Академический Документы
Профессиональный Документы
Культура Документы
SUBMITTED BY
ISAIVANI.L
(Reg No: 07 PIT09)
MARCH 2009
HEDGING IN FOREX
(With Special Reference to Renowned Auto Products MFRS Ltd Hosur)
MARCH 2009
CERTIFIED AS BONAFIDE RESEARCH WORK
The researcher expresses her deep sense of gratitude to the Dean, Faculty of Business
Administration, Mrs.Shantha.B.Kurup M.Com., M.B.A., M.Phil., Dip.Ed., Ph.D.,for
her support and encouragement during the project.
The researcher wishes to record her ardent thanks to her project guide Ms.K.Ramya,
M.B.A., M.Phil., Lecturer, Avinashilingam School of Management Technology, for her
timely advice, constant encouragement and her resourceful guidance in successful
completion of the project.
The researcher expresses her sincere gratitude to all the other Faculty members of
Avinashilingam School of Management Technology, for their valuable support and
encouragement to complete the project.
The researcher extends her genuine love and gratitude to her parents who have built her
profession and backed her up in difficulties.
Table of Contents
II REVIEW OF LITERATURE 20
III RESEARCH METHODOLOGY 31
IV ANALYSIS AND INTERPRETAITON 33
V SUMMARY
5.1 FINDINGS 61
5.2 SUGGESTIONS 62
5.3 CONCLUSION 63
BIBLIOGRAPHY
ANNEXURE
SYNOPSIS
The report is a result of the study titled “Hedging in Forex” for the Renowned
Auto Products MFRS Ltd, Hosur, which was conducted for a period of 2 months. The
objectives of the study were to study the hedging approaches followed by the company
and to analyse the level of hedging across various currencies.
Foreign Exchange is the largest financial market in the world. Forex hedging is an
excellent risk management tool to avoid unnecessary foreign currency losses on a
concerns foreign currency assets or liabilities. Forex hedging protects the company from
adverse changes in foreign currency exchange rates on the company’s foreign currency
assets and liabilities.
The present study made use of the percentage analysis to analyze and interpret the
collected data.
List of Tables
INTRODUCTION
Many foreign companies have been investing in the Indian Automobile Market in
various ways such as technology transfers, joint ventures, strategic alliances, exports, and
financial collaborations. The auto market in India can boast of attractive finance schemes,
increasing purchasing power, and launch of the latest products.
Total sales of major car manufacturers in India registered a figure of 0.674 million
units at the end of March 2007. The number of car exports in India was 39,295 units.
General Motors, Maruti, and Honda accounted for 60 percent of the market sales at the
end of April 2007. There has been an increase in the purchase of motorcycles and cars
both, in the rural as well as urban areas.
Some vital statistics regarding the automobile market in India has been mentioned below:
1
As such, the Indian automobile market comprises of a wide variety of vehicles such as
light, medium, and heavy commercial vehicles, cars, scooters, mopeds, motor cycles, 3
wheelers,andmulti-utility vehicles such as jeeps and trucks.
The automotive industry is the barometer of Indian economy. The sign of recovery
are most visible in the growing demand for automobiles. The aspirations of Indian
consumer are rising with the growing demand. The cumulative effect of growing
customer demand, increased competition, technology up gradations along with the traits
are likely to be observed in the following trends.
♦ With the entry of new models, medium sized cars segment is further divided into low
prestige and high prestige cars. Customers are upgrading from entry level small cars
to sophisticated small cars and from sophisticated small cars to prestige car segment.
2
♦ Stricter Pollution norms are likely to force vehicle manufacturers to adopt latest
technology in maintaining emission standards. This is likely to curtail the average life
span of vehicle on road while the maintenance cost and the genuine parts
consumption per vehicle is expected to increase.
♦ Due to free imports local industry is expected to face increased competition from
international automotive companies.
With the increasing number of vehicle population the two wheeler owners will have
viable option of used cars. The vehicle with higher resale value and good service network
is likely to dominate the market.
• Passenger car production in India is projected to cross three million units in 2014-
15.
• Sales of passenger cars during 2008-09 to 2015-16 are expected to grow at a
CAGR of around 10%.
• Export of passenger cars is anticipated to rise more than the domestic sales during
2008-09 to 2015-16.
• Motorcycle sales will perform positively in future, exceeding 10 Million units by
2012-13.
• Value of auto component exports is likely to attain a double digit figure in 2012-
13.
3
INDIAN MARKET CONDITIONS
DOMESTIC SALES
Exports
Future Prospects
In the last 3 years the Renowned Auto Products MFRs Ltd product mix has
changed gradually from 2 wheel shocks to 4 wheel shocks & struts. In 4 wheeler
applications for the past 3 year we have been awarded the development & supply of rear
shocks & front struts for the following platform from various customers.
