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A PROJECT REPORT ON

A STUDY ON FOREIGN EXCHANGE RISK MANAGEMENT BY


EXPORT SMEs OF BENGALURU

SUBMITTED BY
CHANDAN SHARMA D
1MS14MBA20
Under the guidance and supervision of:
INTERNAL GUIDE

EXTERNAL GUIDE

Dr. Y.M Satish

SHANKAR RAJA M P

Professor

Regional Head -Karnataka,

Department of Management Studies

Shivajinagar,

MSRIT, Bangalore 560054

Bangalore-560051

Submitted in the partial fulfilment for the award of


Master of Business administration

M.S.RAMAIAH INSTITUTE OF TECHNOLOGY


(Autonomous Institute, Affiliated to VTU, Belgaum)
ISO: 9002 Certified
VidyaSoudha, MSR Nagar, M.S.R.I.T POST, Bangalore- 560054

2014-16

CERTIFICATE
This is to certify that the project work entitled A STUDY ON FOREIGN
EXCHANGE

RISK

MANAGEMENT

BY

EXPORT

SMEs

OF

BENGALURU is a bonafide work carried out by CHANDAN SHARMA D


(1MS14MBA20) in a partial fulfilment for the award of the degree of Master of
Business Administration of Visvesvaraya Technological University, Belgaum as
per the academic requirements. This study has not formed a basis for the award
of any Degree, Diploma by Visvesvaraya Technological University or any other
University.
Dr.Y.M Satish

Dr.P.V.Raveendra

Project Guide

HOD, MBA Dept.

Dr.S.Y.Kulkarni
Principal of the College

KUSHAL GANESH S
1MS14MBA42
Examiners:
1.
2.

Signature with date

CERTIFICATE BY THE GUIDE

This is to certify that the project on A STUDY ON FOREIGN EXCHANGE


RISK MANAGEMENT BY EXPORT SMEs OF BENGALURU,
submitted in partial fulfilment of the curriculum requirement of Master of
Business Administration course affiliated to Visvesvaraya Technological
University is record of original work carried out by CHANDAN SHARMA D
(1MS14MBA20) under my supervision and guidance. This has not been
submitted for the award of any degree/diploma by Visvesvaraya Technological
University or any other University.

Dr. Y.M Satish


(Internal Guide)
Professor
Dept. of Management Studies,
MSRIT

Place: Bangalore
Date:

DECLARATION
I, CHANDAN SHARMA D, bearing USN No: (1MS14MBA20) student of
MSRIT College, Bangalore hereby declare that the project titled A STUDY
ON FOREIGN EXCHANGE RISK MANAGEMENT BY EXPORT SMEs
OF BENGALURU is submitted by me for the partial fulfilment of award of
Masters of Business Administration. This report was prepared on my own
efforts and it has not been produced earlier towards the award of any other
degree.

Date:
CHANDAN SHARMA D
Place: Bangalore

(CHANDAN SHARMA D)

ACKNOWLEDGEMENT
"The successful completion of any task would be incomplete without
mentioning the people who made it possible and whose constant guidance and
encouragement secured us our success".
I am indebted to Dr. Y.M Satish ( Professor, MSRIT) for his perfect guidance in
every step of my project, which has always been my source of inspiration and
motivation. I extend my sincere thanks for her constant support and guidance.
I would like to express my sincere & heart filled thanks to
SHANKAR RAJA M P, Assistant Vice President, for his perseverance and
eagerness to help me in all possible ways and giving me an opportunity to do
my project in this esteemed organization.

CHANDAN SHARMA D
1MS14MBA20

Contents
1. EXECUTIVE SUMMARY................................................................................1
2. INTRODUCTION..........................................................................................3
3. INDUSTRY PROFILE...................................................................................24
FOREX MARKET HISTORY IN INDIA......................................................................28
4. COMPANY PROFILE...................................................................................31
A.
BACKGROUND AND INCEPTION OF THE COMPANY................................................................31
B.
NATURE OF THE BUSINESS CARRIED..................................................................................32
C.
VISION, MISSION AND QUALITY POLICY............................................................................33
D.
PRODUCT / SERVICE PROFILE.......................................................................................33
E.
AREA OF OPERATION GLOBAL/NATIONAL/REGIONAL ..........................................................36
F.
OWNERSHIP PATTERN................................................................................................... 36
G.
COMPETITORS INFORMATION.........................................................................................37
H.
INFRASTRUCTURAL FACILITIES........................................................................................ 38
I.
ACHIEVEMENT AWARDS................................................................................................39
J.
W ORKFLOW MODEL (END TO END)..................................................................................40
5. MCKINSEYS SEVEN S MODEL......................................................................41
A.
STRUCTURE.............................................................................................................. 41
B.
SKILL....................................................................................................................... 42
C.
STYLE...................................................................................................................... 42
D.
STRATEGY................................................................................................................ 42
E.
SYSTEM................................................................................................................... 43
F.
STAFF...................................................................................................................... 44
G.
SHARED VALUE.......................................................................................................... 44
6. RESEARCH METHODOLOGY........................................................................47
A.
TITLE OF THE PROJECT................................................................................................47
B.
STATEMENT OF THE PROBLEM........................................................................................ 47
C.
OBJECTIVES.............................................................................................................. 48
D.
OPERATIONAL DEFINITIONS...........................................................................................49
E.
DATA COLLECTION...................................................................................................... 52
F.
STATISTICAL TOOLS USED FOR RESEARCH........................................................................52
G.
PLAN OF ANALYSIS...................................................................................................... 54
H.
LIMITATIONS TO THE STUDY........................................................................................... 54
7. DATA ANALYSIS AND IMPLEMENTATION..........................................................54
8. SUMMARY OF FINDINGS..............................................................................60
9. SUGGESTIONS.........................................................................................61
10. CONCLUSIONS FUTURE GROWTH...............................................................62
A.
QUESTIONNAIRES....................................................................................................... 62

LIST OF TABLES
Table No

Particulars

List of Stock Exchanges by Market Capitalization

Showing Top Traded Commodities

Vital Data of Anand Rathi

Indian Presence of Anand Rathi

List of Products and Services offered by Anand Rathi

Classifying 7s into Hard and Soft Elements

List of Indian Companies stocks by Capitalization

Awareness about the Investment Avenues

Income Profile

10

Educational Qualification effect on selection of Investment


Avenues

11

Factors Influencing While Selecting Investment Avenues

Page No

LIST OF CHARTS
S.No

Particulars

Products offered by Stock Broking Companies

Showing Large Capitalization Stocks of Indian Companies

Showing Medium Capitalization Stocks of Indian Companies

Showing Small Capitalization Stocks of Indian Companies

Page
No

1. Executive Summary

Finance is strictly study of how individuals portion their assets over the amount
of your time below condition of certainty and not certainly. A key purpose in
finance, that influences selections, is that the duration of cash that says that a
unit of currency these days is worth more than identical unit of currency
tomorrow. Finance aims to price assets supported their risk level, and expected
rate of return.
One of the most monetary call which each and every exporter or importer of any
merchandise or material should take is concerning exchange risk with respect to
currency. The fluctuation in currency market that is taken into account in pip is
very volatile and powerfully depends on economic and monetary conditions of
each the countries influenced by macroeconomic variables of world economy.
In india several firms or business who are into export and import and of
course has turnover of quite five hundred cores usually follow appropriate
frame work of hedging technique it should be swapping of currency, or using
currency derivative.
In India, regulation has been steadily created simple and turnover and liquidity
within the foreign currency derivative platform has eased, though the use is
especially in shorter maturity contracts of a year or less. Forward and option
contracts are the a lot of popular instruments. Regulators had at first solely
permitted certain banks to deal in this market but now even corporate also can
write option contracts.
For now, Indian Industries are actively hedging their foreign exchanges risks
with forwards, currency and rate of interest swaps and different types of options
like call, put, cross currency and range-barrier choices. The high use of forward
contracts by indian corporations also highlights the absence of a rupee futures
exchange in India. However, the urban center Gold and Commodities Exchange
in June, 2007 introduced Rupee- dollar futures that would be traded on its
exchanges followed by Rupee-EURO, Rupee-YEN and had provided another
route for firms to hedge on a transparent basis. There are fears that RBIs ability
to regulate the partially convertible currency are subdued by this introduction
however this issue is on the far side the scope of this study.
This study is mainly is principally based on study of behaviour and attitude of
hand-picked small scale trade who are into Import and export of products and
their manner of utilization of foreign exchange hedging technique especially
their dependency on currency derivative for risk mitigation purpose
The limitation of this study is that just one sort of risk is assumed i.e the
interchange risk. Conjointly relevancy of conclusion is limited as solely very
few companies were reviewed over just one period of time. but the results from

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this exploratory study are encouraging and attention-grabbing, leading us to


conclude that there's scope for a lot of rigorous study on these lines.

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2. Introduction

What is risk management?


McNamee (1997) provides a useful view of risk management and proposes that
risk is never managed since it is a conceptual property. It is the organization that
is managed to anticipate the uncertainties characterised by risk. He also writes:
Managing risk is actually managing the organization: planning, organizing,
directing, and controlling organization systems and resources to achieve
objectives. Managing risk must come from within and act to change the
organization and its response to change in environment. Rather than try to guess
what risks will affect the organization, the organization should build in certain
characteristic to improve its ability to respond to change.
However, it is more common to view risk management as the process of
determining whether or how much of the risk is acceptable and what action
should be taken (McNamee, 1997). Accordingly, risk management includes risk
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assessment and risk treatment. Potential treatments are risk diversification or


avoidance, risk sharing and contingency planning (McNamee, 1997).
Figure below presents a framework for integrated risk-management, which is
adapted from McNamees (1997) notion that the risk management process
includes three major steps: (1) establishing firms objectives, (2) risk assessment
and (3) risk treatment. This process is regularly influenced by risk
communication between experts, from experts to management teams, and from
management teams to the public in the whole process of risk analysis. A number
of text books relating to risk management follow this framework and suggest a
process of risk management, for example C. M. Elliott and Vaughan (1972),
Vaughan and Vaughan (2007), Shapiro (2006). As the first step in the riskmanagement process, a firm would determine objectives by deciding precisely
what is to be expected from its risk-management programme. It is common to
be aware of risks before anything is undertaken. A number of tools can be used
to identify risks, including insurance policy checklists, risk analysis
questionnaires, flow process charts, analysis of financial statements, and
inspection of firms operations. After risk identification, risks must be evaluated
by measuring the possible size of loss and the probability that it is likely to
occur. Based on this evaluation, ranking of priorities is followed, known as risk
prioritization. The next step is the consideration of alternative techniques and
selection of risk treatment. Risk characteristics are considered as determinants
of the treatment, such as whether a risk is to be transferred or to be retained.

Figure 2-1: Risk Management Process, adapted from McNamee (1997)


Similarly, Finger (1999) conceives risk-management as
the practice of assessing and identifying the different kinds of risks facing a
person, an institution, or society because of its activities and environment,
determining the likelihood of losses and other consequences from those risks,
and taking appropriate actions, which include monitoring the risks and reducing
the losses and other consequences from them. (Finger, 1999, p. 731)
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Thus a firms financial risk manager, who is part of a risk-management


department or group, is firstly attempting to assess and measure the risks facing
the firm as a result of its activities and the business environment; then to
monitor the risks for any change; to determine whether the firm has the
resources to deal with the risks; to alert senior managers and boards of directors
about the risk information; and finally to suggest courses of action for the firm
to take to deal with the risks (Finger, 1999). As discussed earlier, forex risk is
categorised as one of the risks faced by firms; thus it is reasonable to adapt this
risk-management framework for forex risk-management. Risk communication
its activities and the business environment; then to monitor the risks for any
change; to determine whether the firm has the resources to deal with the risks;
to alert senior managers and boards of directors about the risk information; and
finally to suggest courses of action for the firm to take to deal with the risks
(Finger, 1999). As discussed earlier, forex risk is categorised as one of the risks
faced by firms; thus it is reasonable to adapt this risk-management framework
for forex risk-management.
SMEs, similar to large firms, also face business risks, which can cause financial
distress and bankruptcy in the worst case (Tan, 2014). However, the theme of
risk management for SMEs has largely been neglected in the business
management literature (Gao, Sung, & Zhang, 2013; Henschel, 2009; Sharifi,
2014; Tan, 2014). The extant literature on SMEs risk management shows that
SMEs are incapable of employing formal structures and knowledge for risk
management, and thus they tend to adopt informal processes of risk
management (Henschel, 2009). Studying German SMEs, Gao et al. (2013) also
find that SMEs lack formal methods for risk management. These findings imply
that SMEs are more likely to use informal hedging techniques for managing
forex risk; this will be discussed in the next sections.
Foreign Exchange Risk in India

In 1971, the Bretton Woods system of administering fixed foreign exchange


rates was abolished in favour of market-determination of foreign exchange
rates; a regime of fluctuating exchange rates was introduced. Besides marketdetermined fluctuations, there was a lot of volatility in other markets around the
world owing to increased inflation and the oil shock. Corporates struggled to
cope with the uncertainty in profits, cash flows and future costs. It was then that
financial derivatives foreign currency, interest rate, and commodity
derivatives emerged as means of managing risks facing corporations.

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In India, exchange rates were deregulated and were allowed to be determined


by markets in 1993. The economic liberalization of the early nineties
facilitated the introduction of derivatives based on interest rates and foreign
exchange. However derivative use is still a highly regulated area due to the
partial convertibility of the rupee. Currently forwards, swaps and options are
available in India and the use of foreign currency derivatives is permitted for
hedging purposes only.
This study aims to provide a perspective on managing the risk that firms
face due to fluctuating exchange rates. It investigates the prudence in
investing resources towards the purpose of hedging and then introduces the
tools for risk management. These are then applied in the Indian context. The
motivation of this study came from the recent rise in volatility in the money
markets of the world and particularly in the US Dollar, due to which Indian
exports are fast gaining a cost disadvantage. Hedging with derivative
instruments is a feasible solution to this situation.
Management of forex risk:

The process of forex risk management, which is adapted from the process of
managing risk (shown in Figure 2-1), includes three major steps. Firstly,
firms start by the establishment of their hedging objectives, e.g., mitigating
certain forex risk exposure, or reducing the volatility of cash flows.
Secondly, assessment of forex risk is referred to as measuring forex exposure
by estimating possible loss if forex rates changes and the probability of
changes; and, thirdly, identifying, measuring and prioritizing factors that
indeed influence firms ability to respond to forex rate changes, e.g., tax
liabilities, transaction cost, investment opportunities.
To hedge or not to hedge:

The term hedging is defined differently in the literature. Broadly, Leland


(1960, p. 140) holds that hedgers are those who seek insurance against the
risk they may face. To analyse the hedging choice of managers, Smith &
Stulz (1985, p. 399) consider hedging as the acquisition of financial assets
that reduce the variance of the firm's payoffs. Lelands concept is widely
used in the literature concerning forex management. Hedging can be carried
out internally, known as internal hedging, when a firm tries to manage forex
risk without the acquisition of financial instruments. On the other hand,
external hedging entails the acquisition of financial instruments, e.g.,
currency derivatives, which are financial instruments whose characteristics
and value depend upon the characteristics and value of a currency.

