Risk Management involving the commodities market has always been a concern for several international companies. The best substantial method to cope with currency risk is using currency derivatives. Many countries are interdependent on each other due to Globalization, which has led to increasing exposure to exchange rate volatility. Recent studies have shown that risk cannot be eliminated completely but it can be minimized when companies make decisions, which are backed by the correct risk management policies. We found out in this paper that there is no single best method to manage currency risk, but hedging using options provides us with the most accurate or profitable outcomes.
In this paper we will try to study the modern day financial…show more content… Various companies including insurers and banks were exposed to high risk in terms of rate of interest, exchange rates and price of commodities and raw materials. Derivatives then became increasingly popular to minimize the risk of volatility in the market.
Financial derivatives are basically contracts between two parties under which they agree to exchange a commodity on a certain date. In simple words derivatives are insurance policies used by a company to minimize its exposure to volatility.
It was found out that during the period of 1975 to 2009 the volatility in foreign investments was reduced due to currency hedging. In this paper we talk about the various currency options, which are used by various corporations and banks for hedging. We use the example of crude oil to better understand the concept.
The various types of currency derivatives are- futures, options, currency swaps and forwards. There are three types of exchange rate risks- translation, transaction and economic exposure.
Globalization has made the world a smaller place and the exposure to overseas markets is increasing. In order to last long this competitive environment the companies have to focus on all the aspects to make the maximum profits, which makes it essential for them to manage risk in exchange rate. The graph below shows the volatility of the GBP as compared to INR.