1. TATA new Indic X1 platform-100% Share of Business.
2. General motor India –M200 platform (spark)-100% Share of Business.
3. TATA X 3 platforms (Nano)-50% Share of Business.
4. M & M – Light Commercial Vehicle (LCV)-100% Share of Business.
5. Nissan – X 02A (Small car) – 100% Share of Business.
6. TKML 800 L (Small car) – 100% Share of Business.
7. Maruti Suzuki YV 4 (Small car) – 100% Share of Business.
8. Ford India Ltd b517 (Small car) – 100% Share of Business.
4
1.2 RENOWNED AUTO PRODUCTS MFRS LTD
Tenneco is an industry leader in emissions control products, from developing the
first patented louvered tube muffler to today's advanced silencing and diesel emission
control technologies. Tenneco is a global leader in emissions control and ride control
products for the automotive industry and the aftermarket. The company has 80
manufacturing facilities and 14 engineering centers located in 24 countries on six
continents. Global revenues are used 4.4bn and Tenneco’s fully owned operating units
across India support both Indian and global OEM’s.
Tenneco’s Mission
Vision
Directors
Mr. A.Hari Nair
Mr. R.Michael John Charlton
Mr. S.Horace Vincent Draa
Mr. R. Ravichandran
Mr. M.Rajarashi chakrabarti (Alternative Director)
Ms. G.Shweta Drbey (Alternative Director)
Company Secretary
Ms. P.Shanmugapriya
5
ORIGINAL EQUIPMENT
BMW , Daimlerchrysler, Fiat, First Auto Works, Ford Motor Company, General
Motors, Tata Motors, Suzuki, Honda, Isuzu, Jimbei Automobile Co., Mazda, Mitsubishi,
Nissan, Porsche, Psa Peugeot Citroen, Renault, Toyota, Mahindra & Mahindra, TVS
Motor Co., Vw Group, Volvo .
• Am General, Caterpillar, Club Car, E-Z Go, Golf Car, Freightliner, Harley-
Davidson Motor Coach, Industries Navistar, Paccar, Scandia, Volvo Truck
AFTER MARKET
They Serve More Than 500 Customers Worldwide In The Automotive Repair
Market Including Full-Line And Specialty Warehouse Distributors, Retailers, Jobbers,
Installer Chains And Car Dealers. We Supply Our Traditional Emission Control And
Ride Control Replacement Parts, And Recently Added A Line Of DuPont Branded Car
Care Products As Well As Monroe™ Branded Brake Pads And Filters In The US.
A GLOBAL LEADER
6
Using a combination of leading-edge technology, manufacturing expertise and
dedication to customer service, Tenneco has increased revenues and penetrated new
markets to solidify its leadership in the global automotive supply industry.
PRODUCTS
4 WHEELERS 2 &3 WHEELERS
Shock absorbers for cars Mono tube shock absorbers
Steering dampers Twin tube shock absorbers
Cab dampers Hydraulic front forks
Seat dampers Canister gas filled shock absorber
Cartridges
EXHAUST MANAGEMENT
• Fabricated Manifolds
o Tubular Design
o Air Gap Insulation
o Integrated Catalytic Converter
• Diesel Particulate Filters (light vehicle)
• Catalytic Converters
7
o Manifold Coupled/Integrated
o Close Coupled
o Under floor
• Center Mufflers & Resonators
o Spun Muffler
o Clam Shell Muffler (seamed and welded)
• Rear Mufflers
o Spun Muffler
o Clam Shell Muffler (seamed or welded)
o Valve Controlled Muffler
• Downpipes
o Laminated
o Single Wall
o Air Gap
8
ELASTOMER & RIDE CONTROL PRODUCTS
• Suspension Bushings
• Control Arm Bushings
• Engine & Body Mounts
• Exhaust Isolators
• Spring Seats
• Stabilizer Bar Bushings
• Gripper™ Stabilizer Bar System
• Links & Link Bushings
• Leaf & Coil Springs
The people in our organization are key to our success. Given this direct link, our
focus on growing the business is tied to developing our people, providing them with
exciting, challenging career opportunities. Tenneco leverages fully integrated,
competency-based Human Resources Development processes that have been judged best
in class and benchmarked for excellence by major companies around the world. These
include:
These processes work together to enhance two-way communication, ensuring that each
team member receives ongoing feedback on performance and development.
9
BRANDS
Monroe®
Shocks and Struts that make the road a safer place.
Walker®
The world's largest producer of vehicle emission systems
and components.
Rancho®
Number one brand in the U.S. for
truck shocks.
DynoMax®
Performance
Exhaust.
Clevite Elastomers
Noise and Vibration Control
Systems.
Gillet
Exhaust Systems – building from
strength.
Fonos
High-quality Exhaust Products Serving the
European Aftermarket.
Fric-ROT®
Shocks and
Struts.
10
Kinetic®
Advanced Suspension
Technology.
Thrush®
Performance
Exhaust.
DNX™
High Performance Products for Sport Compact Vehicles.
CUSTOMERS
PASSENGER COMMERCIAL
VEHICLE VEHICLE
FORD,HYUNDAI ASHOK LEYLAND
TOYOTA,FIAT TATA,EICHER
GENERAL MOTORS SWARAJ,BAJAJ
HINDUSTAN TVS,YAMAHA
MOTORS
M&M ROYAL ENFIELD
ETC… HONDA, ETC…
JOINT VENTURES
The Joint venture started focusing on exports from 1995 and now exports are a major
source of revenue. The company is currently exporting to markets,
United States of America
China
11
Australia
Great-Britain
Germany
Iran.
Middle East
Nepal
Malaysia.
Singapore.