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Considering that risk management is about planning, organizing, directing,


and controlling organization systems and resources to achieve objectives
(McNamee, 1997, p. 4), managing forex risk refers to planning, organizing,
directing, and controlling a firms systems and resources for improving its
ability to respond to forex rate changes. Although hedging aims to seek
insurance for forex risk, hedging is one way of managing forex risk, the
other way is to do nothing. A decision whether to hedge or not to hedge is
one step in the process of managing forex risk. To this end, doing nothing
(no-hedge) is one of the hedging strategies. It might not necessary to hedge if
SMEs could find benefits from favourable movements in the exchange rates,
or if there might be no way they make a loss.
While some themes from the literature oppose hedging at a corporate level,
others support corporate forex hedging strategies. For example, Dufey &
Srinivasulu (1983) made a case for corporate forex risk hedging. They point
out that in a perfect world in which Purchasing Power Parity (PPP) theorem,
Capital Asset Pricing Model (CAPM), Modigliani-Miller (MM) theorem, the
Concept of Self-insurance, the Efficient Market Hypothesis, Hedging of
Consumption Bundle and The Uncertainty of Forward Rates & Spot Rates
are all valid, there would be no need to hedge. Since we are not in an ideal
world, however, it is evident that firms do need to hedge, as much of the
literature suggests (Dufey & Srinivasulu, 1983).
In line with the study of Dufey & Srinivasulu (1983), a large number of
studies provide empirical support for the performance of hedging strategies
(Brookes et al., 2000; Dash et al., 2008; Dhanani, 2003; Joseph, 2000;
Loderer & Pichler, 2000; e.g., Marshall, 2000; Moosa, 2004; Morey &
Simpson, 2001; Pramborg, 2005). Short-term fluctuations in the exchange
rate can be hedged with little difficulty and at little cost, while longterm
movements are likely to be more serious (Brookes et al., 2000). In addition,
it is thought to be imperative to hedge against adverse movements in
exchange rates that may cause infrequent but large exposures (Moosa, 2004).
In practice, however, firms may choose not to hedge for various reasons,
despite no evidence that hedgers outperform non-hedgers; for example, as a
result of using derivatives (Allayannis, Brown, & Klapper, 2001). For
instance, because of difficulties for firms in measuring forex exposure, e.g.,
since they are unable to estimate future cash flows and presumably firm
value (Loderer & Pichler, 2000; Papaioannou, 2006; Pramborg, 2005), some
might make the decision not to hedge. Other reasons for this decision could
be insignificant forex exposure and the cost of setting up a hedging

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programme (Pramborg, 2005). To this end, due to high cost of establishing a


hedging programme, and low magnitude of international involvement of
SMEs in comparison with large MNEs, SMEs might choose not to hedge;
however, once SMEs have a high percentage of their turnover denominated
in a foreign currency, forex exposure would be potentially just as significant
for SMEs as for large firms, and then SMEs might choose to hedge.
Hedging strategies:

There are a number of hedging strategies noted in the literature concerning


forex risk management; however, most hedging strategies refer to the use of
currency derivatives as hedging instruments. For instance, firms under a no
hedge strategy never purchase a forward foreign exchange contract to cover
exchange rate risk. An alternative strategy is always-hedge, also referred to
as hedged strategy. Selective hedging is a strategy under which firms will
hedge if forward rates are at a premium. Large premia strategy is referred to
as hedging when forward rates are at a historically large premium. This
happens if spot exchange rates and future/forward exchange rates are quite
different, when forward exchange rates and spot exchange rates move apart.
On a relative purchasing power parity (ppp) exchange rate, firms will hedge
whenever the current spot rate is above the ppp equilibrium, which is
referred to as ppp down strategy. Under a hedge-no-hedge strategy, firms
may hedge when the estimated exchange rate is higher than the forward rate
offered for a short position, but lower than that offered for a long position.
All of these hedging strategies (summarized in Eaker & Grant, 1987; Moosa,
2004; Morey & Simpson, 2001) are based on the use of currency derivatives.
The effectiveness of these strategies is extensively covered in the literature.
For example, empirical data from Moosa (2004) study show no significant
difference in the performance of the three strategies, namely no hedge,
always hedge and hedge-nohedge, if foreign currency exposure is regular
over a long period of time. This result implies that frequent forex exposure is
not necessarily hedged because the unbiased efficiency hypothesis holds
over a long period of time. According to this hypothesis, overestimation and
underestimation of future spot prices in the short run would balance one
another in the long run. Moreover, unbiasedness also implies that in the long
run, negative errors would cancel out positive errors, since the estimation
error is random rather than systematic (Moosa, 2004).
However, Morey & Simpson (2001) find that in every time horizon, and for
every sample of their study, an un-hedged strategy, also referred as to no
hedge strategy, performs better than a hedged strategy, which is in line with
the previously discussed notion that firms do not necessarily need to hedge.
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Additionally, Eaker & Grant (1987) find that currency cross-hedging is


likely to offer risk reduction opportunities, but unlikely to be as effective as
using the same currency hedges. This result is consistent with logical
predictions about the relationship between currencies. In other words, the
true correlation between assets and currencies is one of the determinants of
the measured effectiveness of cross hedging (Eaker & Grant, 1987, p. 87).
As a result, multiple hedges, which partially mitigate problems of intertemporal instability of the exchange rate coefficients, are more effective than
single currency cross-hedges. Eaker and Grant also add that the effectiveness
of naive hedging strategies and more sophisticated ones is the same when
portfolio positions are being hedged.
There are two initial inputs necessary for any hedging strategy, exchange rate
forecast and exposure measurement (Jacque, 1981). These provide
information for the assessment of risks in relation to exchange rate
movements. However, not all firms have this capability, so SMEs
willingness and their ability to forecast exchange rates and measure exposure
are also in doubt. Firms are unlikely to know how to quantify their risk
profile as they are unable to figure out the percentage that their operating
cash flows change if the forex rates change (Loderer & Pichler, 2000).
Similarly, Swedish and Korean nonfinancial firms have difficulties in
estimating their forex exposure (Pramborg, 2005). It is the complexities to
measure accurately current risk exposure that presents a challenge for firms
in selecting the appropriate hedging strategy (Papaioannou, 2006). Also,
daily exchange rates are extremely difficult to precisely forecast (Zhou,
1992). In the light of all of these results, SMEs might find difficulties in
accessing these two key initial inputs for their forex risk management.
Hedging as a tool to manage foreign exchange risk

There is a spectrum of opinions regarding foreign exchange hedging. Some


firms feel hedging techniques are speculative or do not fall in their area of
expertise and hence do not venture into hedging practices. Other firms are
unaware of being exposed to foreign exchange risks. There are a set of firms
who only hedge some of their risks, while others are aware of the various
risks they face, but are unaware of the methods to guard the firm against the
risk. There is yet another set of companies who believe shareholder value
cannot be increased by hedging the firms foreign exchange risks as
shareholders can themselves individually hedge themselves against the same
using instruments like forward contracts available in the market or diversify
such risks out by manipulating their portfolio. (Giddy and Dufey, 1992).
There are some explanations backed by theory about the irrelevance of
managing the risk of change in exchange rates. For example, the
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International Fisher effect states that exchange rates changes are balanced
out by interest rate changes, the Purchasing Power Parity theory suggests
that exchange rate changes will be offset by changes in relative price
indices/inflation since the Law of One Price should hold. Both these theories
suggest that exchange rate changes are evened out in some form or the other.
Also, the Unbiased Forward Rate theory suggests that locking in the forward
exchange rate offers the same expected return and is an unbiased indicator of
the future spot rate. But these theories are perfectly played out in perfect
markets under homogeneous tax regimes. Also, exchange rate-linked
changes in factors like inflation and interest rates take time to adjust and in
the meanwhile firms stand to lose out on adverse movements in the exchange
rates.
The existence of different kinds of market imperfections, such as incomplete
financial markets, positive transaction and information costs, probability of
financial distress, and agency costs and restrictions on free trade make
foreign exchange management an appropriate concern for corporate
management. (Giddy and Dufey, 1992) It has also been argued that a hedged
firm, being less risky can secure debt more easily and this enjoy a tax
advantage (interest is excluded from tax while dividends are taxed). This
would negate the Modigliani-Miller proposition as shareholders cannot
duplicate such tax advantages. The MM argument that shareholders can
hedge on their own is also not valid on account of high transaction costs and
lack of knowledge about financial manipulations on the part of shareholders.
There is also a vast pool of research that proves the efficacy of managing
foreign exchange risks and a significant amount of evidence showing the
reduction of exposure with the use of tools for managing these exposures. In
one of the more recent studies, Allayanis and Ofek (2001) use a multivariate
analysis on a sample of S&P 500 non-financial firms and calculate a firms
exchange-rate exposure using the ratio of foreign sales to total sales as a
proxy and isolate the impact of use of foreign currency derivatives (part of
foreign exchange risk management) on a firms foreign exchange exposures.
They find a statistically significant association between the absolute value of
the exposures and the (absolute value) of the percentage use of foreign
currency derivatives and prove that the use of derivatives in fact reduce
exposure

Foreign Exchange Risk Management Framework

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Once a firm recognizes its exposure, it then has to deploy resources in


managing it. A heuristic for firms to manage this risk effectively is presented
below which can be modified to suit firm-specific needs i.e. some or all the
following tools could be used.
Forecasts: After determining its exposure, the first step for a firm is to

develop a forecast on the market trends and what the main direction/trend is
going to be on the foreign exchange rates. The period for forecasts is
typically 6 months. It is important to base the forecasts on valid assumptions.
Along with identifying trends, a probability should be estimated for the
forecast coming true as well as how much the change would be.
Risk Estimation: Based on the forecast, a measure of the Value at Risk (the

actual profit or loss for a move in rates according to the forecast) and the
probability of this risk should be ascertained. The risk that a transaction
would fail due to market-specific problems4 should be taken into account.
Finally, the Systems Risk that can arise due to inadequacies such as reporting
gaps and implementation gaps in the firms exposure management system
should be estimated.
Benchmarking: Given the exposures and the risk estimates, the firm has to set

its limits for handling foreign exchange exposure. The firm also has to
decide whether to manage its exposures on a cost centre or profit centre
basis. A cost centre approach is a defensive one and the main aim is ensure
that cash flows of a firm are not adversely affected beyond a point. A profit
centre approach on the other hand is a more aggressive approach where the
firm decides to generate a net profit on its exposure over time.
Hedging: Based on the limits a firm set for itself to manage exposure, the

firms then decides an appropriate hedging strategy. There are various


financial instruments available for the firm to choose from: futures,
forwards, options and swaps and issue of foreign debt. Hedging strategies
and instruments are explored in a section.
Stop Loss: The firms risk management decisions are based on forecasts which

are but estimates of reasonably unpredictable trends. It is imperative to have


stop loss arrangements in order to rescue the firm if the forecasts turn out
wrong. For this, there should be certain monitoring systems in place to detect
critical levels in the foreign exchange rates for appropriate measure to be
taken.
Reporting and Review: Risk management policies are typically subjected to

review based on periodic reporting. The reports mainly include profit/ loss
status on open contracts after marking to market, the actual exchange/ interest
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rate achieved on each exposure, and profitability vis--vis the benchmark and
the expected changes in overall exposure due to forecasted exchange/ interest
rate movements. The review analyses whether the benchmarks set are valid and
effective in controlling the exposures, what the market trends are and finally
whether the overall strategy is working or needs change.

Figure 2-2 Framework of foreign exchange risk management

Hedging Strategies/ Instruments


Basically, foreign currency risk may be hedged with internal and external techniques
(Eaker & Grant, 1987; Joseph, 2000). A wide range of hedging techniques is listed in
Table 2.2. According to Mathur (1985), internal hedging refers primarily to the shifting of
funds and commodities within a firm so as to maintain favourable balance sheet positions;
on the other hand, external hedging generally involves contractual obligations with parties
external to the firm. Similarly, this thesis defines external hedging as the use of
contractual obligations with parties external to a firm, whereas internal hedging is defined
as the use of a firms systems and resources e.g., funds, goods within the firm. Both
external and internal hedging can be used to improve the firms ability to respond to forex
rate changes.

