of the economy, availability of financial infrastructure, and expected state interference in financial transactions, particularly foreign exchange transactions.

5.Country Risk This risk related to the ability and willingness of a country to service its external liabilities. It is also known as ‘sovereign risk’ or ‘transfer risk’.

6.Overtrading Risk Risk of Overtrading arises when the volume of transactions by the dealer or the bank is beyond its administrative and financial facility. In the anxiety to earn huge profits, the dealer or the bank may take up large deals, which a normal prudent bank would have avoided.

7. Fraud Risk

Dealers or operational staff may indulge in frauds for personal gains or to conceal a genuine mistake committed earlier.

8.Legal risk In addition to the foregoing risk there is a legal risk, which exists in all kinds of financial markets. It its probably more so in foreign exchange and interest rates given that inherent volatility. It is therefore extremely important the banks as also the corporate dealing in such products take such steps as would sufficiently protect them from the legal standpoint.

3.12 MEASURES OF FOREIGN EXCHANGE RISK The direct source of foreign exchange risk can be gauged by tallying u the net positions on a bank’s assets and liabilities that are denominated in foreign currencies. The example of the bank’s loan to the exporter shows the limitations of the narrow, standardized method most clearly. While the exporter’s loan by itself leaves the bank short in dollars, the standardized method captures none of this indirect exposure. Further, if the bank were to use the foreign currency market to hedge the short dollar position, then the standardized method, having messed the original exposure, would mistakenly treat the hedge as if it added to exposure. In general, if a bank chooses its foreign exchange holdings as though they contribute to risk as the standardized approach does it inappropriate.

Use of the latter option, know as the “internal models” approach, is subject to several requirements for prudence, transparency and consistency. When used appropriately, it can provide a significant improvement over the standardized method. The internal model approach enables banks to take a broader view of their foreign exchange risk than does the standardized method. This year, the internal model approach focuses on evaluating the

risks arising from banks’ trading activities. The approach is well suited to incorporating the correlation between, say, the value of interest rate instruments and the value of foreign exchange. In principle, the internal model approach allows each bank to gauge its exposure carefully enough to incorporate the relationships among even its non-trading operations.

However, even at is its, best, the internal models approach is limit din its range of coverage.

An even broader approach to assessing banks’ foreign exchange risks can be obtained from an analysis of a banks’ equity returns. Equity returns reflect changes in the value of the firm as a whole. So, if the value of a bank as a whole is sensitive to changes in the exchange rate, the bank’s equity returns will mirror that sensitivity. Whether from direct or indirect sources, foreign exchange exposure will be reflected in the behavior of returns. Thus, the exchange rate sensitivity of a bank’s equity return provides a comprehensive e measure of its foreign exchange exposure.

One drawback of this equity approach is that it is not useful for evaluating the risk ness of a particular action. The approach is not linked to an explicitly model of the determinants of foreign exchange exposure, so it cannot be used to trace out the implications of specific decision. However, the approach is useful for bankers and regulators as a tool to evaluate the success of past management of foreign exchange risk. It is especially suitable for comparing the exposure of an assortment of a bank because it can be applied consistently across banks and because it does not require access to their detailed internal models. More over, its comprehensiveness makes it a good benchmark for evaluating other gauges of exposure.

3.13 FORIGN EXCHANGE EXPOSURE 3.13.1DEFINITION OF FOREIGN EXCHANGE

EXPOSURE

Foreign exchange exposure is the sensitivity of changes in the real domestic currency value of assets, liabilities, of operating incomes to unanticipated changes in exchange rates.

Several features of this definition are: First, it is exposure of the sensitivity of domestic currency values i.e., it is a description of the extent or degree to which the home currency value of something is changed by exchange rate changes.

Second, it is concerned with real domestic- currency values,. By this we mean that this adjusts inflation to changes in exchange rates.

Third, it has existed on assets and liabilities or on operating incomes of firms. Since the values of operating income are so much per period of time, we see that exposure exists on stocks and flows.

Fourth, it has not been qualified in the list of exposed items by describing them as being foreign assets, and so on. This is because, unanticipated changes in exchange rates can affect domestic as well as foreign assets, liabilities, and operating incomes.

Finally, it has been noticed that the definition refers only to unanticipated changes in exchange rates. This is because markets compensate for changes in exchange rates that are anticipated. Consequently, it is only to the extent that exchange rates change by more or less than had been expected that there will be gain or loss on assets, liabilities or operating incomes.

3.13.2 TYPES OF EXPOSURE Whether the exposure is accounting-based or economic, the evidence indicates very clearly that changes in foreign exchange rates can change the

real cash flows of the firm and thus can have a significant negative impact on a firm’s ability to compete. There are three types of foreign exchange exposure that impact the operation and performance of multinational companies; translation and transaction that are accounting based, and economic which is operational or real exposure. Foreign exchange exposure can be classified into three broad categories.  Transaction exposure  Translation exposure  Economic exposure First and the third together are known as ‘cash flow exposures’ while the second is referred to as ‘accounting exposure’ or ‘balance sheet exposure’.

• Transaction exposure: A transaction exposure exists when a change in one of the financial prices will change the amount of a receipt or expense. The amount of a transaction ( a receipt or expense) would be determined by the price per unit and the number of units sold or purchased. Transaction exposures typically focus on only the direct effect of a price change-the impact of price changes on quantity is ignored. A transaction exposure will often lead to trouble when there is a mismatch in receipts and expenses.

Eg. If an Indian exporter has a receivable of $200,000 due three months, hence and if in the meanwhile the dollar depreciates relative to the rupee a cash loss occurs, conversely if the dollar appreciates relative to the rupee cash gain occurs. Conversely reverse will take place in case of imports.

• Translation exposure: A parallel exposure-one that also focuses only on the direct effects of a price change-that would be reflected in the firm’s balance sheet is referred to as a translation exposure.

A translation exposure reflects the change in the value of the firm as foreign assets are converted to home currency. Most of the firms make a point of noting that they do not manage translation exposures.

• Economic exposure: Moving beyond the strike accounting-based exposures, firms have begun to consider their firm’s economic, or real, exposure-also referred to as competitive exposures. Changes in foreign exchange rates will change the firm’s receipts or expenditures not only because of the direct price change but also because the price change will change the amount that the firm buys or sells. This view of finical price risk recognizes changes in foreign exchange rates on the firm’s sales and market share and then on the firm’s net profits (net cash flows).

3.14 METHODS OF HEDGING Methods of hedging can be classified as a. Internal methods b. External methods

a. Internal methods: Internal methods include:

i. Invoicing: In invoicing the corporate shifts the entire exchange risk to the other party by insisting that all its imports and exports be invoiced in its home currency. ii.

Netting/matching of cash flows: In this method of hedging if a firm has receivables and payables corresponding to the same periods then even if no other action is taken it will be able to match these exposures and make payments out of the payments received, since it will not have to buy or sell currencies in respect of these matched receipts and payments, there is no forex exposure risk involved. This is also called as ‘natural hedging’.

iii.