Srilanka
Taiwan
o BMW
o Daimlerchrysler,
o Fiat,
o First Auto Works,
o Ford Motor Company,
o General Motors,
o Tata Motors,
o Suzuki,
o Honda,
o Isuzu,
o Jimbei Automobile Co.,
o Mazda
o Mitsubishi.
o Nissan.
o Porsche.
o Psa Peugeot Citroen.
o Renalt
12
o Toyota.
o Mahindra & Mahindra.
o TVS Motor co.
o VW Group.
o Volvo
AWARDS
Recent Awards Tenneco has earned.
FOREX, an acronym for Foreign Exchange, is the largest financial market in the
world. With an estimated $1.5 trillion in currencies traded daily, Forex provides income
to millions of traders and large banks worldwide. The market is so large in volume that it
13
would take the New York Stock Exchange, with a daily average of under $20 billion,
almost three months to reach the amount traded in one day on the Foreign Exchange
Market.
Forex, unlike other financial markets, is not tied to an actual stock exchange.
Forex is an over-the-counter (OTC) or off-exchange market.
Purpose
The foreign exchange market is the mechanism by which currencies are valued
relative to one another, and exchanged. An individual or institution buys one currency
and sells another in a simultaneous transaction. Currency trading always occurs in pairs
where one currency is sold for another and is represented in the following notation:
EUR/USD or CHF/YEN. The exchange rate is determined through the interaction of
market forces dealing with supply and demand.
The Forex market is one of the largest and most liquid financial markets in the
world, and includes trading between large banks, central banks currency speculators,
corporations, government, and other institutions. The average daily volume in the global
foreign exchange and related markets is continuously growing. Traditional daily turnover
was reported to be over US$ 3.2 trillion in April 2007 by the Bank for International.[1]
Since then, the market has continued to grow. According to Euro money’s annual FX
Poll, volumes grew a further 41% between 2007 and 2008.[2]
14
its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on
Sunday until 22:00 UTC Friday),
The variety of factors that affect exchange rates...
the low margins of profit compared with other markets of fixed income (but
profits can be high due to very large trading volumes)
The use of leverage.
As such, it has been referred to as the market closest to the ideal perfect
competition, notwithstanding market by central banks. According to the Bank for
International Settlements, [1] average daily turnover in global foreign exchange markets is
estimated at $3.98 trillion. Trading in the world's main financial markets accounted for
$3.21 trillion of this.
This approximately $3.21 trillion in main foreign exchange market turnover was
broken down as follows:
15
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36
trillion, or 34.1% of the total, making London by far the global center for foreign
exchange. In second and third places respectively, trading in New York accounted for
16.6%, and Tokyo accounted for 6.0%. In addition to "traditional" turnover, $2.1 trillion
was traded in derivates... Exchange-traded FX futures contracts were introduced in 1972
at the Chicago Mercantile Exchange and are actively traded relative to most other futures
contracts. Several other developed countries also permit the trading of FX derivative
products (like currency futures and options on currency futures) on their exchanges. All
these developed countries already have fully convertible capital accounts. Most emerging
countries do not permit FX derivative products on their exchanges in view of prevalent
controls on the capital accounts. However, a few select emerging countries (e.g., Korea,
South Africa, and India) have already successfully experimented with the currency
futures exchanges, despite having some controls on the capital account. FX futures
volume has grown rapidly in recent years, and accounts for about 7% of the total foreign
exchange market volume.
There is typically a cost associated with forex hedging and generally, forex
hedging will require a certain amount of margin cash (retail online forex broker) or
available credit from your financial institution, while the forex hedge is outstanding.
1.4 OBJECTIVES
16
To analyse which is best Individual currency hedging or Net hedging.
1.5 LIMITATIONS
17
• There may be macroeconomic environmental risks in the future, which in turn
may cause unexpected exchange rate fluctuations.
1.6 SCOPE
The study was carried out at Renowned Auto Products MFRs Ltd. The study
aims to find out the hedging approaches followed by the company and to analyse the
level of hedging across various currencies. The study also aims to find out the best
individual currency hedging practices and to provide suitable suggestions for the same
18
are given at the end of the study.
CHAPTER II
REVIEW OR LITERATURE
19
According to Beneda Nancy (1996) the technique of computerized optimization
and simulation modeling to manage foreign exchange risk. The results indicate that a
lower level of risk can be achieved, given a specified level of expected hedging cost,
from using optimization modeling. The focal point of the technique is its ability to
identify optimal combinations of hedging vehicles (i.e. futures, options, forward
contracts, leaving the position open). An optimal combination of hedging vehicles is one,
which minimizes the variance of the expected cost of the commodity (i.e. foreign
currency), given a desired level of hedging cost.1
20
reactions of experts to a simulated market to determine the rules in our knowledge base.
