Importantly the risk exposure of Indian companies to its foreign trade has also increased dramatically. Conceptually the foreign exchange market faces risks of transaction exposure, translation exposure, and operating exposure which seems to be part of the exchange rate determination system.

The hedging measures to be part of the risk management practices in the foreign exchange system across the global market. The exchange currency of US dollar is taken in the account of the foreign exchange market and its impact corporate profitability is being discussed with reference to information technology major Infosys. As exchange rate has challenged Indian corporate at many periods of interval, due to volatile movement of exchange rate directly impact on the corporate profitability.

Infosys risk hedging being analyzed to know how it manages the exchange risk volatility and impact on corporate profitability is studied reference to information technology IT industry.

The historical picture of the exchange rate of INR against major currencies like US dollar, Euro, Pound sterling, and Yen, surprised many corporate as it had direct impact on the corporate profit. This paper brings out the problem of exchange rate risk and its effect on corporate profitability on IT industry.

Macroeconomics and Finance in Emerging Market Economies. Dayanand Arora. IOSR Journals publish within 3 days. Derivatives play asignificant role in addressing the risk inborn in financial transactions. They can be used to hedge an existing market exposure forwards , to obtain downside protection to an exposure even while retaining upside potential options , to transform the nature of an exposure swaps , and to obtain insurance against events such as default credit derivatives.

At the same time, derivatives involve incomprehension owning to the complexity of their valuation, design and risk implication. The Global Financial Crisis has spurned a large volume of literature laying much of the blame for the crisis on indiscriminate use of derivatives, pointing out the dangers integral to derivatives and emphasising the need for further regulation of the market.

The OTC derivatives markets all over the world have shown tremendous growth in the recent years. OTC financial derivatives market in India has also grown, but by international standards the total size of the Indian OTC derivatives market still remains small. The origin of the Indian currency market can be traced to when banks were permitted to undertake intra-day trading in foreign exchange. The OTC derivatives in the form of foreign currency forward and foreign currency swaps contracts have been in existence for a long time.

In January , the RBI started permitting Indian banks to write " cross-currency " options including barrier options and other innovations. The deregulation of interest rates as a part of the financial liberalisation process created need for interest rate derivatives and the RBI responded by permitting interest rate swaps and forward rate agreements in The reporting platform for Credit Default Swaps CDS was put in place from the date of introduction of the instrument itself i.

December 1, A good reporting system and a post-trade clearing and settlement system, through a centralised counter party, has ensured good surveillance of the systemic risk in the Indian OTC market. Firming up the position of the Clearing Corporation of India CCIL as the only centralised counterparty for Indian OTC derivatives market and better supervision of the off balance sheet business of financial institutions are two measures that confirm the stability of the market.

This paper explores the Indian OTC financial derivatives market. It includes the study of evolution of the market, growth, supervision, regulation, reporting and clearing system and stability of the market.

The present paper studiesOTC Forex, Interest Rate and Credit Derivatives market in India. It also traces issues and challenges for OTC financial derivatives market in India. Log in with Facebook Log in with Google. Remember me on this computer. Enter the email address you signed up with and we'll email you a reset link. Need an account? Click here to sign up. Download Free PDF.

A study on FOREX Risk Management with a special emphasis on banks SUBMITTED BY. Rbhya Pal. Abstract he purpose of this report is to understand the history and concept of foreign exchange transactions, to know about the risks associated with FOREX trading and, its management. Continue Reading Download Free PDF.

Related Papers. com OTC Derivatives Market In India: Recent Regulatory Initiatives and Open Issues for Market Stability and Development. Download Free PDF View PDF. Reserve Bank of India Occasional Papers Non Deliverable Foreign Exchange Forward Market: An Overview.

Bonfring Exchange Rate Risk in the Foreign Exchange Market: A Challenge on Corporate Profitability. Macroeconomics and Finance in Emerging Market Economies OTC derivatives market in India: recent regulatory initiatives and open issues for market stability and development.

SSRN Electronic Journal OTC Derivatives Market in India: Recent Regulatory Initiatives and Open Issues for Market Stability and Development.

OTC Financial Derivatives Market in India Development, Regulatory Framework and Issues. PROJECT REPORT ON A study on FOREX Risk Management with a special emphasis on banks SUBMITTED BY RBHYA PAL Roll number: UID: TYBMS SEMESTER V C.

PRITESH ARTE ST. Acknowledgement I, Rbhya Pal, student of TYBMS of St. Xavier's College- Autonomous, Mumbai would like to extend my heartfelt gratitude towards the University of Mumbai and, St. I would especially like to thank my International Finance Professor, Mr.