Leading and Lagging: The expression leading mean s paying before the due date and lagging means postponing the receipt of funds beyond the date on which they are due. The general rule is to lead i.e. advance payables and lag i.e. postpone receivables in strong currencies and conversely lead receivables and lag payables in weak currencies.

b. External methods: External method includes: i. Forward contract: Forward contract is a firm and binding contract entered into by the bank and its customer for the purchase of specified amount of foreign currency at an agreed rate of exchange for delivery and payment at a future date or period agree upon at the time of entering into foreword deal. The bank on its part will cover itself in the inter-bank market or by matching a contract to sell with a contract to buy.

ii. Option contracts: These are contracts in which the rate of exchange between the two currencies is fixed at the time the contract is entered into as in a standard forward, but the delivery date is not a fixed date. The corporate (customer) can at its option, take or make delivery on any day between the fixed dates. The internal between the two dates is the option period. Options are financial instruments that confer upon the holder the right to do something without the obligation to do so. More specifically, the option is an asset on or up on a specified date if he chooses to do so.

The option buyer can simply let his right lapse by not exercising his option on the other hand; the seller of the option has an obligation to take the other side of the transaction if the buyer wishes to exercise his option.

For this privilege the option buyer has to pay the seller a fee. iii. Financial Swaps: Swaps is an arrangement whereby a firm borrows in the currency in which it has advantage and exchanges the liability with another firm for an equivalent liability in another currency. Under the same currency, the relative strengths of the firms may be with regard to the payment of interest. One firm may have advantage in borrowing at fixed rate of interest while the other in floating rate. Therefore, the swap many involve borrowing at floating rate and exchanging the liabi8lity for payment of interest with another firm borrowing at fixed interest rate. It is also possible that both currency and interest factors affect the choice for going for a swap. iv. Futures: Currency futures are standardized contracts that trade like conventional commodity futures on the floor of a futures exchange. A standardized forward contract is a future contr4act (quantity, date and delivery conditions are standardized). They are traded on organized exchanges. In future contract a margin is required, future contracts are

‘marketed to market’ on a daily basis i.e. profits and losses arising on future contracts are settled daily.

4.1 INTRODUCTION TO INDIAN SOFTWARE INDUSTRY India accounts for about 0.4% of the global software industry with a turnover of approximately Rs.120 bn, during 1998-99. Of the total turnover, about Rs.63 bn. is derived from the global markets, while the remaining is from domestic market. India’s global software revenues are from the US (56.3%) and Europe (24%) which together contributes about 80% of the export revenues.

The Indian software industry is fragmented with over 600 players. However, the major 11 companies accounted for approximately 32 % of the total exports during 1998-99. All the software companies have to follow the rules and regulations mention by the Software Technology Part.

4.1.1 INDIAN SOFTWARE INDUSTRY The Indian software industry has grown rapidly at a compounded annual rate of 50% from US$ million eight years ago to a US$ 3.9 billion in 1998-99 according to National Association of software and service Companies (NASSCOME); a faster rate than the US grew in the same stage of this life cycle. Fuelled by domestic deregulation, entrepreneurial flair and the soaring global demand for low-cast, high-quality software and services India is becoming one of the world’s main centers for offshore software work.

Among the Fortune 500 companies, 203 outsource software development to India.

4.1.2 INDIAN SOFTWARE INDUSTRY ADVANTAGES Quality Reliability

• 131 companies have ISO9000 certificate • Ultimate adherence to delivery schedules • Customer satisfaction by using state-of-the-art

Cost and time savings

technology • High speed data communications 64 kbps+easing off-shore communications

Large

• 24 hour virtual offices • 115,000 engineers graduate every year

manpower pool

• Second largest IT professional source in the world

people Year 200

• Fuller range of cost effective solutions

4.1.3 CLASSIFICATION OF SOFTWARE COMPANIES Software companies can be classified based on numerous parameters. The following bases can be there for their classification: 1. based on software revenue stream consideration the companies can be classified in the following categories.

• Core software companies (says revenues from software greater the 50% of the total revenues).

• Diversified software companies –those in the area other than software including the sales and service of computer hardware.

2.

Based on the work platform employed: the companies may be either or some fo all of the available platforms-say RS 600, LAN, SUN, DEC, AS/400,PS/2, IBM/Mainframe, UNIX/Variants, PC, etc.

3. Based on area of work:  Software products: the company can be dealing in the software products and packages.  Software services: the companies can provide software services ins the form of maintenance of the system, up gradation of the software packages, data entry, solutions to Y2K problems, internet needs, etc.  On-site service company: these are the companies that work on the client premises and have minimum capital expenditure at own office.  Offshore service company: these offshore development centers works on the project with regular interface with the client via data communication lines. The solutions are development in-house and transmitted/installed in the client premises with the help of data communication.

4. Based on the are of application: the companies can target any of the sectors as their customer and focus to provide products or services for that sector. Generally the big companies undertake software work inhouse to cater to their specific needs rather than outsourcing the same.

The sector of focus can be agriculture, banking, communication, telecommunication, finance, manufacturing, etc.

5.On the basis of growth achieved:

 The companies can have an established reputation in the market with solid base and some assurance of business. They enjoy high growth and are experiencing movement up the value chain.  The companies can otherwise be startup concerns. These are typically promoted by some technocrats and are vying to making a placer for themselves in the market. They are generally at the low level in the value chain. Survival is the main concern.

6. On the basis of ownership:  The companies can be multinational’s subsidiaries that are doing job exclusively for the parent company. The parent MNC typically supports them financially and otherwise. There is assurance of business so the risks are minimal.  The captive software division or separate company owned by Indian Company for their captive use.  The Indian companies that are in the fray to provide solutions on competitive basis as any other vendor in the open market. They do not have captive clients.  The joint ventures between the foreign company and Indian company to provide in-house support as well as to have commercial operations as any other company in the open market.

4.1.4 VALUE CHAIN OF SOFTWAREINDUSTRY The value chain of the software industry is very difficult to conceive. These are rather two sub-segments of the industry having their separate value chains-Software products and software services. While the product is a height-risk strategy as the investment has to be made upfront and the

revenue generation is later, the margins are therefore higher to compensate the risk therein. The services are having a low element of risk in them. The investment and the revenue generation are simultaneous. The margins are therefore low as compared to the products. The company can adopt either of the strategy depending on its risk profile and preference. While infosys has been persistently moving in the product direction, the wipro strategy is of service.

The movement up the value chain is usually accompanied with following effects.

FROM  Manpower

TO multiplication  An

game

intellectual

property

business

 Suppliers of cheap labor

 Providers

of

value

service

 Pay for effort  Focus on the lower costs

 Pay for solutions

 Slow growth, low margins,

 Focus is more on quality

and

manpower

Dependant

value

 Faster growth, higher margins and fewer person-dependants

Company.  The

added

that

customer

obtains will be measured in terms of man-hours spent.

company.  The

value

that

customer

derives shall be measured in term

of

function

points

delivered or maintained, and in terms of business leverage that  Time

and

the customer obtains from the

management

product

contract

 Fixed price contracts.

4.1.5 CRITICAL SUCCESS FACTORS The software industry has some peculiar features. The manpower intensity is being one of them. The success factors those are critical to the survival of the company6are as below.  Employee retention and more than that employee utilization  Cost  In-house software development facility  Export orders at hand  Quality of software product or services  Plans to move up the value chain after assessing the current position  Visionary management  Human resource policy  Customer focus  Type of order-whether repeat or new.  Quality of clientele-reputation and credit worthiness of the client shall be very important for success.  Geographical distribution of clientele-after the south East Asian crisis, it has become a matter of concern whether the risks of the company are diversified geographically or not.