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Table : Hedging techniques Category Techniques


Internal
1. Pricing.
There are three options for currency invoicing:
domestic currency of the country where firms are based.
the currency in which the majority of the costs are incurred.
the domestic currency of the main competitors in order to eliminate the effect of
exchange rate variations on comparative prices.
2. Matching inflows and outflows with respect to timing of settlement.
3. Inter-company netting of foreign receivables and payables
4. Asset/liability management
5. Transfer pricing agreements
External
6. Leading and lagging
7. Adjustment clause in sales contracts
8. Cross hedging with futures.
9. Cross-currency interest rate swaps
10. Foreign currency swaps
11. Forward exchange contracts
12. Forex options
13. Forex futures
14. Foreign currency borrowing and lending
15. Factoring bills receivable
16. European currency unit
17. Special drawing rights
18. Other currency blocs
19. Government exchange risk guarantee
20. Insurance policies
A derivative is a financial contract whose value is derived from the value of some other
financial asset, such as a stock price, a commodity price, an exchange rate, an interest
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rate, or even an index of prices. The main role of derivatives is that they reallocate risk
among financial market participants, help to make financial markets more complete. This
section outlines the hedging strategies using derivatives with foreign exchange being the
only risk assumed.
Forwards: A forward is a made-to-measure agreement between two parties to buy/sell a
specified amount of a currency at a specified rate on a particular date in the future. The
depreciation of the receivable currency is hedged against by selling a currency forward. If
the risk is that of a currency appreciation (if the firm has to buy that currency in future say
for import), it can hedge by buying the currency forward. E.g if RIL wants to buy crude
oil in US dollars six months hence, it can enter into a forward contract to pay INR and
buy USD and lock in a fixed exchange rate for INR-USD to be paid after 6 months
regardless of the actual INR-Dollar rate at the time. In this example the downside is an
appreciation of Dollar which is protected by a fixed forward contract. The main
advantage of a forward is that it can be tailored to the specific needs of the firm and an
exact hedge can be obtained. On the downside, these contracts are not marketable, they
cant be sold to another party when they are no longer required and are binding.
Futures: A futures contract is similar to the forward contract but is more liquid because it
is traded in an organized exchange i.e. the futures market. Depreciation of a currency can
be hedged by selling futures and appreciation can be hedged by buying futures.
Advantages of futures are that there is a central market for futures which eliminates the
problem of double coincidence. Futures require a small initial outlay (a proportion of the
value of the future) with which significant amounts of money can be gained or lost with
the actual forwards price fluctuations. This provides a sort of leverage. The previous
example for a forward contract for RIL applies here also just that RIL will have to go to a
USD futures exchange to purchase standardised dollar futures equal to the amount to be
hedged as the risk is that of appreciation of the dollar. As mentioned earlier, the
tailorability of the futures contract is limited i.e. only standard denominations of money
can be bought instead of the exact amounts that are bought in forward contracts.
Options: A currency Option is a contract giving the right, not the obligation, to buy or
sell a specific quantity of one foreign currency in exchange for another at a fixed price;
called the Exercise Price or Strike Price. The fixed nature of the exercise price reduces the
uncertainty of exchange rate changes and limits the losses of open currency positions.
Options are particularly suited as a hedging tool for contingent cash flows, as is the case
in bidding processes. Call Options are used if the risk is an upward trend in price (of the
currency), while Put Options are used if the risk is a downward trend. Again taking the
example of RIL which needs to purchase crude oil in USD in 6 months, if RIL buys a Call
option (as the risk is an upward trend in dollar rate), i.e. the right to buy a specified
amount of dollars at a fixed rate on a specified date, there are two scenarios. If the
exchange rate movement is favourable i.e the dollar depreciates, then RIL can buy them
at the spot rate as they have become cheaper. In the other case, if the dollar appreciates
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compared to todays spot rate, RIL can exercise the option to purchase it at the agreed
strike price. In either case RIL benefits by paying the lower price to purchase the dollar
Swaps: A swap is a foreign currency contract whereby the buyer and seller exchange
equal initial principal amounts of two different currencies at the spot rate. The buyer and
seller exchange fixed or floating rate interest payments in their respective swapped
currencies over the term of the contract. At maturity, the principal amount is effectively
re-swapped at a predetermined exchange rate so that the parties end up with their original
currencies. The advantages of swaps are that firms with limited appetite for exchange rate
risk may move to a partially or completely hedged position through the mechanism of
foreign currency swaps, while leaving the underlying borrowing intact. Apart from
covering the exchange rate risk, swaps also allow firms to hedge the floating interest rate
risk. Consider an export oriented company that has entered into a swap for a notional
principal of USD 1 mn at an exchange rate of 42/dollar. The company pays US 6months
LIBOR to the bank and receives 11.00% p.a. every 6 months on 1st January & 1st July,
till 5 years. Such a company would have earnings in Dollars and can use the same to pay
interest for this kind of borrowing (in dollars rather than in Rupee) thus hedging its
exposures.
Foreign Debt: Foreign debt can be used to hedge foreign exchange exposure by taking
advantage of the International Fischer Effect relationship. This is demonstrated with the
example of an exporter who has to receive a fixed amount of dollars in a few months
from present. The exporter stands to lose if the domestic currency appreciates against that
currency in the meanwhile so, to hedge this, he could take a loan in the foreign currency
for the same time period and convert the same into domestic currency at the current
exchange rate. The theory assures that the gain realised by investing the proceeds from
the loan would match the interest rate payment (in the foreign currency) for the loan.

Choice of hedging instruments


The literature on the choice of hedging instruments is very scant. Among the available
studies, Gczy et al. (1997) argues that currency swaps are more cost-effective for
hedging foreign debt risk, while forward contracts are more cost-effective for hedging
foreign operations risk. This is because foreign currency debt payments are long-term and
predictable, which fits the long-term nature of currency swap contracts. Foreign currency
revenues, on the other hand, are short-term and unpredictable, in line with the short-term
nature of forward contracts. A survey done by Marshall (2000) also points out that
currency swaps are better for hedging against translation risk, while forwards are better
for hedging against transaction risk. This study also provides anecdotal evidence that
pricing policy is the most popular means of hedging economic exposures. These results
however can differ for different currencies depending in the sensitivity of that currency to

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various market factors. Regulation in the foreign exchange markets of various countries
may also skew such results.
Determinants of Hedging Decisions
The management of foreign exchange risk, as has been established so far, is a fairly
complicated process. A firm, exposed to foreign exchange risk, needs to formulate a
strategy to manage it, choosing from multiple alternatives. This section explores what
factors firms take into consideration when formulating these strategies.
Production and Trade vs. Hedging Decisions
An important issue for multinational firms is the allocation of capital among different
countries production and sales and at the same time hedging their exposure to the varying
exchange rates. Research in this area suggests that the elements of exchange rate
uncertainty and the attitude toward risk are irrelevant to the multinational firm's sales and
production decisions (Broll,1993). Only the revenue function and cost of production are
to be assessed, and, the production and trade decisions in multiple countries are
independent of the hedging decision.
The implication of this independence is that the presence of markets for hedging
instruments greatly reduces the complexity involved in a firms decision making as it can
separate production and sales functions from the finance function. The firm avoids the
need to form expectations about future exchange rates and formulation of risk preferences
which entails high information costs.

Cost of Hedging
Hedging can be done through the derivatives market or through money markets (foreign
debt). In either case the cost of hedging should be the difference between value received
from a hedged position and the value received if the firm did not hedge. In the presence of
efficient markets, the cost of hedging in the forward market is the difference between the
future spot rate and current forward rate plus any transactions cost associated with the
forward contract. Similarly, the expected costs of hedging in the money market are the
transactions cost plus the difference between the interest rate differential and the expected
value of the difference between the current and future spot rates. In efficient markets,
both types of hedging should produce similar results at the same costs, because interest
rates and forward and spot exchange rates are determined simultaneously. The costs of
hedging, assuming efficiency in foreign exchange markets result in pure transaction costs.
The three main elements of these transaction costs are brokerage or service fees charged
by dealers, information costs such as subscription to Reuter reports and news channels
and administrative costs of exposure management.

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Factors affecting the decision to hedge foreign currency risk


Research in the area of determinants of hedging separates the decision of a firm to hedge
from that of how much to hedge. There is conclusive evidence to suggest that firms with
larger size, R&D expenditure and exposure to exchange rates through foreign sales and
foreign trade are more likely to use derivatives. (Allayanis and Ofek, 2001) First, the
following section describes the factors that affect the decision to hedge and then the
factors affecting the degree of hedging are considered.
Firm size: Firm size acts as a proxy for the cost of hedging or economies of scale. Risk
management involves fixed costs of setting up of computer systems and training/hiring of
personnel in foreign exchange management. Moreover, large firms might be considered
as more creditworthy counterparties for forward or swap transactions, thus further
reducing their cost of hedging. The book value of assets is used as a measure of firm size.
Leverage: According to the risk management literature, firms with high leverage have
greater incentive to engage in hedging because doing so reduces the probability, and thus
the expected cost of financial distress. Highly levered firms avoid foreign debt as a means
to hedge and use derivatives.
Liquidity and profitability: Firms with highly liquid assets or high profitability have
less incentive to engage in hedging because they are exposed to a lower probability of
financial distress. Liquidity is measured by the quick ratio, i.e. quick assets divided by
current liabilities). Profitability is measured as EBIT divided by book assets.
Sales growth: Sales growth is a factor determining decision to hedge as opportunities are
more likely to be affected by the underinvestment problem. For these firms, hedging will
reduce the probability of having to rely on external financing, which is costly for
information asymmetry reasons, and thus enable them to enjoy uninterrupted high
growth. The measure of sales As regards the degree of hedging Allayanis and Ofek (2001)
conclude that the sole determinants of the degree of hedging are exposure factors (foreign
sales and trade). In other words, given that a firm decides to hedge, the decision of how
much to hedge is affected solely by its exposure to foreign currency movements.
An Overview of Corporate Hedging in India
The move from a fixed exchange rate system to a market determined one as well as the
development of derivatives markets in India have followed with the liberalization of the
economy since 1992. In this context, the market for hedging instruments is still in its
developing stages. In order to understand the alternative hedging strategies that Indian
firms can adopt, it is important to understand the regulatory framework for the use of
derivatives here.
Development of Derivative Markets in India
The economic liberalization of the early nineties facilitated the introduction of
derivatives based on interest rates and foreign exchange. Exchange rates were deregulated
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and market determined in 1993. By 1994, the rupee was made fully convertible on current
account. The ban on futures trading of many commodities was lifted starting in the early
2000s. As of Feb 2016, even corporates have been allowed to write options in the
atmosphere of high volatility.
Derivatives on stock indexes and individual stocks have grown rapidly since inception. In
particular, single stock futures have become hugely popular. Institutional investors prefer
to trade in the Over-The-Counter(OTC) markets to interest rate futures, where
instruments such as interest rate swaps and forward rate agreements are thriving. Foreign
exchange derivatives are less active than interest rate derivatives in India, even though
they have been around for longer. OTC instruments in currency forwards and swaps are
the most popular. Importers, exporters and banks use the rupee forward market to hedge
their foreign currency exposure. Turnover and liquidity in this market has been
increasing, although trading is mainly in shorter maturity contracts of one year or less.
The typical forward contract is for one month, three months, or six months, with three
months being the most common.
The Indian rupee, which is being traded on the Dubai Gold and Commodities Exchange
(DGCX), crossed a turnover of $53.24 million in Jan 2016.
Regulatory Guidelines for the use of Foreign Exchange Derivatives
With respect to foreign exchange derivatives involving rupee, residents have access to
foreign exchange forward contracts, foreign currency-rupee swap instruments and
currency options both cross currency as well as foreign currency-rupee. In the case of
derivatives involving only foreign currency, a range of products such as Interest Rate
Swaps, Forward Contracts and Options are allowed. While these products can be used for
a variety of purposes, the fundamental requirement is the existence of an underlying
exposure to foreign exchange risk i.e. derivatives can be used for hedging purposes only.
The RBI has also formulated guidelines to simplify procedural/documentation
requirements for Small and Medium Enterprises (SME) sector. In order to ensure that
SMEs understand the risks of these products, only banks with which they have credit
relationship are allowed to offer such facilities. These facilities should also have some
relationship with the turnover of the entity. Similarly, individuals have been permitted to
hedge upto USD 100,000 on self declaration basis.
Authorised Dealer(AD) banks may also enter into forward contracts with residents in
respect of transactions denominated in foreign currency but settled in Indian Rupees
including hedging the currency indexed exposure of importers in respect of customs duty
payable on imports and price risks on commodities with a few exceptions. Domestic
producers/users are allowed to hedge their price risk on aluminium, copper, lead, nickel
and zinc as well as aviation turbine fuel in international commodity exchanges based on
their underlying economic exposures. Authorised dealers are permitted to use innovative
products like cross-currency options; interest rate swaps (IRS) and currency swaps,
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caps/collars and forward rate agreements (FRAs) in the international foreign exchange
market. Foreign Institutional Investors (FII), persons resident outside India having
Foreign Direct Investment (FDI) in India and Nonresident Indians (NRI) are allowed
access to the forwards market to the extent of their exposure in the cash market.

Hedging Instruments for Indian Firms


The recent period has witnessed amplified volatility in the INR-US exchange rates in the
backdrop of the sub-prime crisis in the US and increased dollar-inflows into the Indian
stock markets. In this context, the paper has attempted to study the choice of instruments
adopted by prominent firms to stem their foreign exchange exposures. All the data for this
has been compiled from the 2014-2015 Annual Reports of the respective companies. A
summary of the foreign exchange risk hedging behaviour of select Indian firms is given in
Table

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Discussion on Hedging by Indian Firms


From Table , it can be seen that earnings of all the firms are linked to either US dollar,
Euro or Pound as firms transact primarily in these foreign currencies globally. Forward
contracts are commonly used and among these firms, Ranbaxy and RIL depend heavily
on these contracts for their hedging requirements. As discussed earlier, forwards contracts
can be tailored to the exact needs of the firm and this could be the reason for their
popularity. The tailorability is a consideration as it enables the firms to match their
exposures in an exact manner compared to exchange traded derivatives like futures that
are standardised where exact matching is difficult.
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RIL, Maruti Udyog and Mahindra and Mahindra are the only firms using currency swaps.
Swap usage is a long term strategy for hedging and suggests that the planning horizons
for these companies are longer than those of other firms. These businesses, by nature
involve longer gestation periods and higher initial capital outlays and this could explain
their long planning horizons.
Another observation is that TCS prefers to hedge its exposure to the US Dollar through
options rather than forwards. This strategy has been observed among many firms recently
in India11. This has been adopted due to the marked high volatility of the US Dollar
against the Rupee. Options are more profitable instruments in volatile conditions as they
offer unlimited upside profitability while hedging the downside risk whereas there is a
risk with forwards if the expectation of the exchange rate (the guess) is wrong as firms
lose out on some profit. The use of Range barrier options by Infosys also suggests a
strategy to tackle the high volatility of the dollar exchange rates. Software firms have a
limited domestic market and rely on exports for the major part of their revenues and
hence require additional flexibility in hedging when the volatility is high. Another
implication of this is that their planning horizons are shorter compared to capital intensive
firms.
It is evident that most Indian firms use forwards and options to hedge their foreign
currency exposure. This implies that these firms chose short-term measures to hedge as
opposed to foreign debt. This preference is possibly a consequence of their costs being in
Rupees, the absence of a Rupee futures exchange in India and curbs on foreign debt. It
also follows that most of these firms behave like Net Exporters and are adversely affected
by appreciation of the local currency. There are a few firms which have import liabilities
which would be adversely affected by Rupee depreciation. However it must be pointed
out that the data set considered for this study does not indicate how the use of foreign
debt by these firms hedges their exposures to foreign exchange risk and whether such a
strategy is used as a substitute or complement to hedging with derivatives.