Pritesh Arte, for guiding and supporting me throughout this project with his invaluable inputs, support and recommendations without which, this project would not have shaped the way it has.

I have gained an immense amount of knowledge about dealings in Foreign Exchange and have gained a better perspective on how this market actually functions. I would also like to thank my professor and Head of Department, Ms.

Soni George Tharakan for enabling us to undertake such intensive projects and to have guided me through her support throughout the course of this project. Further, I would like to thank my family and friends for their constant support and patience throughout this project. Table of Contents 1. Executive Summary Research Objectives Literature Review FOREX in India……………………………………………………………… Role of RBI in FOREX Management… How do banks deal in FOREX?

Risks in Foreign Exchange……………………………… How do banks reduce the chances of risks associated with FOREX? How do banks exercise hedging? FOREX trading in Indian Banks………………………………………………………………………… Commercial Banks……………………………………………………………………………. Current Scenario and Scope of FOREX Market in India………. Major Findings………. The report focuses on the various kinds of risks that the banks face and what are the ways by which these commercial banks can prevent those risks associated with FOREX.

Then with reference to two Indian banks- one private and one government, it has been briefly discussed that how banks in India prefer or rather, how a particular type of risk management technique is more applicable to Indian banks as compared to the rest.

It starts with discussing in detail what the Foreign Exchange market is and how it has evolved over the years, the different kinds of transactions- long term and short term that happen, the function that banks play in it and how they manage the various risks associated with foreign exchange transactions when, the exchange rates of a currency pair keep changing by the minute.

This has given a boost to FOREX transactions to people and companies in India as well, which is now among the major players in the merging global market, capitalizing on this, banks in India too have improvised upon and enabled quicker and varying kinds of foreign exchange transactions to everyone in their country.

However, beyond a point, it begins to affect the money supply in the country, and interest rates. Given this low rate of return, there has been discussion about the unique proposal to use part of the reserves to fund infrastructure projects.

This is one of the major reasons why the RBI intervenes in the day to day functioning of the commercial banks and authorized dealers of the FOREX and, why banks need to carefully manage their funds and dealings in FOREX.

What is FOREX? Foreign exchange, more commonly and popularly known as FOREX is the conversion of a country's currency into another country's currency.

The rampant globalisation existing today makes the entire world one market and gives birth to what we know as a free economy; exchange and conversion of currencies is thus a part and parcel of all trade, commerce and business that exists due to this, the value of a country's currency is not solely determined by its domestic or internal affairs but also the supply and demand of the currency in domestic and international markets that is, a currency can basically be 'pegged to' another country's currency or a basket of currencies in order to determine its value and demand with respect to these other currencies.

Most major countries operated on the gold standard system. A unit of the country's currency was defined as a certain weight - a part of an ounce - of gold. A country is said to be on the gold standard when its central bank is obliged to give gold in exchange for its currency when presented it. The gold standard was a keystone in the classical economic theory of equilibrium in international trade. The UK came off the gold standard in but, in returned it returned to a modified version termed the 'gold bullion standard'.

The First World War: WWI had a grave impact on the international monetary system. Britain was forced to abandon the gold standard because of the wartime deficit on its balance of payments, and its reluctance at that time to provide gold to settle international differences. Many other countries abandoned the gold standard temporarily, but none had the same significance.

Ultimately, due to the inflexibility in costs and, the Great Depression of the late s and early s, Britain abandones the gold standard in , followed by a lotmany other countries. Exchange Rates- to With the First World War, the stability of exchange rates for major currencies ended.

The Second World War, however, led to more extensive and tighter controls on international trade and investment. By the end of the Second World War, many bankers and economists agreed upon the need for a new monetary system, giving birth to the Bretton Woods System. Bretton Woods System: This immediately occupied the international stage for the immediate post-war period through to The prime movers for it were John Maynard Keynes and Harry Dexter White. This system led to the establishment of the International Monetary Fund IMF to promote consultation and collaboration on international monetary problems and lend to member countries in need due to recurring balance of payments deficit.

SDRs Special Drawing Rights were also allocated to individual countries by the IMF. Post all of this, the exchange rate was finally formulated. The global market functioned on fixed exchange rate systems up till , when managed float was then introduced and started by the London exchange market. Foreign Exchange Market The foreign exchange market is the forum which facilitates foreign exchange.

It is the framework of individuals, firms, banks and brokers who buy and sell foreign currencies. The foreign exchange market for any one currency, for example, the French Franc, consists of all the locations such as Paris, London, New York, Zurich, Frankfurt and so on, in which the French Franc is bought and sold for other currencies.

The most important foreign exchange markets are found in London, New York, Tokyo, Frankfurt, Amsterdam, Paris, Zurich, Toronto, Brussels, Milan, Singapore and Hong Kong. Companies and individuals need foreign currency for business or travel. Commercial banks are the source from which companies and individuals obtain their foreign currency.