The expert system's performance will be verified by analyzing its decisions in a simulated
market. The relationship between exchange rate risk & export & hedging decision of an
international exporting firm is examined. Synthetic forward contract or the currency
option contract as hedging techniques is studied in particular. Analysis indicates that the
hedging techniques are used only in instances when the risk premica of the currency put
and call options are the same.3
According to Andrew Siegel (1977) the use of the cross option prices in
evaluation future relationship between changes in the exchange rates of foreign
currencies proves to be more effective that the use of historical measures. Empirical tests
show the cross-option prices provide improved currency market estimates although they
are not perfectly applicable in venality. Additionally, the information contents of implicit
beta hedge ratio of foreign currencies using cross option prices is greater than that of
historical hedge ratio. Hedging forex options is problematic when neither the underlying
nor the deliverable currency is the currency, which the trader keeps his P&L further
correlations risk is both an opportunity and a challenge. In the foreign exchange options
markets, one trader’s vanilla option is another’s cross options. Cross options are vanilla
options where neither the strike nor the deliverable currency is the traders booking
currency. 4
21
Microfinance institutions (MFIs) generally raise capital denominated in hard currencies
(U.S. Dollars, Euros, etc.). 5
Raj Aggarwal (2000) studied documents that daily changes in Asian exchange
rates are significantly non-normal, serially correlated, non-stationary, and have unit roots.
Further, accounting for these time series properties and using a longer time horizon than
other similar studies of exchange rates, this study also documents co integration between
the Japanese Yen and two sets of Asian currencies, i.e., currencies of the 'Tigers', Hong
Kong, South Korea, Singapore, and Taiwan; and currencies of the ASEANs, Malaysia,
Philippines, Thailand, and Singapore. These findings of co integration among Asian
exchange rates are in contrast to the findings for the major currencies, and are evidence of
nascent Yen blocs in Asia. The results presented here have important implications for
understanding Asian financial integration and the international role of the Japanese yen
and should be useful for developing asset allocation, currency overlay, value at risk
(VAR), and hedging strategies for investments in these often illiquid Asian currencies.7
22
derivate market liquidity exchange rate volatility exposure volatility and recent hedging
outcomes. 8
According to Asim Ghosh (2000) stated that the traditional price change hedge
ratio estimation method is extended by applying the theory of co integration in the case of
cross-hedging of spot exchange risk of the Belgian franc (BF), the Italian lira (IL), and
the Dutch guilder (NG) with U.S. Dollar Index futures contracts. Previous studies ignore
the last period's equilibrium error and short-run deviations. The findings of this study
indicate that the hedge ratio estimated by the error correction method is superior to that
obtained from the traditional method, as evidenced by the likelihood ratio test and out-of-
sample forecasts. Hedgers will be able to control the risk of their portfolios more
effectively at a lower cost. 9
According to Sivakumar and Runa Sekart (1979) says that studying the use of
hedging instruments major Indian firms from different sectors, the paper concludes that
forwards and options are preferred as short term hedging instruments while swaps are
preferred as long term hedging instruments. The high usage of forward contracts by
Indian firms as compared to firms in other markets underscores the need for rupee futures
in India. In addition, the paper also looks at the necessity of managing foreign currency
risks, and looks at ways by which it is accomplished. A review of available literature
results in the development of a framework for the risk management process design, and a
compilation of the determinants of hedging decisions of firms. He concludes by pointing
out that the onus is on Reserve Bank of India, the apex bank of the country, and its
Working Group on Rupee Futures to realize the need for rupee futures in India and the
convertibility of the rupee.10
According to Yoder, Lowell D., McGill, Sandra P (1982) the final IRS
regulations governing the tax treatment of foreign currency hedging transactions entered
into by Subpart F taxpayers have expanded the definitions used to allow more
transactions to qualify. They state, “Compared to the temporary regulations, more
transactions are considered to have been entered into for the purpose of hedging under the
23
final regulations, meaning that more transactions are excluded from foreign personal
holding company income treatment”. The temporary regulations also imposed strict
reporting requirements that have been relaxed in the final regulations.11
According Shane Magee (2003) says that I reinvestigate the effect of foreign
currency hedging on firm value. Consistent with prior research, my initial analysis
suggests foreign currency hedging is associated with an increase infirm value. However,
this analysis ignores the possibility that firm value may affect foreign currency hedging.
They find foreign currency hedging depends on past amounts of firm value and after
controlling for this feedback effect foreign currency hedging no longer affects firm value.
He says that highlights the importance of controlling for the possibility for feedback from
24
past amounts of firm value to the current amount of hedging when examining the effect
of hedging of firm value. 13
According to Shroup, Gary (1979) Important reading for all managers dealing in
business with foreign exchange whether buying or selling and for bankers and those
dealing in foreign currency -Also vital for students studying subjects that require an
understanding of foreign currency management with the advent of the World Trade
Organization and NAFTA, foreign exchange now affects the corporate world as never
before. Hedging currency risk--usually through the interbank network--should now be a
routine treasury function. However, medium sized companies (up to $200 million in
annual sales) are often shut out of the interbank market because of the cost and minimum
size requirement. Currency Risk Management as a handbook for financial managers,
brokers, and their consultants, shows them how to capture this business. The author
writes in an easy-to-read style and shows the finer points of foreign exchange and the
various exchange regimes recognized by the IMF. The reader will learn why exchange
rates are a matter of government restrictions and controls as well as market price
25
recovery. Intended for managers in finance, accountants, treasury managers, libraries,
brokers, and financial consultants.16
According to Elsevier Science B.V (1975) using a unique dataset, this study
examines the relationship between foreign-denominated debt (FDD), foreign currency
exposure and foreign currency derivative (FCD) use, for a sample of US multinational
corporations. We find a positive relationship between the exposure to foreign currency
risk and the level of FDD, indicating that this debt may be used as a hedge. Moreover,
FDD is negatively related to the use of FCD. We interpret this as further evidence that
FDD is used as a hedge, and substitutes for the use of FCD in reducing currency risk.17
26
According to Andress Rotting (1998) says that the impact of corporate currency
hedging on economics stability by introducing hedging activity in a mundell Fleming,
Tobin frame work for analyzing currency and financial crises. The ration between
hedged and unhedged firms is modeled depending on firm size as well as hedging costs.