Inference:
Derivative use for hedging is only to increase due to the increased global linkages and
volatile exchange rates. Firms need to look at instituting a sound risk management system
and also need to formulate their hedging strategy that suits their specific firm
characteristics and exposures.
In India, regulation has been steadily eased and turnover and liquidity in the foreign
currency derivative markets has increased, although the use is mainly in shorter maturity
contracts of one year or less. Forward and option contracts are the more popular
instruments. Regulators had initially only allowed certain banks to deal in this market
however now corporates can also write option contracts. There are many variants of these

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derivatives which investment banks across the world specialize in, and as the awareness
and demand for these variants increases, RBI would have to revise regulations.
For now, Indian companies are actively hedging their foreign exchanges risks with
forwards, currency and interest rate swaps and different types of options such as call, put,
cross currency and range-barrier options. The high use of forward contracts by Indian
firms also highlights the absence of a rupee futures exchange in India. However, the
Dubai Gold and Commodities Exchange in June, 2007 introduced Rupee- Dollar futures
that could be traded on its exchanges followed by Rupee-EURO, Rupee-YEN and had
provided another route for firms to hedge on a transparent basis. There are fears that
RBIs ability to control the partially convertible currency will be subdued by this
introduction but this issue is beyond the scope of this study. The partial convertibility of
the Rupee will be difficult to control if many exchanges offer such instruments and that
will be factor to consider for the RBI.
The Committee on Fuller Capital Account Convertibility had recommended that currency
futures may be introduced subject to risks being contained through proper trading
mechanism, structure of contracts and regulatory environment. Accordingly, Reserve
Bank of India in the Annual Policy Statement for the Year 2007-08 proposed to set up a
Working Group on Currency Futures to study the international experience and suggest a
suitable framework to implement the proposal, in line with the current legal and
regulatory framework.
The limitation of this study is that only one type of risk is assumed i.e the foreign
exchange risk. Also applicability of conclusion is limited as only very few firms were
reviewed over just one time period. However the results from this exploratory study are
encouraging and interesting, leading us to conclude that there is scope for more rigorous
study along these lines.
As a result of globalization, firms, whether they are multinational enterprises (MNEs) or
small and medium sized enterprises (SMEs), have been increasingly involved in
international business. Exporting firms might be particularly affected by fluctuations of
exchange rates, for the fluctuation in currency markets impacts on the economy in general
and firm production costs and revenues, in particular. It is also worth considering the
fluctuations in the context of a floating exchange rate. Therefore, foreign exchange
(forex) risk management is of interest to exporting firms.
However, a majority of research papers on this topic focus specifically on tackling
problems in MNEs, while there is a scarcity of studies on managing forex risk for SMEs
(Bartram, Brown, & Minton, 2010; Jonuka & Samnait, 2003). Some research studies,
such as those of Jonuka & Samnait (2003), Chan-Lau (2005) and Pramborg (2005),
looked into hedging and managing forex risk in developing countries, where the majority
of the companies are SMEs. These studies have addressed a variety of hedging
determinants, but tended not to describe in detail how these determinants together impact

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hedging behaviours. This study investigates the interrelationships among hedging


determinants, which are specific about exporting SMEs.
In the literature on forex risk management, there are a number of variables which have
been seen as determinants of firms choice to hedge forex risk. They include the cost of
hedging versus benefits received, cost of using derivatives, managers knowledge, trust in
banks, accounting procedures (Jonuka & Samnait, 2003); hedging objectives (e.g., to
reduce fluctuations in cash flows and fluctuations of accounting numbers), maturity of
derivative markets (Pramborg, 2005); firm size, economies of scale, and international
dependency (Berkman, Bradbury, & Magan, 1997); accounting treatment, derivative
market liquidity, exchange rate volatility, exposure volatility, and recent hedging
outcomes (Brown, 2001).
In the light of all of these findings, firms might apply various hedging strategies and
techniques to manage forex risk. They could use currency derivatives, foreign debt, and
other external and internal methods, for example, leading and lagging, to hedge forex
risk. But the usage of hedging techniques to manage their forex risk has not been
thoroughly explored.
This thesis added to the current literature on forex risk management by focusing on how
SMEs manage their forex risk, specifically identified factors that influence hedging
strategy, and the relationships between these factors. The thesis extended the literature on
forex risk management to a setting of exporting SMEs, examined the impact of factors
with regard to firms resources, and the degree of internationalisation (Gankema, Snuif, &
Zwart, 2000

3. Industry Profile
The equity brokerage industry in India is one of the oldest in the Asian region. India had an
active stock market for about 150 years that played a significant role in developing risk
markets and also promoting enterprise and supporting the growth of Industry

The roots of a stock market in India began in the 1860s during the American civil war that
lead to the sudden surge in the demand for cotton from India resulting in setting up a number

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of joint stock companies that issued securities to raise finance. This trend was akin to the
rapid growth of securities market in Europe and the North America in the background of
expansion of railroads, exploration of natural resources and land development.

Historical records shows that as early as 1864, there were about 1000 brokers with the stock
market functioning from three places in Mumbai between 9am to 7pm at the junction of
Meadows Street and Rampart Row from day break till 9am and from 7pm to early hours of
next morning at Bazargate.

Share Prices rose sharply even at that time. A share of Colaba Land Company during the
boom period of the 1860s rose from Rs10,000 at par to Rs 120,000 and that of Backbay
Shares went up from Rs 54000. Bombay, at that time, was a major financial center having
housed 31 banks, 20 insurance companies and 62 joint stock companies.

In earlier times, the trading, that is, the buying and selling of shares and stocks takes place at
a particular place known as stock exchange. Thus, the person needs to go at that particular
platform if he or she needs to trade in the shares. However with the advancement of
technology, this process has almost become redundant. Now the trading of shares and stock
can takes place electronically. There is a tremendous reduction in paper work as everything
has gone online. This market is not new to India it has about 299 years old history, It was in
early 18th Century, The main institution that is dealing in the trading of shares and stocks
(mainly in bank and cotton) was initiated by East India company. Later by around 1830s
main dealing in the shares and stock was initiated in Bombay. There after the concept has
attracted nm\ember of people to indulge in the trading of items, By 1860, the number of
brokers who are dealing in the trading of items goes up to 60 in number further increased
from 60 to 250 in around 1862-1863. Around 1980-61 there is no supply of cotton from
America as there was civil war that took place in America due to which the Indian market had
the initial flavour of the trading in items and the concept of Stock market.

Pre-Independence Era:
The concept of stock market place was not a very systematic system.
People who needs to trade generally gathered on the streets which was
popularly known as the DALAL STREET and the trading and the transaction
used to take place from the Dalal street. It was in year 1875 that first
stock exchange was formulated in the Name of Native Share and Stock
Brokers Association which is presently known as Bombay Stock
Exchange Thereafter it was in year 1908, that the stock exchange in

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Calcutta was formulated know as Calcutta Stock Exchange Association


followed by other stock exchanges.

Post-Independence Era:

There was shutdown of various stock exchanges in India due to the depression that took place
after Independence. It was under the Securities Contracts (Regulation) Act, 1956 that various
stocks Exchange has got recognition as a recognised stock exchange such as Bombay, Delhi,
Hyderabad, Indore etc there are several stock exchanges established post independence. Thus,
The market of stock exchange that were established post Independence. Thus the market is in
its leap now and is growing without leaps and bounds.

The BSE and NSE

Most of the trading in the Indian stock market majorly takes place on its two stock
exchanges: those are Bombay Stock Exchange (BSE) and the other is National Stock
Exchange (NSE). The BSE is been in existence since 1875. On the other hand The NSE, ,
was founded in 1992 and trading was started in 1994. However, both exchanges follow and
share the same trading mechanism, trading hours, settlement process, etc. At the last count,
the BSE had about 4,700 listed firms, whereas the rival NSE had nearly 1,200. Out of all the
listed firms on the BSE, only about 500 firms constitute more than 90% of its market
capitalization and the rest of the crowd consists of highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a
dominant share in spot trading, with about 70% of the market share, as of 2009, and almost a
complete monopoly in derivatives trading, with about a 98% share in this market, also as of
2009. Both exchanges compete for the order flow that leads to reduced costs, market
efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock
exchanges within a very tight range.
Trading Mechanism
Trading at both the exchanges takes place through an open electronic limit order book, in
which order matching is done by the trading computer. There are no market
makers or specialists and the entire process is order-driven, which means that market orders
placed by investors are automatically matched with the best limit orders. As a result, buyers
and sellers remain anonymous. The advantage of an order driven market is that it brings more
transparency, by displaying all buy and sell orders in the trading system. However, in the
absence of market makers, there is no guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which provide
online trading facility to retail customers. Institutional investors can also take advantage of
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the direct market access (DMA) option, in which they use trading terminals provided by
brokers for placing orders directly into the stock market trading system.
Settlement Cycle and Trading Hours
Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place
on Monday, gets settled by Wednesday. All trading on stock exchanges takes place between
9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday.
Delivery of shares must be made in dematerialized form, and each exchange has its own
clearing house, which assumes all settlement risk, by serving as a central counterparty.
Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market
index for equities; it includes shares of 30 firms listed on the BSE, which represent about
45% of the index's free-float market capitalization. It was created in 1986 and provides time
series data from April 1979, onward.

Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which
represent about 62% of its free-float market capitalization. It was created in 1996 and
provides time series data from July 1990, onward.
Market Regulation
The overall responsibility of development, regulation and supervision of the stock market
rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an
independent authority. Since then, SEBI has consistently tried to lay down market rules in
line with the best market practices. It enjoys vast powers of imposing penalties on market
participants, in case of a breach.
Who Can Invest In India?
India started permitting outside investments only in the 1990s. Foreign investments are
classified into two categories: foreign direct investment (FDI) and foreign portfolio
investment (FPI). All investments, in which an investor takes part in the day-to-day
management and operations of the company, are treated as FDI, whereas investments in
shares without any control over management and operations are treated as FPI.

For making portfolio investment in India, one should be registered either as a foreign
institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both
registrations are granted by the market regulator, SEBI. Foreign institutional investors mainly
consist of mutual funds, pension funds, endowments, sovereign wealth funds, insurance
companies, banks, asset management companies etc. At present, India does not allow foreign
individuals to invest directly into its stock market. However, high-net-worth individuals
(those with a net worth of at least $US50 million) can be registered as sub-accounts of an FII.
Foreign institutional investors and their sub accounts can invest directly into any of the stocks
listed on any of the stock exchanges. Most portfolio investments consist of investment in
securities in the primary and secondary markets, including shares, debentures and warrants of
companies listed or to be listed on a recognized stock exchange in India. FIIs can also invest
in unlisted securities outside stock exchanges, subject to approval of the price by the Reserve
Bank of India. Finally, they can invest in units of mutual funds and derivatives traded on any
stock exchange.

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An FII registered as a debt-only FII can invest 100% of its investment into debt instruments.
Other FIIs must invest a minimum of 70% of their investments in equity. The balance of 30%
can be invested in debt. FIIs must use special non-resident rupee bank accounts, in order to
move money in and out of India. The balances held in such an account can be fully
repatriated.
Restrictions/Investment Ceilings
The government of India prescribes the FDI limit and different ceilings have been prescribed
for different sectors. Over a period of time, the government has been progressively increasing
the ceilings. FDI ceilings mostly fall in the range of 26-100%.

By default, the maximum limit for portfolio investment in a particular listed firm, is decided
by the FDI limit prescribed for the sector to which the firm belongs. However, there are two
additional restrictions on portfolio investment. First, the aggregate limit of investment by all
FIIs, inclusive of their sub-accounts in any particular firm, has been fixed at 24% of the paidup capital. However, the same can be raised up to the sector cap, with the approval of the
company's boards and shareholders.
Secondly, investment by any single FII in any particular firm should not exceed 10% of the
paid-up capital of the company. Regulations permit a separate 10% ceiling on investment for
each of the sub-accounts of an FII, in any particular firm. However, in case of foreign
corporations or individuals investing as a sub-account, the same ceiling is only 5%.
Regulations also impose limits for investment in equity-based derivatives trading on stock
exchanges.
Investment Opportunities for Retail Foreign Investors
Foreign entities and individuals can gain exposure to Indian stocks through institutional
investors. Many India-focused mutual funds are becoming popular among retail investors.
Investments could also be made through some of the offshore instruments, like participatory
notes (PNs) and depositary receipts, such as American depositary receipts(ADRs), global
depositary receipts (GDRs), and exchange traded funds (ETFs) and exchange-traded
notes (ETNs).

As per Indian regulations, participatory notes representing underlying Indian stocks can be
issued offshore by FIIs, only to regulated entities. However, even small investors can invest
in American depositary receipts representing the underlying stocks of some of the wellknown Indian firms, listed on the New York Stock Exchange and Nasdaq. ADRs are
denominated in dollars and subject to the regulations of the U.S. Securities and Exchange
Commission (SEC). Likewise, global depositary receipts are listed on European stock
exchanges. However, many promising Indian firms are not yet using ADRs or GDRs to
access offshore investors.
Retail investors also have the option of investing in ETFs and ETNs, based on Indian stocks.
India ETFs mostly make investments in indexes made up of Indian stocks. Most of the stocks
included in the index are the ones already listed on NYSE and Nasdaq. As of 2009, the two
most prominent ETFs based on Indian stocks are the Wisdom-Tree India Earnings Fund
(NYSE: EPI) and the PowerShares India Portfolio Fund (NYSE:PIN). The most prominent
ETN is the MSCI India Index Exchange Traded Note (NYSE:INP). Both ETFs and ETNs
provide good investment opportunity for outside investors.

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The Bottom Line


Emerging markets like India, are fast becoming engines for future growth. Currently, only a
very low percentage of the household savings of Indians are invested in the domestic stock
market, but with GDP growing at 7-8% annually and a stable financial market, we might see
more money joining the race. Maybe it's the right time for outside investors to seriously think
about joining the India bandwagon.