 Adaptability to the cutting edge of the leading technologies from the present  Management of change

4.1.6 SWOT ANALYSIS OF SOFTWARE INDUSTRY STRENGTH • Availability of adequate manpower.

• Acceptable quality • Well-accepted potential abroad.

• Established reputation • Vendor preference • Offshore software development • High quality standards-Indian software companies have acquired the highest number of ISO 900 certificates in the world

WEAKNESS • Mismatch of talent and needs • Orientation towards service provision rather than packaged software development.

• Lack of world-class infrastructures in term of telecommunications, international airports, power, and highways.

• Lack of international management and marketing skills.

OPPORTUNITY • The global market is poised to exhibit high growth for the years to come.

• Availability of young people with potential to develop into system analysis.

• Increased thrust on outsourcing.

• The coming age of Internet commerce.

• Great prospects in the Internet segment due to strong UNIX knowledge.

THREAT • Protection granted by the foreign countries via non-tariff trade barriers. Varies are difficult to get for Indian software professionals.

• The piracy problem is very damaging.

• Competitions from other countries like Pakistan, Singapore, Thailand, china, etc.

• Indian companies have become favorite poaching grounds for software professionals. High attrition rates can render the industry impaired.

4.2

INTRODUCTION

TO

INDIAN

SOFTWARE

COMPANIES 1. HCL-PEROT SYSTEM A joint venture between HCL technologies and perot System Corporation, our series span the entire gamut of the IT applications lifecycle. We have, since our inception in 1996, evolved into a global software solutions company, synergisign the IT capabilities and business transformation strength of our parent organization. To cope with the changing technologies, Rs 250 crore HCL Perot System (HPS), is investing in development of competence development centers to analyses trends and develop programmers for enabling its associates to gain expertise.

HPS is a 50:50 joint venture between $ 1 billion HCL group and $ 1.5 billion US- based Perot System Corporation company is also working with the financial Internet solutions provider Factor-E to provide application services to First-E, a pioneering Internet bank in Europe.

Services “Effective people are not problem-minded. They are opportunity mined. They feed opportunities and starve problems”.

---Stephen Covey We offer solutions that cater to the complete lifecycle of information technology applications. From legacy system to e-enablement, application Development to Maintenance, Re-engineering and migration to Enterprise solutions services. We offer out clients the flexibility of solutions on a range

of platforms using innovative technologies and techniques. We also create processes and define methodologies that enable re-usability and r5educe delivery life cycles. Our service offerings draw upon our expertise in multiple domains, technologies, tools and platforms.

2. HONEY WELL Honeywell is one of the world’s largest controls companies with a centurylong tradition of excellence in control products, technology and service. The headquarters of Honeywell inc. is in Morristown, NJ. Its annual revenue is around $8.4bn. We provide components, products, system, and services that keep people conformable, improve productivity, save energy, and enhance safety6. We have global capability, market leadership and technical strength to produce outstanding results.

Our range of products and series, ad our diversified portfolio of businesses.

The opportunities we continue to discover and develop worldwide. Our employees’ potential to explore new ways to do things, learn new skills, and make a real impact on modern life. And perhaps most of all, our carefully built, unprecedented balance of strengths. Technological innovation, leadership, outstanding people and tract record of delivering on our commitments.

SIX SIGMA PLUS six sigma is one of the most potent strategies ever developed to accelerate improvements in processes, products, and services, and to radically reduce manufacturing and/or administrative costs and improve quality. It achieves this by relentlessly focusing on eliminating waste and reducing defects and variations.

Honeywell has realized $2.2 billion in cumulative savings from Six Sigma related activities. It saved $500 million in 198, more than $600 million in

1999 and this year it expects Six Sigma plus cost savings to total at least as much. Through Sliz Sigma Plus, Honeywell empowers its employees with the skill as tools necessary to create more value for this customer; improve its processes, products, and services, and grow the company by capitalizing on the power of the Internet through e-Business. So successful has Honeywell been with Six Sigma plus internally that it now offers its expertise externally to customers and suppliers.

3. IBM At IBM, we strive to lead in the creation, development and manufacture of the industry’s most advanced information technologies, including computer systems, software, networking systems, storage devices and microelectronics. And our worldwide network of IBM solutions and services professionals translates these advanced technologies into business value for our customers.

It’s main products and services are: PRODUCTS

Personal computing • Notebooks • Desktops • Workstations • Monitors • Accessories/upg rades • Handholds

Servers • Enterprise • Intel-based • Integrated applications • UNIX • Enterprise

Softwares • Application development • Database and data management • E-commerce • Graphicsmultimedia • Groupwareproductivity • Home office • Networking and communication • Operating systems

SERVICES

Business service • Strategic consulting • E-business

BUSINESS SUMMARY

IT services • Infrastructure • System management • Networking Connectivity • Outsourcing • Web hosting

International Business Machines Corporation (IBM) uses advanced information technology to provide customer solutions. The company operates using several segments that create value by offering a verity of solutions, including, either singularly or in some combination, technologies, systems, products, service, software and financing. Organizationally, the company’s three hardware product segments are comprised of Technology, Personal Systems and Enterprise Systems. IBM’s other major operations consist of a Global Services segment, a software segment, a global Financing segment and an Enterprise Investments segments.

FINANCIAL SUMMARY IBM provides customer solutions through the use of advanced information technology. These solutions include technologies, systems, products, services, software and financing. For the three month-ended 3/31/01, total revenues rose 9% to $21.04 billion. Net income applicable to common rose 15% to $1.75 billion. Revenues reflect higher Global Services, Hardware, personal and printing Systems and Enterprise systems revenues. Net income also reflects improved margins.

4.iFLEX SOLUTIONS i-flex solutions limited has since its inception been constantly innovating new products and series for its global customer base and is today considered the leading providers of e-solutions for the financial services industry worldwide.

Our mission is to ‘enable financial institutions excel in an e-powered world’. And this we do by providing a suite of banking products, services and e-commerce solutions to financial institutions across the Americans, Europe, Middle East, Africa and Asia. i-flex has created a unique position within the industry, in terms of Strong vertical segment focus, rich services and consulting offering, quality and process maturity, Geographical diversification an d strong financials Main products are FLEXCUBE, Micro Banker, Promoter, etc.

Alliances: Compaq, HP, IBM, ORACLE, Microsoft, Sun Microsystems, etc.

5.INFOSYS TECHNOLOGIES LIMITED Company Overview Infosys technologies Ltd. Is a publicly held company and a world leader in providing software consulting and software services to Fortune 1000 companies.

Infosys

offers

software

services

such

as

application

development, e-commerce and Internet consulting, software maintenance, and offshore software development centers. The company employs more than 3,000 people and is ISO 9001 certified. By using a global delivery model, the company leverages software factories in different parts of the

world to provide high quality, rapid time-to-market solutions at an affordable price. Infosys’ US headquarters is located in Fremont, California with offices throughout the US, Europe, and Asia.

Foreign exchange differences An amount of Rs. 2,77,93,084 and Rs. 3,34,20,847 is included in the Profit and Loss Account for the years ended March 31, 1999 and 1998, representing the realized and unrealized exchange gains due to currency fluctuation. This represents 0.54% and 1.32% of total revenue for the years ended March 31, 1999 and 1998.

