Research on Foreign Exchange Risk Management

13065 Words Apr 15th, 2011 53 Pages
Research Paper On
Foreign Exchange Risk Management
Submitted In Partial Fulfillment
Of the Requirement
Of Masters of Business Administration

Table of Contents EXECUTIVE SUMMARY 1 CHAPTER 1: PLAN OF THE RESEARCH 4 1.1. INTRODUCTION 5 1.1.1. Features of Forex Market 6 1.1.2. Functions of Forex Market 7 1.1.3. Structure of Forex Market 8 1.1.4. Needs for Foreign Exchange 9 1.1.5. What Does Forex Provide? 9 1.1.6. Methods of Quoting
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dollar exchange rate moved nearly 20 percent. Empirical studies demonstrate that FX volatility can significantly affect companies’ profits.

Multinational businesses face several types of FX risk, including financial, translational, transactional and economic FX risk. We focus here on economic risk, also known as operational or competitive FX risk. Economic risk arises, for example, when a multinational business incurs costs in one currency and generates sales in another. Profits may decrease if the cost currency appreciates against the sales currency.

Multinational businesses have tools to reduce economic FX risk. They may use financial instruments to hedge unfavorable FX moves, although doing so entails explicit costs. They also may change their operations to reduce FX risk. For instance, they may change the denomination of cash deposits, restructure contracts, relocate plants, or change the source of capital or production materials. They may share FX risks with related parties or pass the costs or benefits of FX changes through to unrelated customers or suppliers. But even businesses that hedge or optimally structure their operations to reduce FX risk may be disadvantaged if a competitor experiences a favorable FX move.

The project started with the primary objective of understanding the foreign exchange risk exposed at Honda Siel Cars India Ltd and the secondary objective is to study the existing foreign exchange risk at the company

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