Forex Market History In India

The foreign exchange currency trading in India is growing at a really good pace
however it is said that the forex market is still in the early phase in India. Nevertheless there
are already several big players in the Indian forex market. Let us find out details on the forex
market history in India to know more about Indian forex market.
The history of forex market in India owes its origin to an important decision taken by the
Reserve Bank of India (RBI) in the year 1978 which allows banks to undertake intra-day
trading in foreign currency exchange. As a result of this step, the agreement of maintaining
square or near square position was to be complied with only at the close of business every
day. The history of currency trading in India also clearly shows that during the initial period
when these economic reforms started, the exchange rate of national currency i.e. Indian rupee
used to be determined by the RBI in terms of a weighted basket of currencies of Indias major
trading partners. Moreover, there were some fairly significant restrictions on the current
account transactions.
Then again during early nineties, more economic reforms were introduced which witnessed
the important two-step downward adjustment in the exchange rate of the Indian rupee in
order to place it at a suitable level in line with the inflation differential so that the
competitiveness in exports could be maintained. With these economic reforms which resulted
in the unification exchange rate of the rupee heralded the commencement of the new era of
market determined forex currency rate regime of rupee in the Indian forex history which was
based on the demand and supply principle in the forex market.
Another landmark in Forex history of India came with the appointment of an Expert Group
committee on Forex currency in 1994. This committee was made to study the forex market in
detail so that step can be taken out to develop, deepen and widen the forex market in India.
The result of this exercise was that banks were significant freedom in many of its market
operations related to like forex market development and liberalization. The freedom was
granted to banks in term of fixing their trading limits, allowed to borrow and invest funds in
the overseas markets up to specified limits, accorded freedom to make use of derivative
products for asset-liability management purposes.
The corporate were granted the flexibility to book forward cover based on previous turnover
and were given freedom to make use of financial instruments like interest rates and currency
swaps in the international currency exchange market. The other feature of forex history in
India is that a large sum of foreign exchange in India came through the large Indian
population working in foreign countries. However, the common man was not much interested
in forex trading. the things are changing now and with the growing economy more and more
people are showing interest in forex trading and are looking out for hedging currency risks.
National Stock Exchange of India popularly known as NSE was the first recognized
exchange in Indian forex history to launch forex currency futures trading in India. These

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currency futures are beneficial over overseas forex trading especially to comparatively small
traders and retail investors. Another important point to know is that before discussing the
history of forex market in India, it is important to know the central government of India has
the powers to control transactions in foreign exchange and hence forex transactions in India
are managed by the government authorities.

Bombay Stock Exchange (BSE)


A very common name for all traders in the stockmarket, BSE, stands for Bombay Stock
Exchange. The oldest market not only in the country, but also in Asia. In the early days, BSE
was known as "The Native Share & Stock Brokers Association." It was established in the
year 1875 and became the first stock exchange in the country to be recognised by the
government. In 1956, BSE obtained a permanent recognition from the Government of India
under the Securities Contracts (Regulation) Act, 1956.
In the past and even now, it plays a pivotal role in the development of the country's capital
market. This is recognised worldwide and its index, SENSEX, is also tracked worldwide.
Earlier it was an Association of Persons (AOP), but now it is a demutualised and corporatised
entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE
(Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange
Board of India (SEBI).
BSE Vision
The vision of the Bombay Stock Exchange is to "Emerge as the premier Indian stock
exchange by establishing global benchmarks."
BSE Management
Bombay Stock Exchage is managed professionally by Board of Directors. It comprises of
eminent professionals, representatives of Trading Members and the Managing Director. The
Board is an inclusive one and is shaped to benefit from the market intermediaries
participation.
The Board exercises complete control and formulates larger policy issues. The day-to-day
operations of BSE is managed by the Managing Director and its school of professionsl as a
management team.
BSE Network
The Exchange reaches physically to 417 cities and towns in the country. The framework of it
has been designed to safeguard market integrity and to operate with transparency. It provides
an efficient market for the trading in equity, debt instruments and derivatives. Its online
trading system, poularly known as BOLT, is a proprietory system and it is BS 7799-2-2002
certified. The BOLT network was expanded, nationwide, in 1997. The surveillance and
clearing & settlement functions of the Exchange are ISO 9001:2000 certified.
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BSE's International Convention Hall


The Bombay Stock Exchange provides convention hall for listed companies and other
Institutions to hold their Annual/ordinary General Meetings, Listing ceremonies, Analyst and
any other important event.
It is centrally located at Mumbai, which can be easily reached from Churchgate or CST (VT)
railway stations. It has a capacity of around 700 to 900 persons with state-of-the-art
infrastructure. The hall has Projection Equipment, Web-cast facility and a Business Room
with Facsimile, Internet, Photocpier and telecom equipment.
BSE Facts

First in India to introduce Equity Derivatives

First in India to launch a Free Float Index

First in India to launch US$ version of BSE Sensex

First in India to launch Exchange Enabled Internet Trading Platform

First in India to obtain ISO certification for Surveillance, Clearing & Settlement

'BSE On-Line Trading System (BOLT) has been awarded the globally recognised the
Information Security Management System standard BS7799-2:2002.

First to have an exclusive facility for financial training

National Stock Exchange

NSE Group
National Securities Clearing Corporation Ltd. (NSCCL)
It is a wholly owned subsidiary, which was incorporated in August 1995 and commenced
clearing operations in April 1996. It was formed to build confidence in clearing and
settlement of securities, to promote and maintain the short and consitent settlement cycles, to
provide a counter-party risk guarantee and to operate a tight risk containment system.

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NSE.IT Ltd.
It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the NSE is
uniquely positioned to provide products, services and solutions for the securities industry.
NSE.IT primarily focusses on in the area of trading, broker front-end and back-office,
clearing and settlement, web-based, insurance, etc. Along with this, it also provides
consultancy and implementation services in Data Warehousing, Business Continuity Plans,
Site Maintenance and Backups, Stratus Mainframe Facility Management, Real Time Market
Analysis & Financial News.
India Index Services & Products Ltd. (IISL)
It is a jointventure between NSE and CRISIL Ltd. to provide a variety of indices and index
related services and products for the Indian Capital markets. It was set up in May 1998. IISL
has a consulting and licensing agreement with the Standard and Poor's (S&P), world's leading
provider of investible equity indices, for co-branding equity indices.
National Securities Depository Ltd. (NSDL)
NSE joined hands with IDBI and UTI to promote dematerialisation of securities. This step
was taken to solve problems related to trading in physical securities. It commenced
operations in November 1996.
DotEx International Limited
DotEx was formed to provide a well structured inter trading platform for the members to
further offer online trading facilities to their customers. With this facility, the members can
serve a larger clientele with the use of automated risk management features and hence
increase the volume. The investors also get comprehensive and updated information through
it.

NSE Facts

It uses satellite communication technology to energise participation from around 400


cities in India.
NSE can handle up to 1 million trades per day.

It is one of the largest interactive VSAT based stock exchanges in the world.

The NSE- network is the largest private wide area network in India and the first
extended C- Band VSAT network in the world.

Presently more than 9000 users are trading on the real time-online NSE application.

Other than this there are regional stock exchanges. There were 26 regional stock
exchanges at times. After NEAT software the requirement of regional stock
exchange decreased and now came down to 19 in total.

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4. Company Profile
a. Background and inception of the company
AnandRathi is a leading full service investment bank founded in 1994 offering a wide range
of financial services and wealth management solutions to institution, corporations,
corporation, high-net worth individuals and retail. The firm has rapidly expanded its footprint
to over more than 700 locations across India with international presence in Dubai, Hong
Kong & New York, founded by Mr. AnandRathi and Mr.Pradeeep Gupta, the group today
employs over 3500 professionals throughout India and its international office. Private wealth
management strong HNI relationship.
Access to wealthy families in India having more than 25000 crores of inventible surpluses.
AnandRathi has been voted # 1 by money polls for 2 consecutive years:

2009 No. 1 Domestic private bank

2010-No.1 Domestic private bank

Our clients base is a strong testimony to our experience in managing wealth large
families and institutions.

Easy and quick access to capital through our existing client relationship which
includes promoters of family owned business, top management of leading companies.
Professionals, corporate treasuries and trusts.

Credited with developing and selling some of the most innovative products in the
market.

Strong retail distribution network; Nationwide reach

AnandRathis retail footprint extends across over more than 700 locations across
India.

Manage more than 3.5 lakhs client accounts across the country, with a daily turnover
of around INR 20 billion.

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Strong product portfolio which induces equities, Derivatives, commodities, IPOs


mutual funds, life and non-life insurance depository services and bonds.

Leading distributor of IPO, insurance, mutual funds and third party products.

We have been ranked 8th amongst all brokers for amount procured in IPOs in India
during January to June 2010 by prime data base. The firms philosophy is entirely
client centric, with a clear focus on providing long term value addition to clients,
while marinating the highest standard of excellence, ethics and professionalism.

b. Nature of the business carried


AnandRathi is a leading full service securities firm providing the entire gamut of financial
services. The firm, founded in 1994 by Mr. AnandRathi, today has a pan India presence as
well as an international presence through offices in Dubai and Bangkok.
AnandRathi provides a breadth of financial and advisory services including wealth
management, investment banking, corporate advisory, brokerage & distribution of
equities, commodities, mutual funds and insurance - all of which are supported by
powerful research teams.
The firm's philosophy is entirely client centric, with a clear focus on providing long term
value addition to clients, while maintaining the highest standards of excellence, ethics and
professionalism. The entire firm activities are divided across distinct client groups:
Individuals, Private Clients, Corporates and Institutions.

c. Vision, Mission and Quality Policy


Vision
To be a shining example as a leader in innovation & the first choice
for clients and Employees
Approach
Client Centric, Solutions & long term focused, Research &
Relationship driven

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Values
Customer Centric | Team work | Innovation | Respect.
Quality Policy

Improving asset quality is key behind performance of bank stock in a falling interest
rate environment
Credit to improve, soft inflation to spur deposits.
Falling inflation would improve real interest rates, which in turn, could channel both
household and corporate savings to bank
Estimated deposit growth at 17% in FY 16 and 16% in FY 16

d. Product / Service Profile


Services Offerings

Private Wealth Management Services

Institutional Services

Investment Banking Services

Currency Consultancy

Corporate Insurance Advisory

Investment Services
1. Preferred Clients Services
2. Privilege Clients Services
Products Offerings

Equity

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Derivatives

Commodities

Currencies

DP

PMS & Structured Debentures

Insurance (Life/Non Life)

Mutual Funds

Fixed Deposits

Loan Against Shares

IPO

Group Overview
Client Base
Direct Employees
Registered Sub Brokers
Location
International Presence

3600000+
2000+
1000+
300+
1

Private Wealth Management

Presence in Mumbai, Bangalore, Delhi, Hyderabad & Chennai

AUM of USD 800 mn

Investment Banking & Institutional Equities

Investment Banking

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Institutional Equity Research, Sales & Trading

Equity & Debt Capital Markets

Investment Services Group

Wide range of products & Services

Emphasis on overall financial planning based on clients specific requirements

Presence in 1500 locations across India

Equity & Derivative Brokerage:


AnandRathi provides end to end equity solutions to solutions to institutional and
individual investors. Consistent delivery of high quality advice on individual stock.
Sector trends and investment strategy has established a competent a and reliable unit
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across the country. Client can trade through online on BSE and NSE for both equities
and Derivatives. They are supported by dedicated sales and trading teams in trading
desks across the country. Research and investment ideas can be accessed by clients
either through their designated dealers, email, web or sms.
Mutual funds:
AnandRathi is one of Indias top mutual fund distribution houses. Their success
lies in their philosophy of providing consistently, superior, independent and unbiased
advices to their clients backed by in depth research. They firmly believe in the
importance of selecting asset allocation based on their clients risk profile, They have
a dedicated mutual fund research cell for mutual funds that consistently churns out
superior investment ideas, picking best performing funds across asset classes .
Depository Services:
AnandRathi depository services provides with a secure and convenient way of
holding your securities on both CDSL and NSDL. AR depository services includes
settelement, clearing and custody of securities, registration of shares and
dematerialization. Also offer daily updates of internet access to holding statement and
transaction summary.
Commodities:
AR commodities broking services include online futures through NCDEX and MCX
and depository services through CDSL. Their research covers broad range of traded
commodities including precious and base metals, oils and oil seeds, agri- commodities
such as weat, chana, guar etc. They also provide customized advice on hedging.
Insurance Services:
As an insurance broker, AR provides to their clients comprehensive risk
management techniques, both within the business as well as on the personal front.
Risk management includes identification, measurement and assessment of the risk and
handling of the of the risk of which insurance is a integral part. They deal with both
life and non life insurance. Their aim is to provide optimum level of cover with least
possible cost.

e. Area of Operation Global/National/Regional


AR financial services offers and provides services not only to regional,
national but also to international countries it has a strong and wide distribution
network. We can find offices of AnandRathi in more than 197 cities and 28 states and
has several branches in Dubai, Bangkok etc.

f. Ownership Pattern
AR has an autocratic management system all strategies decisions and actions are
taken by owner of organisation. New plans, branch, opening decisions taken by top
management in entire AnandRathi services firm. But in branch level they have

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democratic management system. That is all vital decisions taken by branch


management.

TOP Management

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g. Competitors Information
There are many competitors to AnandRathi as stock market is one of the good and best
avenues of investment stock broking services are increasing day by day. Few major
competitors are Share Khan, Motilal Oswal, Angel Broking, ICICI Direct, Zeroda etc
1) Zerodha : They are one of the largest and oldest Discount broker in India having more
than 50,000 clients. They have a very competitive and a simple brokerage structure (Rs
20 per trade) and good customer service. The account opening process is also very easy
and most of the work can be completed online. They are one of the few discount broker
who have their own Proprietor trading/charting software caller Pi which allows for
writing custom algorithm. The good thing about these discount brokers is you may never
have to visit their offices. The forms can be filled online and the application can be
shipped to them
2) RKSV: RKSV is a discount broker operating from Mumbai. They provide very
competitive rates of Rs 20 per trade irrespective of the size of the trade. The provide
NEST and ODIN platform for trading. They are coming up with new mobile based
platform called Upstock and the product look nice. There account opening process is
also very easy and most of the work can be completed online.
3) ICICI Direct: By far the biggest and best know full service stock broker in India. They
have decent service and easy to use user interface but there brokerage is really high
compared to what other discount brokers are providing. There rates starts from as high as
.5% to .2% depending on the value of trades you do with them. There biggest selling
point is there seamless integration with your ICICI bank account which makes
transfer/withdrawal of funds really easy and quick. Good broker for investor but not for
trader.
4) ShareKhan : Incorporated in February 2000, Sharekhan is Indias 2nd largest stock
broker as per number of customers, providing brokerage services through its online
trading website Sharekhan.com and 1950 Share shops which includes branches &
Franchises in more than 575 cities across India. They are full service broker and provide
various other services like asset management etc.
5) HDFC Security: They are one of the larger broking houses in India and with their bank
branches, they have one of the largest network which is only after ICICI. They have a
vast network of bank branch in even smaller town. Most of the investor who have a bank
account end up opening a trading/Demat account with them. They are good full service
brokers providing all major services like research desk, mutual fund investments and
portfolio management services.
6) Kotak Securities: They are one more well know name in Financial services and with
their bank branches in big cities they are able to cater to clients in big cities. There
online service is decent but brokerage is not that competitive.
7) Reliance Money: They came with a bang but lately have lost a lot of sheen from their
name. There have been lots of question about their business practices.
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8) Motilal Oswal : These are one of the decent broker operating in India. They are also full
service brokers providing gamut of financial service to the customer.
9) Karvy : They are one of the oldest broking house operating in India. They are the
brokers which your fathers used to use for buying there IPO and MF but there online
service are not that great. Lately they are upgrading their online platform and there
brokerage is also comparable to other full house brokers.

h. Infrastructural facilities

Dealing desk and land line phones

Sales talent and research team and equity team

Intellectual capital, specialized transactions

Client Quire room.