The results indicate that with an increasing fraction of hedging firms in an economy the
magnitude of a crisis decreases and from specific hedging level onwards currency crises
are ruled out. In order to improve corporate risk management accer to hedging
instruments should be made possible and hedging cost should be reduces.20
27
According to Zealand companies (2000) exporting is the lifeblood of their business.
Irrespective of the size of the business, or whether the business is well established or still
in its infancy, the penalties for mistakes, ignorance of market and financial risk, and plain
bad advice can be harsh. Failure to take adequate measures to protect currency and
exchange rates can be a very sobering experience, and will usually result in a negative
flow-on effect to the company's operating profits, cash flows, and overall value.
Anecdotal evidence strongly suggests that many small to medium export businesses shy
away from active management of their foreign exchange. 23
Reference:
1. http://www.faqs.org/abstracts/Business/Subpart-F-new-foreign-currency-
hedging-exception-From-storefronts-to-servers-to-service-providers-st.html.
2. http://www.faqs.org/abstracts/Business/Foreign-currency-exposure-and-the-
hedging- possibilities-for-pension-funds.html.
28
3. http://www.infibeam.com/Books/info/Gray-Shoup/Currency-Risk-Management-
A-Handbook-foroFinancial/1888998229.html
4. http://www2.sseriga.edu.lv/library/working_papers/FT_2003_19.pdf
5. http:/www.hmtindia.com/html/frame.asp?page=careers.htm.
6. http://www.highbeam.com/doc/1G1-158673431.html
7. http://www.highbeam.com/doc/1P1-22071707.html
8. http://www.highbeam.com/doc/1P1-2365291.html
9. http://www.highbeam.com/doc/1G1-125147301.html
10. http://www.highbeam.com/doc/1P3-807281451.html
11. http://ideas.repec.org/p/ags/umdrwp/28573.html#abstract
12. http://springerlink.metapress.com/content/f18u076393772233/?
p=3c8477255be94d6f8ca7b3946a954e6b&pi=9
13. http://springerlink.metapress.com/content/t163111201m8154q/?
p=567ce414cfc34c29b2e13082adc3d58d&pi=12
14. http://springerlink.metapress.com/content/h85842qn24540p33/?
p=567ce414cfc34c29b2e13082adc3d58d&pi=17
15. http://springerlink.metapress.com/content/kg9xl18w01433v34/?
p=567ce414cfc34c29b2e13082adc3d58d&pi=18
16. http://springerlink.metapress.com/content/h132mv3171t21471/?
p=567ce414cfc34c29b2e13082adc3d58d&pi=19
17. http://springerlink.metapress.com/content/j21113427n325484/?
p=29a1387b26914244b95b3c99c7a49aca&pi=20
18. http://springerlink.metapress.com/content/m8341223114w5678/?
p=29a1387b26914244b95b3c99c7a49aca&pi=22
19. http://springerlink.metapress.com/content/m04j425p57wu8840/?
p=29a1387b26914244b95b3c99c7a49aca&pi=26
29
20. http://springerlink.metapress.com/content/h43k35740j3u7q00/?
p=985bb26eda4b4569976fb7f87cc20a5d&pi=50
21. http://springerlink.metapress.com/content/t836101040p84484/?
p=985bb26eda4b4569976fb7f87cc20a5d&pi=53
22. http://springerlink.metapress.com/content/t104u6n215087700/?
p=985bb26eda4b4569976fb7f87cc20a5d&pi=57
23. http://springerlink.metapress.com/content/172hr3h575mx2651/?
p=e3d99eacb7184a128b381b61f63711c5&pi=69
CHAPTER III
RESEARCH METHODOLOGY
30
measure progress, and what constitutes success. Methodology is defined as “a body of
methods, rules and postulates employed by a discipline”, “a particular procedure or set of
procedures or “the analysis of the principles or procedures of inquiry in a particular
field”. The common idea here is the collection, the comparative study and the unique of
the individual methods that are used in a given discipline or field of inquiry
A. Research design
B. Data collection method
C. Sampling design
D. Tools for analysis
RESEARCH DESIGN
Research design is a framework or blue print for conducting the research project.
It specifies the details of the procedure necessary for obtaining the information, needed to
structure and /or solve research problems.
The research designed for the purpose of the study undertaken is of Analytical
type.
31
The researcher collected secondary data for the study.
Secondary data
Secondary data are extracted from the books, magazines, researches, newspapers
and websites. The information about the company taken for two years and its type of
work was collected from the organization’s records.
Percentage Analysis
The present study made use of the percentage analysis as a statistical tool to
analyze and interpret the collected data.
CHAPTER IV
32
in such a manner that they answer the research questions. Interpretation is concerned with
relationships within the collected data, partially overlapping the analysis.
Thus analysis and interpretation can be better understood by the various factors
that seem to explain what has been observed by the researcher in the course of the study
and it also provides a theoretical conception.