Foreign currency transactions In the case f sales made to clients outside India, income is accounted on the basis of the exchange rate as on the date of transaction. Adjustments are made for any variations in the sale proceeds on conversion into Indian currency upon actual receipt. Expenditure in foreign currency is accounted at the conversion rate prevalent when such expenditure is incurred. Where realization are deposited into and disbursements made out of a foreign currency bank account, all the transactions during the month are reported at a rate which approximates the actual rate during the period.In the case of current assets and current liabilities expressed in foreign currency, the exchange rate prevalent at the end of the period is taken for the purposes of translation and accounting in the books. Fixed assets purchased at overseas offices are accounted on the basis of actual cost incurred at the exchange rate prevalent at the time of purchase. Depreciation is charged as per company policy. Exchange d9fferences arising on foreign currency transactions are being recognized as incomes or expense in the period in which they arise. In case of forward contracts, the difference between the forward rate and the

exchange rate on date of transaction is recognized a income or expense over the life of the contract.

Foreign currency translation The accompanying financial statements are reported in US dollars. The functional currency of the company is the Indian rupee. The translation of Rs. To US dollars is performed for balance sheet accounts using the exchange rate is effect at the balance sheet date, and for revenue and expense accounts using a monthly average exchange rate for the resp3ective periods. The gains or losses resulting from such translation are reported as� other comprehensive income�, a separate component of stockholder’ equity.

The method for translating expenses of overseas operations depends upon the funds used. If the payment were made from rupee denominated bank account, the exchange rate prevailing n the data of the payment would apply. if the payment is made from a foreign currency, i.e., non-rupee denominated account, the translation into rupees is performed at the average monthly exchange rate.

Foreign currency transactions The company enters into foreign exchange forward contracts to limit the effe3ct of exchange rate changes on its foreign currency receivables. Gains and losses on these contracts are recognized as income or expense in the statements of income as incurred, over the life of the contract Foreign exchange forward contracts The company enters into foreign exchange forward contracts to offset the foreign currency risk arising from the accounts receivable denominated in

currencies other than the Indian rupee, primarily the US dollar. The counter party to the company’s foreign currency forward contracts is generally a bank. Management believes that the risks or economic consequences of nonperformance by the counter party are not material to this financial position or results of operations. There were no significant foreign exchange gains and losses on foreign exchange forward contracts during the six months ended September 30, 200 and 1999 and fiscal 2000. There were no open foreign exchange forward contracts as of September 30,2000, September 30,1999 and March 31, 2000, respectively.

Infosys also provides a lot of solutions to its customers like customer management, e-business, financial services, insurance, manufacturing and distribution, communications, utilities etc. with regard to services, infosys provides

consulting,

engineering,

products

co-development,

system

implementation, etc.

6. MPHASIS-BFL SOFTWARE PVT.LTD. Mphasis is a global, multicultural organization headquartered in both Santa Monica, and Bangalore, India. With a 1400 strong mobile development team, MPhasis has the bandwidth to undertake large multi-location projects and provide both onsite and offshore co-sourcing facilities to our clients. We have a special advantage in the banking & financial services, insurance, logistics and airlines verticals.

Leveraging our India advantage, we are able to provide different services to customers that allow them to save 40-70% on cost, with faster time-tomarket and without any compromise on quality. Mphasis has the following

service offerings: collaborative sourcing, Msource and web Design Technology.

Our solutions are specifically tailored to meet the requirements of the banking & finance, insurance, logistics and airlines verticals and delivered through result-focused engagement models. In the solutions space, Mphasis provides the following: 1. Functional & technology Architecture 2. Delivery of 3rd Generation e-solutions 3. Transformation of Legacy Applications 7. ORACLE ORACLE is a leading software company, focusing mainly on database and Internet applications. It has four major line of business operating segments: license, support, education and consulting. Leading products include Oracle8i, the .com suite, and Developer.

Oracle recently released on-target fiscal fourth quarter results. Operating earning per share in Q4 hit $0.15, which is flat compared to the prior year after excluding extraordinary gains. For the full 12 months of fiscal 2001,operating earnings increased to $0.44 from $0.34 in the last year.

Revenues in the fourth quarter matched our estimated of $3.26 billion, down 3% over last year measured in U.S. dollars, buy advanced slightly in local currency. Ten percent growth in Asia carried the quarter, as growth in Europe was stagnant and revenues plunged 17% in the United States owing to adverse economic conditions. By product line, applications license revenues dropped by 24%. Overall service revenues advanced 5%. Oracle’s operating margin slipped to 39.7% from 41.1% in the prior year, which reflects higher cost of services and increased spending for research and

development. While oracle’s operating margin proved lower than we expected, the company’s profitability is still quite impressive given the difficult selling environment faced by most software companies.

Oracle Corporation develops, manufactures, markets and distributes computer software that help corporations manage and grow their businesses, including systems software and business applications software.

8. SATYAM Satyam computer services ltd. is a multifaceted end-to-end IT solutions provider. Satyam has presence in 35 countries across five continents and a customer base of over 300 global companies, of which 40 are Fortune 500 corporations. Satyam’s range of expertise includes: software development, services Engineering services, systems integration, ERP solutions, Customer Relationship

Management,

supply

Chain

Management,

Product

Development, Electronic Commerce, Consulting, IT outsourcing The company, through its subsidiary satyam Info way, also provides Internet access & hosting services and network & network-enabled services.

Satyam’s range of consulting and IT skills have helped businesses reengineer and reinvent their products, services and processes to compete successfully in an ever-changing marketplace Satyam’s software development centers in India, the United States, UK, Middle East, Singapore and Japans work with a variety of business and technology partners to design and implement projects onsite, offshore and offsite. Satyam’s ideas and products have resulted in technology-intensive transformations that have met the most stringent of international quality standards.

Satyam’s range of IT services and solutions addresses the technology needs of your company in a variety of vertical business segments. Satyam’s solutions address a range of situations, including, but not limited to, the following: • Streamlining processes with IT • Managing IT enabled processes • Placing IT in the picture • Managing existing technology and integrating it with new technology • Bringing people up to speed with IT • Integrating process and technology • Optimizing IT resources • Creating better business value • Enabling e-commerce

9. TEXAS INSTUMENTS A Texas instrument incorporated is the world leader in digital signal processing and analog technologies, the semiconductor engines of the Internet age. TI is a leader in the real-time technologies that help people communicate. We are moving fast to drive the Internet age forward with semiconductor solutions for large markets such as wireless and broadband access and for new emerging markets such as digital cameras and digital audio.

TI envisions a world where every phone call, every internet connection, every photography you take, every song you listen to are touched by the power of IT’s Digital Signal Processor (DSP) and Analog technologies.

IT BUSINESSES: the main businesses of TI are: semi Conductors, Educational and Productivity Solutions, sensors and controls, and Digital Light processing.

IT GLOBAL STRETEGIES: Map consistency, Transmission Verification and EDIFACT.

10. WIPRO Wipro technologies are the global technology services division of Wipro Limited. For the last two decades, we’ve successfully served the technology needs of more then 200 customers from diverse industries and locations.

We believe we are best defined by our people-talented, enthusiastic and driven. Today, we have a team of over 9,500 committed people from different managerial and engineering.