Training and meeting room.

Dealers cabin

TV for share market update watch

Cafeteria

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i. Achievement Awards

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j. Workflow Model (end to end)

Fig shows workflow model between clients and corporate

Fig shows workflow model within organisation

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5. Mckinseys Seven S Model

a. Structure
Includes policies and procedures that govern the way in which the organisation acts
within the organization. It provides the frame work for relationship among different parts of
the organization. It sets out formal reporting relationships, mode of communication, their
respective roles and rules and regulation for carrying out different tasks. If it is not properly
defined it has a detrimental effect on the effective working because motivation and morale is
low, decision are delayed and are of poor quality the expenses rises, orders are lost due to
competitive, lack of confidence etc.
Structure of any organisation has to answer the following questions

What us basic structure form?


How centralized versus decentralize in the organization?
What is the relative status and power of the organization?

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b. Skill
Skills include distinctive competencies that reside in the organisation. These can be
distinctive competencies people, management practices, systems and technology. What new
capabilities the organisation needs to develop, which one does it needs to unlearn to compete
in future. This can be learnt through a SWOT Analysis.
The competent skills of the people include good communication and presentation skills,
strong academic record, consistent in the performance levels etc.

c. Style
Style includes Leadership style of top management and overall operating style
of the organisation. Style impacts the norms people follow and they work and interact
with each other and with customers.

How does the top management make decisions- participatory Vs Top down?

How do managers spend their time in informal meetings, informal


conversations? Etc

At AnandRathi, they follow a very effable style of functioning.

Managers, staffs are approachable ( a perfect blend of formal and informal


approaches)

Personal attention to the project trainees helps in creating a good image in the
eyes of the public.

Staff has very good informal conversations that develop s sense of loyalist,
motivation, dedication within the employees.

Emergency meetings are held where top management and employees


collectively participate targets for the week is set, responsibilities are
delegated, suggestions are invited.

There is a good cordial relation between the management and the employees
which shows a participatory leadership style is observed.

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d. Strategy
Set out vision, mission objective and major action plans and policies of the organisation.
These set out picture of the organisation in the future typically spelling out the overall
corporate strategy, the Strategic business unit strategy and functional strategies. It is the first
step that the company has to take in leading its organisation to ladder of success. The major
areas of strategic goals of Anandrathi are:

1) Marketing Standing

2) Innovation
3) Human Resource
4) Financial Resources
5) Physical Resources
6) Productivity
7) Social Responsibility

Desired share of present and new markets,


including areas in which new products are
needed and services goals aimed at building
customer loyalty
Innovation in production services as well as
innovation in skill and activities required to
supply them
Supply, development and performance of
managers employee attitudes
Sources of capital supply and how it will be
utilized
Physical facilities and how they will be
utilized in providing services
Efficient use of resources relatives to
outcomes
Responsibility in such area as concern for
community and ethical behavior

e. System
System in their frame work stands for the rules and regulations. Procedures and practices
that must be allowed to carry out the task in organization. At AnandRathi in Shivajinagar the
procedure followed is clear, transparent and not complicated. The information system at the
various branches of AnandRathi is followed by submission of MIS reports at the end of their
day to day activities. The activities of the front end operation include:

Head office of South Zone AnandRathi

Client Advisory Services

Processing of demat account transactions

New issue promotions.

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Portfolio Management of NRI clients.

Promotions activities for promotions of newly arrived various products

Finally MIS reporting of day to day transactions.

Administration accounting of all office operational expenses

At the office day to day operations include

Processing of various application forms of demat account IPOs and forwarding the
same to the Head office.

Providing statement of account to the various investors on requesting.

Addressing requests for non-payment of sub brokers commission.

MIS reporting of day to day transactions.

Transaction of accounts of account holders are carried out by dealers.

Training of Relationship Managers and newly appointed individuals

The total Quality Control System of AnandRathi has created principles about its quality
philosophy

Create constancy of purpose and improve services for long range needs rather than
short term profitability.

Search continually problems in the system and improve process.

Encourage effective two way communication and other means to drive fear
throughout the organisation and help people to work more productively.
The Electronic Data Processing (EDP) department of AnandRathi takes care of both
offline and online transactions. Online trading takes place using NEAT software. It is
connected to NSDL, CDSL, NSE and BSE and helps stock broke trade online. The

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office is mainly connected for the purpose of conversion of physical form of shares to
electronic form.

f. Staff
The staffing procedure mainly includes how the organisation has to look into its people,
their background and competencies. Staff also organisation approaches to recruitment,
selection and specialization. How people developed, how recruits are trained, socialized and
integrated and how their careers are managed.

At AnandRathi, there are around 3500 employees working across India.

At AnandRathi, Shivajinagar branch there are about 80 employees.

The candidates are recruited from diverse fields of commerce like B.coms MBAs.
ICWAs CAs and CFAs great opportunity for freshers and post graduates are
available.

They are involved in all the required meetings and activities.

The staffs are given freedom to use their innovation and creative skills.

Get together are held for staff members to socialize.

Staffs grievances are given a listening in a year.

g. Shared Value
i. Study of implementing Shared Value
It refers to core fundamental values that are widely shared in the organisation and serve as
guiding principles that are important. These values have great meaning because they focus
attention and provide a broader sense and purpose. They also give a strong basis for stabilities
to organisation, in a rapidly changing environment by providing a basis meaning to people
working in the organisation.

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Do people have a shared understanding of why a company exist?

Do people have a shared understanding of the vision of the company?

How do people describe the ways in which the company is distinctive?

At AnandRathi, which is primarily a client or investor oriented organisation has


embedded this quality all its member employees. The members work today
towards the growth and success of the unit. The employees share responsibility
and protect the companys name and integrity. There is no sharing of information
with the outsiders. There is collective responsibility and accountability on the
part of its members. This can be said as the shared values of the employees of
the organization.

ii. SWOT Analysis


A SWOT analysis is a tool, used in management and strategy formulation. It can
help to identify the Strengths, Weaknesses, Opportunities and Threats of a particular
company.
Strengths and weakness: Analysis may view the internal factors as strengths or as
weaknesses depending upon their effect on the organization's objectives. What may
represent strengths with respect to one objective may be weaknesses (distractions,
competition) for another objective. The factors may include all of the 4Ps; as well
as personnel, finance, manufacturing capabilities, and so on.
Opportunities and threats: The external factors may
include macroeconomic matters, technological change, legislation, and socio cultural
changes, as well as changes in the marketplace or in competitive position. The results
are often presented in the form of a matrix.
SWOT analysis is just one method of categorization and has its own weaknesses.
For example, it may tend to persuade its users to compile lists rather than to
think about actual important factors in achieving objectives. It also presents the
resulting lists uncritically and without clear prioritization so that, for example,
weak opportunities may appear to balance strong threats.
It is prudent not to eliminate any candidate SWOT entry too quickly. The
importance of individual SWOTs will be revealed by the value of the strategies
they generate. A SWOT item that produces valuable strategies is important. A
SWOT item that generates no strategies is not important.

SWOT MATRIX

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Breadth of Services.
In line with its client- centric philosophy, the firm offers to its clients the entire spectrum off
financial services ranging from brokerage services in equities and commodities. Distribution
of mutual funds, IPs and Insurance products, real estate, investment banking, mergers and
acquisitions, corporate advisory.

In-Depth Research:
Our research expertise is at the core of the value proportion what we offer to our clients.
Research teams across the firm continuously track various markets and products. The aim is
however common to go far deeper than others, to deliver incisive insights and ideas and be
accountable for results.

Strengths.

Global parentage and expertise.

Experienced senior management

World class technology and infrastructure

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Strict risk control systems

Fundamental and technical research.

Multiple products under one roof.

Company with well diversified portfolio.

Weakness

Many competitors.

Ineffective direct marketing strategies

No global reach

Weak brand name.

No Digital marketing

Opportunities

To grab the growing India market.

Scope for taking business and going global.

Scope for increasing its branch network especially in the important financial centres
as well as extending its physical presence in other parts of the country.

Up gradation of the latest technology to give better and faster services to its clients

THREATS

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Global economic slowdown.

Highly volatile market

The ever increasing and challenging neck to neck competitions especially with those
established and existing reputed stock broking companies.

Uncertainly of the market and volatility and fluctuations in the stock prices.

Changing in customers needs, preferences and taste.

Threat from new entrants into the field of stock broking.


Growth And Future Prospectus
Growth is an every successful organization positive sign in the competitive world.
In India financial market is booming drastically and number of new investors is
increasing.
AnandRathi is providing competitive services to clients and day by day their clients
spreading across India. For growth they are conducting education meeting across
India.

6.

Research Methodology

An exploratory survey, by way of extensive literature review of books, journals


and other published data related to the focus of the study, as also concerned
websites, was carried out to gather background information about the general
nature of the research problem.

a. Title of the Project


The study concentrates on FOREX risk management by SMEs who are
mainly engaged in exporting goods, tools or services. So the appropriate
title would be
FORIEN EXCHANGE PERCEPTION AND MANAGEMENT BY EXPORT SMEs OF
BANGLORE

b. Statement of the problem


National economies in recent years have grown closer together as a result of
globalisation; firms are, therefore, influenced by global changes (Fard, Cheong, &
Yap, 2014; OECD, 1997). As a result, fluctuations in global forex markets impact

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all firms, but especially those which are directly involved in international
business. Several findings question the value of firms hedging forex risk because
the risk may not be a major impediment to international trade, and because
difficulties, costs of hedging, and short-term exchange rate fluctuations are not
considerable (Brookes, Hargreaves, Lucas, & White, 2000). However, a number of
studies demonstrate that firms should be managed in anticipation of uncertainty
of forex rates (Brookes et al., 2000; Dash, Babu, Kodagi, & Vivekanand, 2008;
Dhanani, 2003; Joseph, 2000; Loderer & Pichler, 2000; e.g., Marshall, 2000;
Moosa, 2004; Morey & Simpson, 2001; Pramborg, 2005). On account of this, a
question arises as to the extent to which firms should hedge their forex risk.
Firm size has been seen to be one of the determinants of hedging policies.
Brsum & degaard (2005) examined Norwegian non-financial firms and showed
that the larger firms were, the higher their usage of derivatives. Similarly, ChanLau (2005) found that in Chile a majority of demand for forex hedging was from
large firms, mostly because of their possession of resources and skills to
implement forex hedging programs. In another study by Culp & Miller (1995),
there were only 13% of firms with a market value of $50 million or less using
derivatives as a hedging vehicle, whereas the proportion of firms with a market
value greater than $250 million that used derivatives was 65%. Thus, because of
size differences, it is likely that SMEs could have their own strategies for
managing forex risks. Such strategies for SMEs might be distinct from those of
larger firms. In other words, there might be a model for SMEs practices in
responding to forex rate fluctuations. The determinants of forex risk strategy and
the interactions between these determinants may also be different for SMEs.
In addition, SMEs might face higher risk as they increase their export sales/total
sales ratio over time; gaining experience and resources, and enhancing market
knowledge lead them to further commitment in more distant markets (Coviello &
McAuley, 1999). The degree of internationalisation of a firm is likely to impact the
forex risk management by SMEs. It is worthwhile investigating this impact.
To address this problem, the study is guided by the following research questions:
1. What factors influence exporting SMEs to choose hedging as a way of
managing forex risk?
2. What factors influence decisions on the hedging degree and on (internal or
external) hedging techniques when exporting SMEs choose hedging to manage
forex exposure?
3. How does an SMEs internationalisation degree impact its choice of forex
strategy?

c. Objectives
This thesis is mainly concerned with identifying the determinants of forex
strategy in SMEs. It sheds new light on SMEs hedging practice by providing a
better understanding of determinants impacting the choice of hedging strategy
for managing forex risk, including the degree to which firms hedge and the
hedging techniques that the firms may use.

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So main objectives of the study are:


1. To identify Foreign Exchange Exposure Measurement Practise by Export Groups

2. To identify Transaction Exposure Management Practices by Export Groups


3. To identify degree Internationalisation of SME Export firms
4. To identify whether or not SMEs make use of any Currency Advisory
services.

d. Operational definitions
There are some of the operational definitions which are conventionally used in
this project.
SME (Small scale Industries):

Indian Small and Medium Enterprises (SME) division has risen as an exceedingly lively and
dynamic segment of the Indian economy in the course of the most recent five decades. SMEs
not just assume critical part in giving extensive job opportunities at similarly bring down
capital expense than huge commercial ventures additionally help in industrialization of
provincial ranges. SMEs are corresponding to expansive commercial ventures as auxiliary
units and this area contributes immensely to the financial advancement of the nation. The
Sector comprising of 36 million units, starting today, gives vocation to more than 80 million
persons. The Sector through more than 6,000 items contributes around 8% to GDP other than
45% to the aggregate assembling yield and 40% to the fares from the nation. The SME area
can possibly spread mechanical development the nation over and can be a noteworthy
accomplice during the time spent comprehensive development.