Table No: 1
33
Particulars 2007-2008 2006-2007
Rs Rs
In’ 000s’ % In’000s’ %
Earnings in
Foreign currency 66593 98.02 59318 99.76
Foreign
Exchange Outgo
Revenue
expenditure 1343 1.98 140 0.34
Capital
expenditure
Total 67936 100 59458 100
The total Foreign Exchange and outgo for year 2007-2008 is Rs.67936 in’000s’ of
which 98.02% is earnings in foreign exchange currency while the rest of 1.98% is
Revenue expenditure. In the year 2006-2007 total of Rs 59458 in ‘000s’ of which is
earning in foreign currency 99.76% while the rest 0.34% is Revenue expenditure.
Chart No-1
34
Foreign Exchange Earnings
and Outgo
120
98.02 99.76
100
Percentage
80
60
40
20
1.98 0.34
0
2007-2008 2006-2007
Year
Earnings in ForeignCurrency
Foreignexchnage outgo
Table No: 2
35
Particulars 2007-2008 % 2006-2007 %
RsIn’000s’ Rs In’000s’
Imported 71182 11.6 69884 12.4
The above table indicates that the value of imported raw materials has been
increased by 0.8% when compared to 2006-2007 which is due to demand for the product
in the Indian market.
Chart No-2
36
600000 542504
494414
500000
Amount in '000s'
400000
300000
200000
100000 71182 69884
0
2007-2008 2006-2007
Year
Imported Indigenous
37
Table No- 3
CIF Value of
Imports
Raw Materials 613686 88.41 564298 96.59
Spares 13594 1.95 12033 2.06
Capital goods 594 0.10
Components & 65831 9.48 6897 1.18
consumables
Other Payments
Travelling expenses 924 0.13 119 0.02
Ware house rental 90 0.01 237 0.04
changes
Total 694125 100 584178 100
The total Foreign exchange outgo in the year 2007-2008 was (Rs.694125), which
is more than that of the year 2006-2007 (Rs.584178), hence an increase in the foreign
exchange outgo in the company.
38
Table No – 4
39
Chart No – 3
M a jo r v e n d o rs in th e Im p o rt o f R a w m a te ria ls a n d c o m p o n e n ts
5% 3%
A S egm ent
B s egm ent
C S egm ent
92%
40
Table – 5
Chart No – 4
41
70
61.76
60
50
Percentage
40
30 26.32
20
11.92
10
0
V1 V2 V3
Vendors
An analysis is done based on the export sales of the year 2007-2008 to determine
the major vendors contributing to about of the export sales.
42
Table No – 6
Chart No – 5
43
M ajo r C u sto m ers C o n trib u tin g to th e E xp o rt S ales
11%
40%
44
Based on the sales in 2007-2008 and the actual payment behavior by customers
the exports collection is determined by month wise considering sales on FOB basis.
Table No -7
Major customer contributing to the Import of Raw Materials and
Components
Table No-8
Rs.In’000s’
1 Belgium 50467 72%
45
2 Eupen 547 1%
3 Europe 3031 5%
4 France 782 1%
5 Singapore 2162 3%
6 Mohelkou 714 1%
7 Japan 10690 15%
8 Germany 25 -
9 Spain 1432 2%
10 South Australia 84 -
Chart No-6
46
Table No-9
Balance of Payment
Balance Of Payment=Export-Import
47
Year Import Export % Of % Of Export Balance of
In ‘000s’ In’000s’ Import payment
The above table indicates that Imports have increased from 31.63% in 2006-2007
to 40.59% in 2007-2008, whereas the exports have decreased by about 6%(approx.)
When compared to 2006-2007. It indicates that the economic growth has been decreased
as imports have been increased.
Chart No-7
Balance of Payments
48
Balance of Payments
60 56 54
50 44 46
40
2006-2007
Percentage 30
2007-2008
20
10
0
IMPORT EXPORT
Table No-10
49
(Export) Outflow INR (Import) Inflow INR-
Fwd
Cover
Apr-06 47 11580 45.25 46.90 0.1
May-06 8530 45.35 49.78 2220 46.15 47.09 2.69
June-06 47.67 49.67 -2
July-06 45.23 48.72 -.3.49
Aug-06 45.34 2107.75 46.95 47.34 -2
Sep-06 48.67 260.30 48.23 0.44
Oct-06 47.43 45.89 1.54
Nov-06 1309.79 44 48.59 5300 45.23 48.01 0.58
Nov-06 49.03 8956 45.31 46.98 2.05
Dec-06 45.01 47.12 -2.11
Jan-07 6627 46.80 47.30 46.32 0.98
Feb-07 9989.39 44.47 42.45 1553.39 44 45.34 -2.89
Mar-07 8836 44.95 48.34 239760 44.03 47.90 0.44
TOTAL -1.67
From the analysis it shown that there is a loss of -1.67 if forward contract is
booked for USD in the year 2006-2007. This is due to the loss in the subsequent months
from June to Feb.
Chart No-8
50
Table No-11
Forward cover for Forex Inflow and Outflow –USD in 2007-2008
Forward cover is booked for both inflow and outflow separately.