Wipro is a diversified corporation into services, consumer products, and biomed, fluid power and information technology. Wipro Infotech started its operations in 1980 and Wipro ventured into software business in 1984.

Wipro Infotech offers a basket of services. It addresses the needs of the clients by offering facilities management, availability services, enterprise management, global support, and system integration, networking, e-security and e-com facilities. To highlight some of Wipro’s achievements: wipro InfoTech was ranked the No.1 company in India for second year in row by Dataquest (2000) in the IS computer world techies 98 awards-wipro walked away with a total 33 awards as the leader in various categories No.1 in system integration, No.1 in support among top 5 brands. Wipro Infotech ahs

a track record of continuous growth in sales, profitability and delivering customer satisfaction whish is unique in India’s IT industry.

Wipro InfoTech Group has three main divisions i.e.

1. Operations and Customer Support Division 2. Enterprise Products Division 3. Solutions and Services Division Wipro InfoTech is known for its strength of R&D, for the quality of its products and for the customer orientation of its services. Several external recognition awards to Wipro Infotech over the years bear testimony to this fact.

Our customers includes leading firms across the globe are 3COM, ABN Amro, Alcatel, Allianz Chruch & Analog Devices, Aristasoft, AT&T, Baxter, BSI, BT, Cisco, Compaq, ContentGaurd, Corel, Cox & kinds, Daiwa, Energy.com, Enron, Epson, Ericsson, esupportnow.com, Farmers Insurance, Franklin Templeton, Fujitsu, General Motors, Genuity, Geoutilities.com, Home Depot, HP, IBM, Intel, Japan Travel Bureau, JP Morgan, KPN, Lucent, Magneti Marelli, Marconi, Menlo Logistics, Microsoft, Mitsubishi, Morgan Stanley, NCR, NEC, New bridge, Nike, Nortel, Nokia, Npower, NTL, OTIS, PacifiCorp, Pindar, Seagate, Sharp, Sonera, Sony Spice, Sun, Sunquest, Telkstra, Texas instruments, Thames water, Thomas Cook, Trafalgar Tours, Transco, Tufts, Health plan, TIBCO, United Technologies, US Wireless, VLSI, Weyerhaeuser and Winterthur.

Charpter-5 constitutes a major portion of the whole report. From here the primary data actually stars. This chapter is based on the analysis of the surveyed software companies. For the purpose of study, the companies were chosen from two cities i.e. from Bangalore. This basically is done to have a clear view about the practices prevailing in the software companies The various companies taken both from Bangalore city for the purpose of study are as follows: CITY

NAME OF THE COMPANIES

Banglore

HCL perot, Honeywell, IBM, i-flex solutions, Infosys, Mphasis-BFL

software,

Oracle,

Satyam,

Texas

instruments and Wipro.

The analysis of all surveyed software companies is shown later in this chapter. The analysis is primarily based on the primary data collection method. In this chapter the author has used various graphs so that the readers can understand it properly. The details relating to each table and graph is shown there with the detail interpretation.

DO SOFTWARE COMPANIES FACE FOREX RISK? Table 3: Percentage of Software Companies facing Foreign Exchange risk

YES NO

% of Companies facing Forex risk 75% 25%

% of Companies facing Forex risk

NO 25% YES NO YES 75%

Graph 2:Companies Facing risk.

INFERENCE: It can be inferred from the above analysis that Software Companies do face Foreign Exchange risk. From the above graph it is clear that 75% of the surveyed software companies face Forex risk and 25% of them says that they are not facing Forex risk. All the surveyed companies are of different levels but they all are in proportion. Some of them are the top companies, some are medium scale companies and some of them are small-scale companies.

TYPES OF FOREX RISK FACED BY SOFTWARE COMPANIES Table 4: Percentage showing type of Forex risk faced by software companies Type of Forex Risk

RISK (as

Open position or Exchange rate risk Cash balance Maturity mismatch Credit risk Country risk

%) 45 20 9 7 12

a

Overtrading risk Fraud risk

40

Open position or Exchange rate risk

35

Cash balance

45

0 2 5

30 25

Maturity mismatch

20 15

Credit risk

10 5 0

Country risk RISK (as a %) Overtrading risk

Graph 3:Fprex risk faced by software companies.

INFERENCE:

Fraud risk

It can be inferred from the above graph that open position or exchange rate is the mostly faced by software companies. Around 45% of the companies are facing this open position risk. Cash balance and country risk follow with 20% and 12%. Maturity, Credit, Legal and Fraud Risk were next with 9%, 7%, 5% and 2%. The overtrading risk is not being faced buy software companies and hence indicated as Nil. The reason for exchange risk being so high is that the exchange rate affects exports/imports from the date of order till the date of payment. Regarding overtrading risk, software companies don’t overtrade and that’s why they are not exposed to this risk.

COMPANIES, WHICH PERCEIVES THAT THEY DON’T HAVE ANY FOREX RISK

75 80 60 25 40 20 0

Facing risk

Not Facing Risk

Graph 4:Risk of companies.

INFERENCE: Among the companies surveyed, about 25% of the software companies perceive that they are not facing Forex risk. The reason behind was that they maintain their balances in foreign accounts i.e. in Exchange Earners Foreign Currency (EEFC) account, which do not earn any interest. They therefore consider their companies as risk fee.

The author’s view is that these companies do face risk i.e. in the form of cash balance risk. By implication, there is the opportunity of lost interest. In addition, in the event of depreciation of depreciation of foreign currency against the home currency the real value of the cash balance maintained in foreign account declines.

TYPES OF EXPOSURE FACED BY SOFTWARE COMPANIES Table 5: percentage showing types of exposure as High, Medium and Low Type of Exposure Transaction Translation Operating

High 40 10 45

Medium 30 45 35

Low 25 40 20

NA 5 5 0

50 40 High Medium Low NA

30 20 10 0

Transaction

Translation

Operating

Graph 5:Types of Exposure.

INFERENCE: The above graph shows that the operating Exposure affects the software companies most. 45% of the companies rank the operating exposure as high, 45% of the companies rank the Translation exposure as medium and 40% of the companies rank the Transaction exposure as high.

A translation exposure reflects the change in the value of the firm as foreign assets are concerted to home currency. Most of the firms make a point of noting that they do not manage translation exposures. Generally, the transaction and operating exposure go together and that’s why they are known as ‘Cash flow exposure’.

SOURCES OF INFORMATION UTILIZED BY COMPNIES TO MANAGE EXPOSURE Table 6: percentage of companies use various source of information Source of information

% of companies use

Bank reports Economic Reports Insurance Companies

100% 80% 10%

1.2

100%

1

80%

0.8 0.6 0.4 0.2 0

0

0 1

0 2

10% 3

4

Graph 6:Percentage of companies uses various sources of information INFERENCE:

It can be inferred form the above graph that the all the surveyed companies use Bank Reports, 80% of the companies use Economic Reports and only 10% the companies take help from Insur4ance Companies. This shows that the software companies use these sources of information to manage the exposure.

The author’s view is that the Economic Reports and Bank Reports are the important indications, which shows the changes in the exchange rate, so the companies should use it. Now days, Insurance companies has come out with a lot of new facilities, so the companies can also use them to manage exposure.