Definition of MSMEs in India


[As Per Micro, Small & Medium Enterprises Development (MSMED) Act, 2006]

Manufacturing Enterprises Investment in Plant & Machinery

Description

INR

USD($)

Micro Enterprises

Up-to Rs. 25Lakh

Up-to $ 62,500

Small Enterprises

Above Rs. 25 Lakh &


up-to Rs. 5 Crore

above $ 62,500 & upto $


1.25 million

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Medium
Enterprises

above Rs. 5 Cr & upto


Rs. 10 Cr

above $ 1.25 million &


upto $ 2.5 million

Service Enterprises Investment in Equipments

Description

INR

USD($)

Micro Enterprise

upto Rs. 10Lakh

Up-to $ 25,000

Small Enterprise

above Rs. 10 Lakh &


upto Rs. 2 Crore

above $ 25,000 & up-to $


0.5 million

Medium Enterprise

above Rs. 2 Crore &


upto Rs. 5 Crore

above $ 0.5 million & upto $ 1.5 million

Assumed SMEs characteristics:


1) Constrained resources; - Weak in marketing skills and abilities; - Depending on relationship with
others for development;
2) Limited capabilities and managerial resources; - Conduct of international marketing impacted by
network partners;
3) Limited financial, managerial, human and information resources seen to restrict moves to foreign
markets. Different management practices compared to large firms;
4) Do not have adequate financial resources and access to commercial lending; - Rely on one-person
management, thus insufficient time and attentions to various managerial functions;
5) SMEs are more entrepreneurial and pay more personal attention to details than large rms;
6) SMEs are different from large firms in terms of their structures, processes, resources and culture;
7) The large firms have access to the whole range of financial instruments available in Chile. The
small firms face financing constraints;
8) SMEs adapt more quickly to changes in economic and social conditions, activating almost in all
sectors of the economy; - SMEs have a rapid system for internal communication, with personal
contact between management and employees; -

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9) SMEs have an external communication system highly responsive to the market, based on direct
contact between management and customers
10) SMEs management is personalized and centralized; usually the owner is the manager
11) SMEs have a hierarchical structure with fewer levels; - SMEs follow less formal strategy, usually
intuitive
12) SMEs reduce specialization of staff, employees often have multiple tasks; SMEs have small
dimensions in terms of employment; - SMEs lack a strong position to negotiate; SMEs face
difficulties in obtaining capital; SMEs have s close relationship with the local community;

Internationalization:
It is the degree to which export companies are exposed to foreign market adoption in terms
of transport, communication, number of countries the export items being sent etc. So in this
context whenever the word Internationalization is used; it is to say that how well exporting
countries are adoptable to foreign export or import culture. Internationalization i.e export
import culture of companies usually varies from company to company and country to
country. It mainly depends of Government policies, work ethics, and economic regulations of
individual country. So internationalization measures adoptability of export companies for
import culture of other countries or visa-versa.
Forex Exposure:
Forex Exposure can be understood from different perspectives. Bodnar and Marston (2000)
defined Forex Exposure as a measure of the sensitivity of a firms cash flows to changes in
exchange rates. The future cash flows of a firm may arise from both domestic and foreign
currency transactions, involving assets and liabilities, and generating revenues and expenses.
To this end, a firms cash flow consists of domestic and foreign currency components. While
the former is unlikely to be sensitive to changes in forex risk, the latter is obviously subject to
the exchange rates. Hence, a measure of Forex Exposure is composed of foreign currency
cash flow and volatility of foreign currencies.
On the other hand, Adler and Dumas (1984) consider exposure to currency risk as the
amounts of foreign currencies which represent the sensitivity of the future, real value of any
physical or financial asset to random variations in the future domestic purchasing powers of
these foreign currencies, at some specific future date. In this definition, volatility of foreign
currencies is not used to compute exposure. This thesis has adopted this definition, similarly
not using volatility of foreign currencies. In line with previous studies (Aabo et al., 2010;
Gonzlez et al., 2007; Kula, 2005; Pramborg, 2005), the share of foreign currency
denominated revenues to total revenues is used as a proxy for Forex Exposure. Given that this
study examines forex risk management by exporting SMEs, it is rationale to use the
definition of Forex Risk by Adler and Dumas (1984), which considers the volatility of foreign
currencies as an economic environmental factor. Forex exposure arises from transactions in
foreign currencies, e.g., exports and imports (Aabo et al., 2010; Pramborg, 2005). As firms
export more to foreign markets, relative to their total sales, the firms are more exposed to the
volatility of foreign currencies. In other words, forex exposure may be significantly
increased, which makes firms utilising more human resources, hedge more and utilise more
external hedging techniques

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Currency Advisory Services:


It is not just mere advice given by third party who knows currencies of other countries well.
Currency advisors can be individuals who are practitioners as many charted accountants or
those who are working for any financial firms who has knowledge of currency market. He or
she should be certified by NISM on Currency derivatives or should have passed relevant
exams.
Perceived Forex Risk
Adapting the definition of risk and perceived risk by Beck (2007), Chow, Lee, and Solt
(1997) and Holton (2004), this thesis defines perceived forex risk as managerial risk
perception of uncertainty and exposure specifically associated with foreign exchange rates.
The concept of perceived forex risk is a function of a number of hedging
determinants, for example, managerial perceptions on the effects of forex changes on overall
business risk, firms losses and their proceeds. In addition, perceived forex risk is presented
as a multidimensional construct, similar to perceived risk in consumer behaviour.
Perceived forex risk refers to the managerial perception of forex risk. Perceived forex risk is
operationalized in the study as the subjective judgment that managers make about the
characteristics and severity of forex uncertainty. In this regard, perceived forex risk is
associated with (1) exchange rate fluctuations, (2) forex exposure and (3) managerial
psychology, awareness and attitude toward forex changes.
This study adapted the concept of perceived risk in a context of forex risk management,
called perceived forex risk. Perceived risk has been widely studied in Psychometric theory
(Slovic, 1992). Perception is also examined in various domains; for example, Sweeney,
Soutar, and Johnson (1999) investigated perceived value for money along with perceived risk
and perceived product and service quality. Given the subjectivity of perception, perceived
forex risk refers to managerial risk perception of uncertainty and exposure specifically
associated with foreign exchange rates. Also, this thesis considers perceived forex risk as
managerial perception of a number of hedging determinants previously discussed in Section
2.3.2, for example, managerial risk attitude.
Factor analyses confirmed three variables for Perceived Forex Risk (PFR): managerial
perception of the effect of forex changes on (1) the use of domestic inputs rather than
overseas ones, (2) production volume, and (3) export prices. These three items are essential
components of an exporting business. The measure of the perceived forex risk construct
exhibits the perception of forex risk to firms exporting operations, which was applicable in
the context of forex risk management.
Perceived Forex Risk is an essential determinant of hedging strategy in the Model of Forex
Risk Management. The Model is efficient in investigating the use of resources associated
with forex risk management since perception has been proved to predict behaviours in
various domains, for example, telephone shopping (Chow et al., 1997), buying behaviours
associated with consumer products (Ackert & Deaves, 2010), and decision making in
innovation processes (Bodnar & Marston, 2000). Empirical data also supported the effect of

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perceived forex risk on the allocation of resources associated with forex risk management,
and especially directs impacts on hedging degree and the use of hedging techniques.
While forex exposure is a major objective factor that indirectly influences hedging strategy,
perceived forex risk is a major subjective factor that directly influences such decisions. Both
quantitative findings and qualitative exploratory interviews suggest that perceived forex risk
is a major determinant of hedging, apart from forex exposure. Empirical quantitative data
supported that firms tend to extend the use of external hedging techniques, and the use of
resources associated with forex risk management, when the firms perceived more forex risk.
Interviewees expressed their inclination to use more resources, to hedge more and to utilize
more external hedging techniques as they realised stronger effects of forex changes. This
finding enriches the extant literature on forex risk management. Forex exposure and
managerial perception of forex risk are essential hedging determinants, in line with precious
studies, e.g. (Bartram et al., 2010). In addition, mediating effect of resources is highlighted,
which have not been mentioned specifically in forex risk management by SMEs.

e. Data collection
Data is collected primarily through questionnaires. Similar questionnaires containing nearly
16 questions are made and participants are interviewed on questionnaire basis and responses
are collected. Data collection was found not so easy as it was required to get the
appointments of participants who mainly works in financial departments of SMEs and only
few participants participated in the interview. The initial idea was to interview at least 20
SMEs in and around Bangalore but because of lack of time and other constraints (Financial
Managers of SMEs are found to be busy than any other month because data collection was
done during the month of March and as it was the financial year end in India it turned tough
to get Financial Managers of SMEs to interview). The questionnaire contained optional
questions of multiple choice and also Likert 5 scale questions which are appropriate in
finding solution to the taken problem and achieving objective.

f. Statistical Tools used for research


MS Excel
Data is collected on Likert scale where responses are collected in 5 scales Module and mean
of responses are calculated using Excel and relative test is also calculated using Microsoft
Excel spread sheet. I have used Excel 2010 version which consist of F test and other such
statistical test option which cant be found in Excel 2007. Few Advance options such as
Macros are also used for the research purpose and Analysis of data.
Statistical Package for the Social Sciences (SPSS) and R Analytics are also used for
Hypothesis testing.

Sampling Technique
The study is conducted by interviewing participants; a set of questions which consist of 11
questions were asked to participants in which first 3 questions are provided with four options
and the best genuine answer was expected . Very first 3 questions are helpful in
understanding economic and financial stability of SMEs. These 3 questions are very

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important in categorising companies under SMEs and to know whether they are export
oriented are not.
Next 7 main questions consist of sub questions which are valued using likert scale. Here
every sub questions are asked to understand the perception or understanding or the usual
practises followed by SMEs the likert scale consist of qualitative aspect such as disagree,
Strongly disagree, Neutral, Agree, Strongly agree.

i. Sampling Unit
Research and study had minimum time of only 3 months of study. In which few days were
spent to understand the inside and organisational structure of AnandRathi and also in
studying how exactly stock- Share, Derivative, and Currency market work. Nearly a week or
so is spent in understanding various currency derivatives available. So for the actual
interview and to get response to the questionnaire prepared there was only minimum time
available this lack of time is one of the main reasons and limitation of the study. And it was
Month of February and March which are the month of financial year end, So to find
participants for the questionnaire was not that easy. Even then I managed to get interview of
representatives of 7 SMEs in which most of them works in accounting department. And
previous researchers who did research on similar study made use of samples less than 10.

ii. Sample Size


Total number of participants and sample size are same as total number of
participants is very less i.e 7 which is valid for project like this. So sample size is
taken as 7 (n=7) while calculating Averages of all answers of questionnaire and to
get conclusions out of it.

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iii. Sampling Method


Sampling method can be called probabilistic sampling but can be categories under
any sub sampling methods which comes under probabilistic sampling as total
population of participants is taken for study. So there is no specific sampling
method which can be specified.

g. Plan of Analysis
Most of the questions which full fills the objective of the study is Likert scale
based questions and analysis is done so that to full fill the objective of the
project. Likert Scale consisting of 5 point gauge is used which consist of
qualitative options like Strongly Agree, Agree , Neutral, Disagree,
Strongly disagree and all this qualitative options were given numbers from 1 to
5 based on priority of answers.
Ex:

Strongly agree, valued as 5


Agree, valued at 4 and so.

Finally Average of options is collected and conclusions are draw according to


facts collected and hence objective is achieved.

h. Limitations to the study


As every research study has its own limitations even this study has some
research limitations can be noted as follows:
Time Constraint: The time available to conduct entire project was
nearly 3 months but time required to study the problem, to draw
objectives and do adopt accurate research techniques needs more
time which was hardly possible.
Limited Participants: Even though there are 50+ SMEs around
Banglore. As It was month of April and March in which I was
supposed to responses from the participants. It turned highly
impossible to the appointments of representative of SMEs who are
concerned with financial department as it was financial year end
time.
No Quantitaive support: The study is based on qualitative analysis
not quantitative. So to prove the study qualitatively is not possible
which one of the major limitations.
Demographic coverage: While conducting study only SMEs in and
around Bangalore is considered because of time constraints.

7. Data Analysis and Implementation


Nature of Business:

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Thesis is carried out keeping in the mind SMEs who are into export business but their
income is mainly dependent on domestic business rather than import and export. Before
starting the on field work of collecting responses for questionnaire i.e before the Interview
there was a perception that Export firms mainly dependent on Export outside the country. But
the assumption turned untrue because most of the SMEs who produce exportable quality
goods are mainly depending on domestic market and more than 60% of revenue comes from
Domestic markets which are within India or within Karnataka for that matter. Example
manufacturing firm sells its manufactured tools to government bodies like HAL, BEL, BHEL
and so or to the MNCs like Bosch etc. only nearly 25 to 40% of business are depending upon
foreign deals and there is no similarities between countries to which goods are exposed
because choice of foreign countries mainly dependent on nature of product its usability etc

Income from Export


Income from Export
4

0%-20%
0

20%-40%

40%-80%

80%-100%
0

It is evident that most of the SMEs who manufacture export quality goods are gaining most
of their income from domestic market not from export market.

Turnover of the business:


As project is mainly concentrated on SME s Turnover should evidently between 25lakhs to
crores. And questionnaire serves the purpose of it.

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4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
<=10MN

10-50MN

50-150MN

>=150MN

Foreign Exchange Exposure Measurement Practise by Export Groups.