51
Month (Export) (Received (Import) Cover
Rate)
23-Apr-07 393168 43.9 43.05 1057388 42.06 42.95 0.99
30-Jun-07 93129 43.95 44.2 119093 41.19 43.9 3.01
30-Jun-07 405987 43.9 44.9 42.34 2.56
19-Jul-07 45345 43.79 44.98 90828.8 41.15 42.34 2.64
14-Aug-07 367644 41.05 40.05 40.08 1.97
21-Aug-07 278902 45.9 45 191572 41.43 40.23 5.77
31-Aug-07 12348 43.97 48.34 26959.1 56.75 57.87 -11.53
24-Sep-07 290965 41.95 43 43.59 -0.59
31-Oct-07 13418.4 40.05 41.95 41.45 0.5
31-Oct-07 187503 40.55 39.7 40.3 1.4
7-Nov-07 13489 43.79 44.56 111760 39.61 40.01 4.56
26-Nov-08 95145 43.97 43 358509 40.03 41.09 2.91
30-Nov-07 356897 39.85 40.35 41.45 1.1
14-Dec-07 11200 39.57 38.98 2354688 40.13 41.09 -1.11
18-Dec-07 277787 40.05 41.9 42.1 -0.2
31-Jan-08 276400 39.85 41.45 42.35 -.0.90
4-Feb-08 217869 38.78 42.35 13395 39.98 40.98 1.37
20-Feb-08 110100 39.75 40.75 41.47 -0.72
20-Feb-08 214705 39.35 37.89 40.35 1.1
12-Mar-08 23870 40.09 42.78 537552 40.01 41.78 1
24-Mar-08 142911 40.2 41.34 40.67 0.67
31-Mar-08 143695 40.2 39.09 40.32 0.91
31-Mar-08 275359 39.7 40.98 40.55 0.55
TOTAL -17.96
From the analysis it shown that there is a loss of -17.96 if forward contract is
booked for USD in the year 2007-2008. This is due to the loss in the subsequent months
from Augest to Feb.
52
Chart No-9
53
Table No-12
54
Forward
Foreign Rate Forward
Date Foreign Received currency * Rate Profit/
Currency Rate * Forward Foreign - Loss
(1) (2) Received Rate(4) Currency Received
Rate (3) (5) Rate (6) [(6)*(1)]
23-04-07 8956 43.9 393168.4 43.05 385555.8 -0.85 -7612.6
30-06-07 2220.00 41.95 93129 44.2 98124 2.25 4995
30-06-07 9248.00 43.9 405987.2 44.9 415235.2 1 9248
14-08-07 8956 41.05 367643.8 40.05 358687.8 -1 -8956
24-09-07 6936 41.95 290965.2 43 298248 1.05 7282.8
31-10-07 335.04 40.05 13418.35 41.95 14054.928 1.9 636.58
31-10-07 4624 40.55 187503.2 39.7 183572.8 -0.85 -3930.4
30-11-07 8956 39.85 356896.6 40.35 361374.6 0.5 4478
18-12-07 6936 40.05 277786.8 41 284376 0.95 6589.2
31-01-08 6936 39.85 276399.6 41.45 287497.2 1.6 11097.6
40.75 112870.16
20-02-08 2769.82 39.75 110100.35 5 1 2769.82
Chart No-10
55
Forward Cover for Forex Outflow –USD-on 2007-2008
Table No-13
56
-EURO
From the analysis it shown that there is a loss of -5.14 if forward contract is
booked for EURO in the year 2006-2007. This is due to the loss in the subsequent months
from June to October.
Chart No-11
57
Table No-14
58
Month Forex Fwd Rate Fwd Forex Fwd Fwd Profit/Loss
Outflow Outflow Cover in Inflow Rate Cover (Fwd
(Export) (Received INR (Import) Inflow Cover in
Rate) INR-Fwd
Cover)
April-07 469442 58.60 57.30 2271.91 57.16 57.34 -0.04
May-07 2271.91 57.16 50.24 62273.64 55.25 52.45 -2.21
June-07 93641.66 55 59.50 254768.71 55.63 56.89 2.61
July-07 9725.93 55.35 55.00 45.39 9.61
Aug-07 99716.14 56.10 53.10 10083.70 56.75 52.89 0.11
Sep-07 37364.62 56.55 51.89 173348 55.89 50.56 1.33
Oct-07 121533 56.60 54.89 16995 55.23 55.67 -0.78
Nov-07 70471 57 43.34 20199 56.70 45.35 -2.01
Dec-07 87083 59.25 44.24 150550 57.54 49.98 -5.74
Jan-08 57601 57.25 49.23 3541 40.07 52.34 -3.11
Feb-08 111206 58.40 55 21872 40.11 56.23 -1.23
Mar-08 82036 59.70 56 253427 40.11 57.56 -1.56
TOTAL -3.02
From the analysis it shown that there is a loss of -3.02 if forward contract is
booked for EURO in the year 2007-2008, this is due to the loss in the subsequent months.
Chart No-12
59
CHAPTER V
5.1 FINDINGS
Foreign Exchange Earnings have decreased by 1.74% in the year 2007-2008 when
compared to the year 2006-2007.
The Revenue expenditure has also increased by 1.64% when compared to the year
2006-2007.
Values of Imported and Indigenous Raw Materials have increased by 0.8% when
compared to the year 2006-2007.
60
The foreign exchange outgo has increased by Rs 109947 when compared to the
year 2006-2007.