TYPE OF HEDGING TOOL ADOPTED BY SOFTWARE COMPNIES Table 7: percentages showing the type of hedging tool adopted by software companies Source of information

% of companies use

Forward cover Swaps Netting Options Natural Hedging No hedge

35% 0% 0% 5% 10% 50%

50% 40%

Forward cover

30%

Swaps

20%

Netting Options

10%

Natural Hedging

0% % of companies use

No hedge

Graph 7:Type of hedging tools.

INFERENCE: It can be inferred from the above graph that hardly 5% of the companies go for operations, 10% of the companies go for Natural Hedging, which means devaluation of rupee in the market, and none of the companies go for swaps and Netting. Around 35% of the companies adopt Forward Contract to cover Forex risk.

The author’s feels that most of the companies do not hedge because they are unaware with the importance of other hedging tools. Companies which maintain foreign accounts i.e. EEFC account do not hedge their positions, which explains for the high percentage of “No hedge” decision.

NORMAL TIME FRAME FOR FORWARD CONTRACT Table 8: percentages of companies showing normal time for forward contract Time Frame(in months) 0-1 2-4 1-3 3-6

% of Companies using 5% 10% 40% 45%

Graph 8: percentages of companies showing normal time for forward 50% 40% % of Companies using

30% 20% 10% 0% 0 to 1

2 to 4

1 to 3

3 to 6

INFERENCE: It has been evident from the above graph shows that around 45% of the companies make forward cover for 3-6 months, 40% of the companies go for forward contract of 1-3 months, 10% of the companies use Forward Contract of 2-4 month and only 5% of the companies make one month Forward Contract. This shows that it is been convenient for the companies to make a Forward cover of 3-6 months and that’s why maximum number of companies uses this.

FACTORS TO BE CONSIDERED AT THE TIME OF FORMULATIN OF HEADING STRATEGY Table 9: percentage of companies considers various factors while formulating hedging strategy.

Factors Rate of Interest Demand and supply Exchange Regulation Speculation

% Of Companies using 60% 50% 80% 70%

Spot Rate Don’t Consider

70% 10%

Graph 9: companies considers various factors while formulating hedging Rate of Interes t 80% 60%

Demand and supply

40%

Exchange Regulation

20%

Speculation

0% % Of Companies using

strategy.

Spot Rate Don’t Cons ider

INFERENCE: Among the surveyed companies it has been found that 80% of the companies consider Exchange regulation, 70% of the companies consider speculation and spot rate, 60% of the companies consider rate of interest, 50% of the companies consider demand and supply and only 10% of the companies don’t consider any of these factors while formulating hedging strategy.

The author says companies should consider these factors at the time of formulation of any hedging practice. Those companies, which are not using theses factors, might be unaware of the importance of these factors or else they don’t formulate or use any hedging practice.

COMPANIES USING BENCHMARK OF HURDLE RATE AS A PART OF HEDGING STRATEGY Table 10: percentage of companies showing the nature of usage of Hurdle rate Nature Using hurdle rate Not using hurdle rate

% of Companies 30% 70%

% of Companies Not using hurdle rate Using hurdle rate 0%

20%

40%

60%

80%

Graph 10: companies showing the nature of usage of Hurdle rate

INFERENCE:

Among the surveyed companies it has been found that very few companies are using only 30% of the companies are using Benchmark or Hurdle rate as a part of their hedging strategy. The rest 70% are not using the Benchmark rate and are of the view that it doesn’t make any difference in their hedging practice.

The author’s option is that those companies who use hedging tool should aloes use the Benchmark rate as a part of their hedging parts. This will motivate them to reduce the burden of Forex risk and also help them by keeping their level above the Benchmark rate.

COS, SATISFACTION LEVEL TOWARDS CURRENTLY ADOPTED HEADING OR UNHEDGE PRACTICE Table 11: percentage showing satisfaction level of companies Nature Satisfied Unsatisfied

Level 100% 0% Level

100% 50%

Level

0% Satisfied

Unsatisfied

Graph 11: percentage showing satisfaction level of companies

INFERENCE: The above graph indicates that at present companies all the surveyed software companies are very much satisfied with the currently used hedged tool. Those companies which are not using any hedging practice are also

seems to be satisfied. This may be because they find adopting the hedging practice may be expensive or they may not be aware of this.

The author’s view is that the companies first of all should gain knowledge for adopting any hedging practice. The forex manager should be aware of all hedging tools available and must also be in a position to select the best. The companies can also go for other tools like ‘Futures’, which are frequently used abroad. This tool found to be beneficial for the companies.

COUNTRYWISE EXPORT/YEAR FROM INDIA Table 12: percentage showing satisfaction level of companies Market USA Europe Japan South East Asia West Asia

1999-00 58% 21% 4% 8% 2%

Australia & new Zealand 2% Rest of the world 5% Total 100% Graph 12: percentage showing satisfaction level of companies 1999-00

USA Europe Japan South East Asia West Asia Australia & new Zealand

INFERENCE:

the world This geographical profile indicated by CRISIL shows thatRest USAof has captured

58% of the world markets, which is high. Similarly Europe take care of 21%, south east Asia 8%, Japan 4%, West Asia, Australia ad New Zealand each 2% and 5% by the rest of the world markets. This shows that if the country deals outside USA and Europe, there are chances of having country risk.

COMPANIES WHICH HEDGE IMPORT AND EXPORTS Table 13: percentage of Companies hedges its imports and exports Nature Imports Exports

% of Companies 100% 60%

Graph 13: percentage of Companies hedges its imports and exports % of Companies hedge 120% 100% 80% 60% 40% 20% 0%

% of Companies hedge

Imports

Exports

INFERENCE: It can be inferred from the above graph that almost all the companies hedge its imports but only 60% of the companies hedge its Exports. It is because of the fact that Rupee is weak currency hence depreciation in rupee incr5eases receivables.

To decide whether to hedge or not to hedge and by how must is take by operation manager in consult6ation with the banker but broad hedging guidelines from hedging are provided by top management of respective companies.

BANKS INVOLVED IN FOREX TRADING Table 14: percentage of banks trade through Indian or foreign banks Nature of bank

%

Of

Indian bank Foreign bank

going for 70% 90%

Companies

100% 80% 60% 40% 20% 0% Indian bank

Foreign bank

Graph 14: percentage of banks trade through Indian or foreign banks

INFERENCE: It can be inferred from the above graph that around 90% of companies trade with the help of foreign banks and around 70% of the companies trade with the help of Indian bank. This shows that now day’s companies go for foreign banks more than Indian banks. This is because foreign banks found to provide more facilities compared to that of Indian banks.

COMPANIES BANKS

TRADISNG

THROUGH

VARIOUS

Table 15: percentage showing companies trade through different types of banks Name of the bank Citibank HSBC HDFC ANZ Grind lays SBI ICICI Others

Companies trade through banks 25% 15% 20% 1% 5% 5% 20%

Graph 15: showing companies trade through different types of banks INFERENCE: 25%

Citibank

20%

HSBC

15%

HDFC

10%

ANZ Grind lays SBI

5%

ICICI

0% Companies trade through banks

Others

It can be inferred from the above graph that maximum number of companies trade through Citibank followed by HDFC and HSBC.10% of the companies trade through ANZ Grind lays and 5% of the companies trade through both SBI and ICICI banks. 20% of the companies also go to other banks for Forex trading. Other banks include Hongkong bank, Deutch Bank, SPP Jain, and banks situated in foreign countries.