The rank order of seven FX exposure measurement practices is shown in Table below. The
table also shows the mean values of the responses of each exposure categories discussed
above namely the export groups The Mean value is average on a scale of 1 (=Strongly Agree)
to 5 (=Strongly disagree).
As it is apparent from Table 2, the SMEs follow the FX rates daily (xx mean), forecast how
much foreign currency unit loss/gain the Indian Rupee receivables will produce until the
collection date (xxx mean). Also following FX rate follow-up activities are widely used by
the SMEs: the forecast of Indian Rupee loss/gain arising from foreign currency receivables
and payables (xxx mean) and the forecast of how much FX rate changes would affect their
companies. The perceived intensity of these activities can be considered as the high level of
FX exposure faced by the sample companies. This high exposure level may stem from the
size effect that is evident in other studies. Among those studies it was found that especially
small firms are exposed to FX risk. As large firms, especially MNC are to achieve a natural
hedge by having matching input and output sensitivities, thereby lessening the extent if FX
exposure.
Statement
We follow the Foreign
Exchange rates daily
We forecast how much
foreign currency unit
loss/gain over Rupee
receivable produce until the
collection date
When receiving loans in
foreign currency, we forecast
the foreign exchange rate at
due date
We forecast how much

Rank
1

Mean
1.5

1.66

1.91

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Indian Rupee loss/gain over


foreign currency receivables
will produce until the
collection date
We forecast how much
Indian Rupee loss/gain over
foreign currency payable will
produce until the payment
date
We forecast how much
foreign currency unit
loss/gain over Rupee
payable produce until the
payment date
We frequently make forecast
of how much foreign
exchange rate changes will
affect our company

2.16

Table shows Foreign Exchange Exposure Measurement Practise by Export Groups where
mean is counted on a scale varying from 1(=strongly agree) to 5 (=strongly disagree) where
sample size is (n=7)

EXPOSURE MEASUREMENT
3.6
3.5
3.4
3.3
3.2

EXPOSURE MEASUREMENT

3.1
3
2.9
2.8
2.7
We follow the Foreign Exchange rates daily

Transaction Exposure Management Practices by Different Exposure Groups

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Six internal hedging practise of transaction exposure are set out in rank order in Table
below. The respondents apply most of the following practices of lagging payables in Indian
Rupee (xxx mean), borrowing in the same currency of export (2.17 mean) and extending
longer credit terms for foreign currency receivables (2.60 mean).
The respondents, on the other hand, do not agree to lag payables in foreign currency (3.18
mean), do not borrow for more than a year (3.45 mean) and for Indian Rupee receivables
differ in a statistically significant manner. Compared both to the import companies (2.19
mean) and the neutral companies (2.30 mean), the export companies (1.97 mean) prefer more
to borrow in the currency of their exports.
The response to the question on the usage frequency of the basic external hedging techniques
showed that the sample companies never used or neither aware of forward contracts, currency
swaps, future contracts and options. The companies were then asked to rate their extant
knowledge of the nature of these techniques on a scale of 1 =very low to 5=very high.
The very low mean levels of nearly (1.5 for currency swaps, 1.5 for forward contracts. 1.6
for future contracts and 1.91 for options) indicates that the respondents have very limited
knowledge of what these techniques means.
Statement
We prefer to lag our payables
in Indian Rupee
In the case of borrowing, we
prefer the same currency in
which we sell our goods
For our foreign currency
receivables, we can extend
longer credit terms
We prefer to lag our payables
in foreign currency
The term of our foreign
currency debts extends a year
For our Rupee receivables,
we can extend longer credit
terms

Rank
1

Mean
1.5

2.16

3.67

4.83

Transaction Exposure Management Practices by Different Export Groups where mean is


counted on a scale varying from 1(=strongly agree) to 5 (=strongly disagree) where sample
size is (n=7).

The above survey result shows SMEs today make use of internal hedging method rather than
external hedging. The finance Managers at SMEs are hardly aware of Forward, Future,
Currency Swaps or Options which are external derivative technique. It doesnt mean that they
are completely blind of these subjects but they have overall Idea of Currency Derivative
markets and its usability but not in-depth details regarding the same which shows lack of
interest of SMEs about currency derivative products.

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Economic Exposure Perception by different export groups


As state earlier, the type of exposure that affects the companies even with no foreign currency
receivables and payables is the economic exposure. Table below shows the breakdown of
replies to a set of statements about economic exposure perception by the exposure groups. As
the higher overall mean values indicates, the respondents perception level of statements are
high: the ratio of FX exposure to overall business risk (3.08), the extent of losses due to
changes in FX exposure (3 mean), and the extent of losses due to changes in FX exposure
(3.67 mean) and the effect of changes in FX rates on the company proceeds even in the
absence of any foreign currency obligation or proceeds even in the obscene of any foreign
currency obligation or proceeds (3.16 mean)
Statements
Mean
The ratio of Foreign exchange risk to overall 3
business risk
The extent of losses we suffer due to changes 3.16
in foreign exchange rates
The extent the changes in FX rates affect the 3.67
company proceeds even if we do not have
any foreign currency obligation or proceeds
Table shows the breakdown of the Assessments of Foreign Exchange Exposure related
statements by export groups. The mean is the average on a scale of 1(=very low) to
5(=very high) where (n=6)
It is evident that SMEs perceive that FOREX rates results in moderate loss in overall
turnover but their statements seems to be kind of biased. Because if risk is moderate then it
should reflect in decision making but SMEs hardly takes into consideration these factors in
decision making purpose as it can be said that perception of loss is moderate and thats how it
is considered by SMEs.

Management of exposure perception:


When it comes to management of economic exposure, as table below shows, the FX rate
movement have in general lower level of effect on the decision of companies regarding the
following issues: to export or sell the goods in domestic market (2.33 mean), to procure from
abroad of from domestic market (2.5 mean), and to specify production volume (2.5 mean). Of
these, only the specification of export prices (3.16 mean) is affected to a greater degree from
the FX rate movements.
Statement
The effect of foreign exchange rate
movements on our specifying export prices
The effect of foreign exchange rate
movements on our specifying product
volume

Mean
3.16
2.5

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The effect of foreign exchange rate


2.5
movements on our decision to procure from
abroad on our decisions to procure from
abroad or from domestic market
The effect of foreign exchange rate
2.33
movements on our decision to export or to
sell our goods in domestic market
Table shows breakdown of Economic Exposure Management by Export groups where the
mean is the average on a scale of 1(=very low) to 5(=very high) and n=6.
It can be found that export companies report limited effort in managing economic exposure.
Overall, the only prominent leverage is in the hands of the export companies in terms of
changing their export price as a reaction to FX rate movements.

Internationalisation of SMEs
As explained in operational definition Internationalization is easiness of a firm to get
adopt to foreign country import culture or ease of business in terms of foreign land
transaction.
Statement
Mean
Reachability of exportable good to Maximum 2.33
possible Countries
Marketing team in Foreign Countries
1.16
Capability of retaining Foreign client for a
3.16
long time
Effective communication with foreign
2.33
Clients
Table shows the breakdown of degree of Internationalisation by export firms where
the Mean is the average on a scale of 1(=very low) to 5(=very high) and n=6.
It is found that amount of Internationalization is moderate and there exists a lot of
scope for the improvement regarding Internationalization aspect. It was found during
interview that adoptability to foreign market is challenging and companies give more
importance to that aspect than managing FOREX exposure and risk due to currency
fluctuation.
Need of Currency Advisory Services:
Below are the questions which help in understanding dependability of SMEs on currency
advisory services
Statement
We frequently go for FX Advisory Services
FOREX Advisory services are economic
FOREX Advisory is very much important for
us when dealing with FX Services

Mean
1.16
1.16
2.33

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Table shows the breakdown of degree of Internationalisation by export firms where the Mean
is the average on a scale of 1(=Strongly Disagree) to 5(=Strongly agree)
The above result shows that dependability of SMEs on Currency advisor is very low. During
interview of participants it was found that SMEs do depend on Financial Advisors for Tax
calculation and such relative aspects only and merely the suggestions of such Financial
Advisories who are Charted Accounts (CA) are taken regarding FOREX as well. Over all
SMEs think that FOREX advisory would be costly affair which is not economic considering
the fact that loss due to FOREX exposure is minimum compared to compensation charges of
Advisory Services.

8. Summary of findings
In total study says SMEs in Bangalore (in India General) are not effectively utilizing
Currency derivatives available for Hedging purpose. This may be because of various reasons
and few are mentioned below:

Lack of Knowledge about currency derivatives or any external hedging techniques for
financial Management team at SMEs
And Internationalisation i.e to get adopted to the external business nature is not so
easy and SMEs invest lot of time for this purpose rather than thinking of Hedging
FOREX risk
SMEs find Currency Advisory service to be costly which would make return on
hedging very minimum and so its not worth approaching Advisory.
No Marketing team abroad to analyse the economic are financial condition of the
participants of other country. So lack of adequate Human resource is also a problem.

So the perception & factors can also be classified as below:


(i)

(ii)
(iii)

Confused perception: including lack of clarity about investor expectations,


difficulties in pricing and valuing, difficulties in evaluating the risk and lack of
understanding as to how to monitor and evaluate hedging outcome.
Policy and legal issues: covering assessment of credit risk, inadequate support
from the Board, tax and legal considerations and disclosure requirements.
Monetary considerations: concerned with transaction costs and liquidity
problems.

(iv) Lack of adequate knowledge about the use of derivatives: 65% of the respondents
were of the view that enough range of derivative instruments are not available yet. This has
the effect of restricting arbitrage opportunities. A good majority felt the need for RupeeDollar Options while others wished that Exchange-Traded Futures were available. From the
above, it can be seen that the SMEs are somewhat halting in their approach to the use of
derivatives.

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9. Suggestions
The stand taken by SMEs regarding hedging FOREX risk is quite evident because
with the growth and increase in resources SMEs will eventually get exposed to
high end FOREX risk from then they would take specific risk management
technique. Few suggestions could be the following points.

An internal team which can look after FOREX risk should be formed which
should consist of People who are strongly aware of FOREX risk
management techniques.
They should go for FOREX Advisory services at least few times when they
are big export transaction and should know whether advisory services
suggestions really work.
Proper training should be given to various departments which directly or
indirectly involve in FOREX market
Pre occupied thoughts and notions regarding FOREX risk management
should be removed and SMEs should utilize FOREX risk hedging properly.
With all these suggestions it is obvious that SMEs will not go through
considerable changes and would make use of External hedging tool.
Because getting clients abroad and to expand business horizon is the
main aim of SMEs in terms of growth so hedging turns second priority. But
for the companies or industries which are already grown in terms of
Business abroad and had millions of turnover the exposure of risk is huge
and they are utilizing hedging techniques effectively.

10. Conclusions Future Growth


Derivative use for hedging is only to increase due to the increased global
linkages and volatile exchange rates. Firms need to look at instituting a sound
risk management system and also need to formulate their hedging strategy that
suits their specific firm characteristics and exposures.
In India, regulation has been steadily eased and turnover and liquidity in the
foreign currency derivative markets has increased, although the use is mainly in
shorter maturity contracts of one year or less. Forward and option contracts are
the more popular instruments. But SMEs are not aware of any these contract
technically even though they follow forward contract in general. Regulators had
initially only allowed certain banks to deal in this market however now
corporates can also write option contracts. There are many variants of these
derivatives which investment banks across the world specialize in, and as the
awareness and demand for these variants increases, RBI would have to revise
regulations.

The limitation of this study is that only one type of risk is assumed i.e the foreign
exchange risk. Also applicability of conclusion is limited as only very few firms
were reviewed over just one time period. However the results from this
exploratory study are encouraging and interesting, leading us to conclude that
there is scope for more rigorous study along these lines.

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a. Questionnaires
1 Nature of Business:

A Domestic
B Import
C

Export

Both Import & Export

E Domestic +Export

2 Turnover of the Company: (In Dollar

A <= 5MM
100MM

B) 5 10MM

/ In Indian Rupee

C) 10 to 100MM

D) more than

3 What percentage of total Business is Import /Export dependent?

A <=10%
B) 20% - 30%
E) 80% - 100%

C)40% - 60%

D)60% - 80%

Foreign Exchange Exposure Measurement Practise by Export Firms

Statement

Strongly

agree

neutral

Dept. of Management Studies, MSRIT, Bengaluru

disagree

Strongly
Page | 68

agree

disagree

We follow
the Foreign
Exchange
rates daily
We forecast
how much
foreign
currency unit
loss/gain
over Rupee
receivable
produce until
the collection
date
When
receiving
loans in
foreign
currency, we
forecast the
foreign
exchange
rate at due
date
We forecast
how much
Indian Rupee
loss/gain
over foreign
currency
receivables
will produce
until the
collection
date
We forecast
how much
Indian Rupee
loss/gain
over foreign
currency
payable will
produce until
the payment
date
We forecast
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how much
foreign
currency unit
loss/gain
over Rupee
payable
produce until
the payment
date
We
frequently
make
forecast of
how much
foreign
exchange
rate changes
will affect
our company

Transaction Exposure Management Practices by Different Exposure Groups

Statement

Strongly
agree

agree

neutral

disagree

Strongly
disagree

We prefer to
lag our
payables in
Indian Rupee
In the case of
borrowing,
we prefer the
same
currency in
which we
sell our
goods
For our

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foreign
currency
receivables,
we can
extend longer
credit terms
We prefer to
lag our
payables in
foreign
currency
The term of
our foreign
currency
debts extends
a year
For our
Rupee
receivables,
we can
extend longer
credit terms
We prefer to
lag our
payables in
Indian Rupee

Economic Exposure Perception by different export groups

Statement

Strongly
agree

agree

neutral

disagree

Strongly
disagree

The ratio of
Foreign
exchange
risk to
overall
business
risk

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The extent
of losses we
suffer due to
changes in
foreign
exchange
rates
The extent
the changes
in FX rates
affect the
company
proceeds
even if we
do not have
any foreign
currency
obligation
or proceeds

Management of exposure perception

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Statement

Strongly
agree

agree

neutral

disagree

Strongly
disagree

The effect of
foreign
exchange rate
movements on
our specifying
export prices
The effect of
foreign
exchange rate
movements on
our specifying
product
volume
The effect of
foreign
exchange rate
movements on
our decision
to procure
from abroad
on our
decisions to
procure from
abroad or from
domestic
market
The effect of
foreign
exchange rate
movements on
our decision to
export or to
sell our goods
in domestic
market

8 Type of FOREX hedging method used to mitigate Risk: (tick all


applicable):
A) FORWORD CONTRACT
B) CURRENCY FUTURE
C) CURRENCY OPTIONS
D) CURRENCY SWAP
E) FOREIGN DEBT

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9 Degree of Internationalization

Statement
Reachability of
exportable
Statement
good to
Maximum
We frequently
possible
Countries
go for FX
Marketing
Advisory
team
in
Services
Foreign
Countries

Strongly
agree
Strongly
Disagree

agree

neutral

disagree

neutral

disagree

agree

Strongly
disagree
Strongly
agree

FOREX
Advisory
services are
Capability of
economic

retaining
Foreign client
for a long time

FOREX
Advisory is
very much
important for
us when
dealing with
FX Services
Effective
communicatio
n with foreign
Clients

10 Need of Currency Advisory Services:

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11 Is hedging cash flows against FOREX currency fluctuation an


important aspect to look upon in your import/export Business?
If yes, Then why?

If not, then Why?

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