Through their extensive network of dealing rooms, their arbitrage operations buying in one centre and selling in another banks ensure that quotations in different centres tend towards the same price. Besides this, there are also foreign exchange brokers who bring buyers, sellers and banks together and receive commissions on deals arranged. The other main player operating in the market is the central bank, the main part of whose foreign exchange activities involves the buying and selling of the home currency or foreign currencies with a view to ensuring that the exchange rate moves in line with established targets set for it by the Government.

The exchange rate is determined by the market, i. through interactions of thousands of banks, firms and other institutions seeking to buy and sell currency for purposes of making transactions in foreign exchange. Fixed exchange rate: It is the system where the government determines the exchange rate for a period of time based on the value of another country's currency such as, the US dollar.

The basic reason for adopting this system is to ensure stability in foreign trade and capital movements. Managed Floating rate: It is the exchange rate system where the forces of demand and supply decide the exchange rate and the central bank influences the exchange rate through intervention in the foreign exchange market.

It does so to restrict the fluctuations in the exchange rate within certain limits. The aim is to keep exchange rate close to desired target values. For this, the central bank maintains reserves of foreign exchange so as to ensure that the exchange rate stays within the targeted value.

Exchange Rate Quotations For a foreign exchange transaction to occur there are two rates that are essentially displayed. They are:  Ask rate: It is the price at which the bank or any other FOREX dealer is willing to sell a unit of the base currency. Exchange rate is denotation of the ask and bid rate of the home currency with respect to another foreign currency. For instance, the exchange rate between USD and INR, with INR being the home currency can be depicted in two ways: 1.

In a foreign exchange quotation, the foreign currency is the commodity that is being bought and sold. The exchange quotation that gives the price for the foreign currency in terms of the domestic currency is known as direct quotation. It is also known as home currency quotation.

Indirect Quotation: 0. In this, the unit of domestic currency is kept constant and the change in the price of the currency is indicated by varying units of the foreign currency for fixed sum of domestic currency. In India, Direct quotation was prevalent till After devaluation of rupee in , following the practice in London Exchange Market, indirect quotation was adopted.

Effective from 2nd August, , India has switched over to direct method of quotation. Balance of Payments and forecasting exchange rates The balance of payments summarises the flow of economic transactions between the residents of a given country and the residents of other countries during a certain period of time. BOP flows represent payments and receipts and its data record only changes in asset holdings and liabilities; they do not represent the absolute levels of these items.

The use of balance of payments data to forecast foreign exchange rates is predicted upon the assumption that when a country's currency is in equilibrium, that country will display a break-even position in respect of trade and the invisibles which reflect the rendering of services. The other key assumptions in forecasting foreign exchange rates from the balance of payments are that currencies which are undervalued will have the effect of creating positive current account outruns, while currencies which are overvalued will have the effect of creating negative current account results.

The main center of foreign exchange transactions in India is its commercial capital, Mumbai. The Foreign Exchange Market in India is regulated by the RBI via the Exchange Control Department as per the Foreign Exchange Management Act FEMA , Before the introduction of FEMA, the entire foreign exchange market was regulated by the Foreign Exchange Regulations Act or FERA , which was introduced post independence as a temporary measure to regulate the inflow of foreign capital into the country.

During the average monthly turnover in the Indian foreign exchange market touched about billion US dollars. Compare this with the monthly trading volume of about billion US dollars for all cash, derivatives and debt instruments put together in the country, and the sheer size of the foreign exchange market becomes evident.

Since then, the foreign exchange market activity has more than doubled with the average monthly turnover reaching billion USD in , over ten times the daily turnover of the Bombay Stock Exchange. Until , all Foreign Investments in India and the repatriation of Foreign Capital required previous approval of the government. The Foreign Exchange Regulation Act rarely allowed foreign majority holdings for Foreign Exchange in India.

However, a new Foreign Investment Policy announced in July , declared automatic approval for Foreign Exchange in India for thirty-four industries; they were designated with high priority, up to an equivalent limit of 51 percent.

Initially, the Government required that a company's routine approval shall rely on identical exports and dividend repatriation. But, in May , this requirement was removed, with an exception to low-priority sectors. As a consequence, in , foreign nationals and NRI non-resident Indian investors were permitted to repatriate their profits as well as their capital for Foreign Exchange in India.

Indian exporters enjoyed the freedom to use their export earnings as they found it suitable. Today, the Indian FOREX market is highly flourishing and is one of the biggest avenues for profit.