Each company is normally involved in 4 to 6 banks for its Forex trading.

Bank fee for Forex transaction’s based on percentage of turnover, which

basically ranges from 0.5% to 0.8% of turnover or the fixed charges mention by the bank (ranged from Rs. 5000 to Rs. 20000 depending upon the bank)., whichever is less and beneficial for the company.

MAJOR CURRENCIES TO WHICH COMPANIES ARE EXPOSED Table 16: table showing percentage of companies is exposed to various currencies Sr. No 1 2 3 4 5 6 7 8 9 10 11

Country Australia Canada China European Union France Germany Hongkong Japan New Zealand Singapore United kingdom

Monetary unit Dollar Dollar Yuan Euro Franc Deutsche mark Dollar Yen Dollar Dollar Pound

% of Companies 60% 50% 40% 100% 60% 80% 100% 50% 70% 60% 80%

Graph 16: percentage of companies is exposed to various currencies 1 Australia Dollar

100% 80%

2 Canada Dollar

60%

3 China Yuan

40%

4 European Union Euro

20% 0% % of Companies

5 France Franc

INFERENCE: The above graph shows that most of the companies are exposed to euro currencies and dollar, which is 100% . 80% of the companies are exposed to deutsche mark and Pound. 70% of the companies are exposed to New Zealand dollar. 60% of the companies are exposed to Franc, Australian dollar and Singapore dollar, 50% of the companies are exposed to Japanese yen and Canadian dollar. And least number of companies i.e. 40% is exposed to Chinese Yuan.

Chapter 6 Constitutes one of the most crucial parts of the study as it states the findings, based on which recommendations will be made. Findings are essentially a compilation of all the primary data that has been gathered and its presentation in a more systematic format to aid easy comprehension.

Findings in turn are inferred from the analysis of the study, which is nothing,

but pictorial representation of the responses obtained from the respondents of the study.

The respondents of the study comprised of various software companies.

They are chosen to identify the prevailing foreign exchange practices in software industry. Companies, with different business operations like software development and software services, are taken for the study purpose.

TARGET SAMPLE Software companies

NO OF RESPONDENTS 10

The software companies interviewed as part of the study. Some of the common findings on corporate practices in managing exchange risk are as follows:  A majority 75% of the companies is saying that they do face foreign exchange risk.  The risk factor for companies operating on gross basis is more than those operating on a net basis.  The various forex risks which are prevailing in software industry ranked by respondents is shown as below: Type of Forex risk Rank Open position risk 1 Cash balance risk 2 Country risk 3 Companies ranked open position or exchange risks as number 1 because they exposed their risk due to exchange rate fluctuations. Cash balance risk, as number 2 and most of the companies is not aware of this risk. This risk arises because of keeping their money in foreign accounts. Country risk has been ranked as number 3. It has been found from the surveyed companies

that if companies are trading outside US, UK and Europe, they may expose to this risk.  Around 25% of the software companies are saying that they do not face any risk. Buy, in actual practice they do face risk, which is so called as cash balance risk.  Companies affecting to various types of exposures at a different level is shown below: Exposure Transaction Translation Operating

Variable High Medium High

 Forex transacting is regularly recorded by the companies in the books of accounts, which are audited at the end of financial year.  In the majority of the cases, companies do not have any corporate policy for managing forex risk. This is due to the following reasons. a. They are not aware of the fact that they too play a role in the forex market and do face forex risk. b. Corporate also are not aware of hedging practice which best suits them. c. Since, there is lack of talented people in this field, thus corporate are unable to make the policy for the organization.  A majority 50% of companies doesn’t use any hedging practice. Small companies are not aware of this and also they do not have enough knowledgeable

people

with

them.

Medium

scaled

Software

Companies feel that it’s expensive and also there is no guarantee that it will benefit them in future. Top companies found to keep their money in foreign accounts and hence they don’t use any of the hedging companies.

Organizational

Reason for not using hedging tool

level Small

Lack of knowledge and talented people aren’t

Medium Top

enough Finds expensive and no guarantee.

Maintain foreign account, which is convenient.

 A type of hedging tool adopted by software companies is forward contract. A minority of the surveyed software companies uses this for a period of 3 to 6 months.  Most of the companies feel that it is not possible to remove all the foreign exchange risks or to become risk-free. Hence selective hedging is regarded as the best strategy.  The software companies export to few selected countries. The ranking gives by companies exporting to main countries are as follows: Country USA Europe South East Asia

Rank 1 2 3

 Almost all the companies hedge its imports and majority 60% of companies hedging its exports. This shows that all the companies are not hedging its exports. They say that rupee is weak currency, hence depreciation in rupee increases receivables.

 A majority 90% of companies uses foreign banks for Forex trading.

They say that these foreign banks are providing more facilities and have good connectivity with them compared to Indian banks.  Almost all the companies go through Citibank and hence regarded as the best bank. But, a minority of companies uses deutsche and it has been found that this bank won Euro money’s foreign exchange poll as the bank of preference for the highest volume of client business.

Companies usually prefer to trade with city bank because they find this bank is cheaper compared to other banks.  A majority of companies said that banks fee for Forex transactions if based on percentage of turnover which basically ranges from 0.5% to 0.8% of turnover or the fixed charges mention by the bank (ranged from Rs. 5000 to Rs. 20000 depending upon the bank), whichever is less and beneficial for the company.  Introduction of LERMS has created greater awareness for the development of sophisticated exchange risk management and has brought about more top management involvement.  In order to maintain effective control separation is ensured between various people like authorizing, concluding, monitoring, and finalizing the transactions.  These are value limits per person/ designation for entry into forex transactions beyond which authority lies in the hands of next higher authority in the chain.  Bank statement regarding forex transactions are obtained periodically which are documented and audited.  Profits/loss arising from hedging are reported to top management.

ď ś Decision whether to hedge or not to hedge and by how much to hedge is taken by operation manger with the banker or consultants but broad hedging guidelines for hedging are provided buy top management.

The following is the hedging strategy adopted by a typical Indian corporate in software industry and having a good market share in India and considerably 43% of market share in the global market.

Exports: a majority 60% of the companies hedges its Exports. The export earning are no generally hedged with the assumption being rupee is weaker currency. As depreciation in rupee is more compared to the forward rates, it is not profitable to cover the exports.

Imports: almost all the surveyed companies hedge its imports. Imports are hedged at least to the extend of net exposures. Selective hedging is done by closely monitoring the daily forward premia. At appropriate rates of forward premier the payables are covered. Generally the corporate covers when the forward premia is in the band of 6 to 12% depending upon the volatility. ď ś It has been found that corporate use the following risk management matrix for managing its exposure: Figure 6.1 Risk Management Matrixes:

Low risk:

High Risk:

High reward Low Risk:

High Reward High Risk:

Low Reward

Low Reward

RECOMMENDATIONS  Around 25% of the companies found not facing risk. Since they are not aware about the cash balance risk and keeping their money in foreign account and indirectly loosing interest. Greater emphasis on forex in companies and constant updating through training in Forex management is recommended.  Almost all the companies are facing all the types of exposures, especially transaction and operating. Thus, it is essential for the companies to minimize these risks by using various hedging tools.  It has been found that a minority 10% of the companies uses insurance companies as a source of information. Now a day, insurance companies provide a lot of facilities. Thus, the companies should take the help insurance companies, and also use them as a source of information.  Since a majority 50% of companies have taken “No Hedge” decision and that’s only because they keep their money in foreign accounts. It is very much essential for the companies to have knowledge of available hedging tool and also to know which tool suits best to their organization. Thus, corporate need to use hedging tool for minimizing their risks.