The Customers belonging to segment A contribute to around 48.45% of the export
sales in the year 2007-2008.
It is found that forward Cover for forex inflow and outflow can be booked
separately for USD as per the analysis for forex inflow and outflow for the year
2006-2007 and 2007-2008.
It is found that forward Cover for forex inflow and outflow can be booked
separately for EURO as per the analysis for forex inflow and outflow for the year
2006-2007 and 2007-2008.
Due to decrease in Economic Growth there is an decrease in Export by 1% in
2007-2008.
The major supply of materials to the company comes from Belgium.
5.2 SUGGESTION
Forward contract for forex inflow and outflow has to be improved in order to
increase the economic development.
Due to global meltdown in the year 2007-2008, Forward contracts were in deficit.
From January 2009 the economy started to progress, which implies forex outflow
will be greater than the forex inflow.
As the money value started rising again at the month of January 2009 against
USD & EURO, the company would book profits from hedging.
61
5.3 CONCLUSION
The increasing trend in the value of imported raw materials and components and
the exports sales as well, clearly shows that the company has been competent enough in
facing the competitive global business environment. The increasing trend in imports and
exports thereby leads to a higher foreign exchange exposure for the company in the
future.
62
63
BIBLIOGRAPHY
BOOKS
• Apte P.G., “International Financial Management” Fourth Edition, Tata McGraw-
Hill Publishing Co.Ltd, New Delhi, 2006, Pp 44-49
• Francis cheruniilam, “International Business “,Tata McGraw-Hill Publishing
Co.Ltd, Third Edition, New Delhi, 2005, Pp. 77-79
• Gupta S.L., “Financial Derivatives’ Theory”, Prentice Hall of Indian Pvt Ltd,
Third Edition, Mumbai, 2006, Pp 62-64
• Jain P.K. “International Financial Management”, Macmillan India Ltd., New
Delhi, 2000, Pp. 34-36
• Jeevanandam.C, “Foreign Exchange & Risk Management”, Sultan Chand & Sons
educational publishers, Ninth Edition, New Delhi, 2004, Pp 1-3
• Kothari C.R, “Research Methodology”, New Age International publishers, 2001.
• Mihir A.Desai, “International Finance” John Wiley & Sons Indian Pvt Ltd,
Mumbai, 2006, Pp 54-62
• Raj Jain “Foreign Exchange Management Law & Practice, Vidhi Publishing (P)
Ltd, New Delhi, 2000, Pp 1- 59
• Surendra S.Yadav, P.K.Jain “Foreign Exchange Markets”, Macmillan India Ltd,
New Delhi, 2001, Pp 3-7
JOURNALS
• Crabb, Petter R., “Foreign Exchange risk management practices of Microfinance
Institutions’, Journal of Microfinance, Volume IV, 2004, July, P. 43
• Kodress, Laura E, “Finance and Development”, Vol 22, 1996, December1, Pp.
23-24.
• Banker, Glenn, “Foreign Exchange”, ZN Business, Volume 12, 2006, December
1,Pp. 35-38.
MAGAZINE
• “Auto Ancillary Got the Right Fit” Industry 2.0 January 2004.
WEBSITES
1. www.tenneco.com
2. www.aboutforex.com
3. http://www.iitk.ac.in/infocell/announce/convention/papers/Marketing,
%20Finance%20and%20International%20Strategy-07-Anuradha%20Sivakumar
%20Runa%20Sarkar.pdf
4. http://portal.acm.org/citation.cfm?id=322471
5. http://ideas.repec.org/p/ags/umdrwp/28573.html#abstract
6. http://www.infibeam.com/Books/info/Gray-Shoup/Currency-Risk-Management-
A-Handbook-foroFinancial/1888998229.html
7. http://www2.sseriga.edu.lv/library/working_papers/FT_2003_19.pdf
Renowned Auto Products MFRs Ltd
Supplementary Profit and Loss Account on 2007-2008
Expenditure in R&D
Recurring Expenditure 1342578 140208
31-3-08 31-3-07
Value in Value in
Units Qty Rs. Qty Rs.
MS TUBE Meters 814158 45420158 1004977 53627269
Road Spring No’s 308768 24583338 308257 26065117
Piston Rod No’s 1571148 38575992 1705731 36909170
Others (Individually
less than 10% of
total consumption) 505107411 447697089
VALUES OF IMPORTS
ON CIF BASIS 31-3-08 31-3-07
Components &
Consumables 65831697 6897095
Capital Goods 594830
EXPENDITURE IN
FOREIGN CURRENCY 31-3-08 31-3-07
Travelling Expences 924821 119774
Warehouse Rental
Charges 90829 23704
EARNINGS IN FOREIGN
CURRENCY 31-3-08 31-3-07
External Sales
EXTERNAL
SALES DOMESTIC OVERSEAS TOTAL
2007-2008 673030079 148002359 821032432
2006-2007 603472190 159156872 762629062
Geographic Location
GEOGRAPHIC
LOCATION 2007-2008 2006-2007
Europe 50414515 38151691
Asia 25166521 40520728
Australia 2126309
Gulf Countries 7566644 7674634
USA 64670771 70515719
Africa 183908 167791
Assets
ASSETS 2007-2008 2006-2007
Receivable 51967684 41583268
Inventory 13854358 2813568