Role of RBI in FOREX Management Buckley , Apte The Reserve Bank of India is India's central banking institution. It commenced its operations on 1st April, during the British Rule, in accordance with the provisions of the Reserve Bank of India Act, But, as mentioned above RBI, later, with the advent of liberalisation revoked this law. The RBI has been vested with the power to issue licenses to those who are involved in foreign exchange transactions.

It has appointed a number of authorised dealers who are permitted to carry out all transactions involving foreign exchange. The 'Exchange Control Manual' contains all directions and procedures given by RBI to authorised dealers from time to time. the Indian Rupees in terms of other currencies. This rate is known as official rate of exchange. All authorised dealers and money lenders are required to follow this rate strictly in all their foreign exchange transactions.

Foreign Exchange Management Act While booking forward contracts for customers, banks are required to observe that the exchange regulations are complied with. Foreign Exchange Management Regulations govern forward exchange contracts in India. A few of the major operational aspects listed down for FOREX exchange, as per FEMA are:  Forward contracts can be booked for resident customers who are exposed to exchange risk in aspect of genuine transactions permitted under current regulations.

The debits and credits in these accounts shall be incidental to the business requirement of the UJV. Provided further that all operations in the account shall be in accordance with the provisions of the Act or the rules or regulations made or the directions issued thereunder. Foreign Exchange Dealer's Association of India FEDAI Apte It was set up in as an Association of banks dealing in foreign exchange in India typically called Authorised Dealers - ADs as a self regulatory body and is incorporated under Section 25 of The Companies Act, The major activities of the association include framing of rules governing the conduct of inter-bank foreign exchange business among banks vis-à-vis public and liaison with RBI for reforms and development of FOREX market.

Some ancillary functions of FEDAI also include:  Guidelines and Rules for FOREX Business. BrightHub, n. Banks deal in FOREX through Swap points. Foreign exchange swap entails a simultaneous sale and purchase of equal amounts of a currency. FOREX is a non-business operation for banks, income from it is therefore Non- Operational Income. The trading of FOREX in banks is done in what is known as the 'dealing room'. The more banks that are approached for quotations, the better the chance for an advantageous rate but what the arbitrageur needs to bear in mind is that the exchange rate keeps fluctuating by the second, it is therefore necessary to make a quick decision before the rate falls or rises by a great deal.

Also, FOREX is not subject to investment therefore, the maximum duration for which FOREX can be kept is for 6 months, with the exception of investors. Mid office: This is where all the transactions take place, via a deal slip handed over from the front office to the mid office. It decides how to mitigate losses in every transaction that takes place every minute and calculates the rates for a trading day. Back office: It maintains all accounts as per the mid office's transactions and reports the accounts as well as the intra-day rates to the Reserve Bank of India.

The gist of the dealing room operations can thus be understood by understanding that Foreign Currency Operation in banks includes FOREX management that is, buying and selling of foreign exchange any currency. The Mid-office decides "which" currency as, they manage the risk and, excessive sale of any type of currency is a pertinent risk since the characteristic of being 'oversold' implies a negative balance in the bank's Nostro account and can lead to the appreciation of any currency with respect to the domestic currency, the Indian Rupees INR in our case.

The goal of credit risk management is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters.

Operational Risk This is the risk associated with the employees working in the bank, dealing with FOREX. This would mean you would have two winning trades or two losing trades.

You can use a correlation calculator from investing. com to quickly see any potential positive or negative correlation your trades might have. The best way to ensure you are staying on track with your money management strategies is to create a clear rule set and money management plan. The first is the fixed percentage method.

The second method is the fixed money method. With this method, instead of using a percentage of your account, you risk the same amount of money on each trade. Understanding and using a smart drawdown level can help stop you from blowing your account or putting huge chunks in it. You may decide to move back to a demo account to find what errors you are making before moving back to your live account.

You only win or lose money when you close your trade, so it is crucial you have a clear rule set that outlines how you take profit or cut your losses short. The best trading plan will be written down with a clear rule set that is easy for you to follow. If you want to become even better with your money management strategies, you might want to look at some more in-depth books that cover different strategies. This risk management book is by Wall Street trader David W.

In this book, you will learn the strategies and systems that professionals use. Edwards goes through how hedge funds and prop firms successfully manage their trading risks. This book by Steve and Holly Burns covers some of the core risk management strategies needed to succeed.

You will learn why the best trades normally go straight in your favor and how to capitalize on them whilst cutting your losses short. You will also learn why risk management is so important and how it can make or break your account.

I hunt pips each day in the charts with price action technical analysis and indicators. My goal is to get as many pips as possible and help you understand how to use indicators and price action together successfully in your own trading. Skip to content. NOTE: Get your Forex money management trading PDF Guide below. Table of Contents.

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