A majority 50% of the software companies doesn’t use any hedging strategy.

Hedging strategy to be followed by Indian Corporate is a function of the following variables, which have to decide by the forex management: The capacity to take risk and willingness to take risk.

 Resources  Interaction with other functions  Very few companies found to be suing benchmark or hurdle rate as a part of hedging strategy. Cooperates should use benchmark rate as a part of their hedging strategy so that it is easier for the companies to find out their performance.  To hedge or not to hedge, this decision is make by the operation manager but the broad guidelines for hedging are provided by top management.

Like imports, exports should also need to be hedged.  Deutsche bank this year won Euro money’s foreign exchange poll as the bank of preference for the highest volume of client business. It also found out that deutsche bank is the best bank for forex trading. Companies, not using this bank, should go for this for their forex trading.  Must of deutsche’s foreign exchange business is related to securities transactions, which the foreign exchange deal leading or lagging the securities sale, purchase, or repo, depending on the market view. For such investors Deutsche has a team of risk strategists around the globe, advising on timing and positioning depending on the client’s time horizon and market view.  It is also essential for the companies to consider the factors like rate of interest, demand and supply, exchange regulation, speculation and spot Rate at the time of formulation their hedging strategy.

ď ś For doing Forex trading, companies can use the trading software, which are available in the market. It has been found that this software is useful and must easier to operate. Some of them are listed below.

1. SHIVA SHIVA is an advanced, extremely high performance trading system development program. Shiva allows you to develop day trading, short tem and long term trading systems using historical data in CSI, tick data inc. or ASCII format, using the latest state of the art, out of sample statistical tools.

2. PORT-F The PORT-F program reads the trade profit/loss or daily equity files from a trading system analysis program like trade station, super charts or market maker and combines the result across a number of different markets or trading models into a single easily analyzed portfolio report. PORT-F’s OMNI-READER feature can handle the report format coming from any trading analysis program. PORT-T is able to read in the results of thousands of trades produced by decades of trading across dozens of markets and output the performance statistics of all possible portfolio combinations of these markets.

3. CARLO

Monte Carlo simulator predicts draw don probabilities, ending equity, many other performances and risk parameters, using actual trades of a trading system or portfolio of systems. Works with all technical analysis programs.

4. PATTERN MASTER State-of-the-art price pattern analyzer tests entire families of patterns simultaneously and produces a simple table of results.

Accomplish in

minutes what would take days with any other technical analysis program.

5. OPTIONEER The only option analysis software, which simulates the trading of any futures option strategy over many years, locating optimal systems. Derives option prices from underlying futures price histories using advanced algorithms.

6. UPDATE Update is the proprietary data distribution program for updating daily foreign exchange rates. This allows for simple databank maintenance and updating.

7. PERF Perf is an add-on utility program for PORT-F. Perf creates monthly composite performance tables, which allow users to analyze single trading system or multiple system portfolio results on a monthly and yearly basis for efficient and effective decision making.

8. EQTPLOT Eqtplot produces a draw down spectrum the same as the one, Market Maker produces, except that it is calculated on an entire portfolio. You can specify a parameter called “threshold” which will produce output lines only for draw down valleys greater then the threshold. Eqtplot can be used with trade station that allows you to plot your equity in a graph.

9. SPOTLYZE Spotlyze.exe is a statistical analysis/error-checking program. Statistics created by spotlyze are yearly OHLC, yearly percentage range, yearly high excursion, yearly low excursion and average volatility. Spotlyze allows for quick analysis of large amounts of data and outputs the results into an easily usable format.

10. LINES Line.exe will extract the last summary result line it finds in each optimization or rolling optimization’s .sum file to MASTER.OUT. This enables user to analyses large amounts of optimization results and sorts these results automatically.

11. EQLYZE Eqlyze.exe produces an output report to analyze the consistence of trading models. Year, month or periods of specified day can break down the equity changes. Eqlyze.exe also calculates equality drawdowns in each period and computes averages, standard deviations, and both sharp ratio and k-ratio on the equity curve.

12. VISUAL SPECULATOR

It enables corporate and day traders who are working over the Internet, via a browser, to do faster, more profitable business. It brings professional tools and disciplines within reach of every online trader, boosting confidence and post-trade monitoring are all done directly from a chart showing market history and forecasts, in the context of the trader’s own objectives and timescales.

Its main features are as follows: • Includes limit and stop orders indicative quotes • Tradable bids and offers charts • Comprehensive technical analysis for novices and advanced users • What is analysis real-time P&L and margins • Detailed activity log visual display of open orders and positions • In-house commentary and chat facilities easily added • Easy integration with corporate web site and web marketing strategy  The most reliable trading system The system we are proposing for larger transactions is LVD-LIVE voice dealing, the traders’ reliable flagship. Love voice dealing and brokering via dedicated telephone lines is safe. Proper identification of the trading party, integrity of data transmission, speed of live quotations and speedy order execution, especially during phases of market volatility and fast market movements. Accuracy in order transmission, on-the –spot trade execution, subsequent instant trade confirmation, anonymity and flexibility in true multisource bid-ask price negotiations with market makers necessitate the human touch.

Access to the forex market place for our customer is assured via live telephone communication with state-of-the –art back-up equipment. We

can further assure you that your dealer has ample will-trained personnel to take your call, to provide you with • Timely market information • Up-to-the-minute interbank bid-ask indications • Instant order executions and confirmations We are aware that currently available PC trading systems can irritate the trading public to a great extent. Internet login, modern dial-up and system access refusals are primarily caused by ‘bandwidth Jams’ or ‘electronic highway bottlenecks’. Repetitious ‘try again later’ messages may among others be caused by poor system design. Customers must be able to exercise their basic rights entitling them to obtain accurate market quotations, 5timely order executions and safe data transmission, even during phases of ‘communication highway congestion’s’. Any time-all of the time.

• Foreign exchange transitions are costly and sometime difficult to process consider netting forex trade requirements bgy7u currency on a daily basis. The approach reduces the number of forex trade (if you are presently doing one forex trade for each foreign security trade) and thus, reduces operations costs. One major plan sponsor used this approach and in the first year of operation saved over $500,000. An industry benchmark standard for forex trades does not exist! How do you know if you are getting the best market executing from your agent? Consider working with your global custodian to measure performance results. Most investors seek competitive bids on forex trades.

• Corporate should change the framework for their risk management.

The management of foreign exchange exposure should be a part of consistent, corporate framework.

Once the organization’s risk appetite has been defined, exposures can be defined, exposures can be reviewuated using the five-prong approach: • Identify the exposure.

• Quantify the exposure • Reviewuate the exposure • Manage the exposure.

• Monitor performance.

BIBLIOGRAPHY

TEXT BOOKS AND MAGZINES  Foreign Exchange International Finance and Risk Management by A.V.Rajwade.  International Financial Management by P.G.Apte  International Business Environment by Sundaram and Black.  Corporate Finance by Prasanna Chandra.  Financial Management by I.M.Pandey.  Chartered Financial Analysts.  Reuters Magazine.

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