Exchange Rate Risk in the Foreign Exchange Market: A Challenge on Corporate Profitability

Foreign exchange market is the largest traded market across the globe. In India, foreign exchange market opened for trade during the decade of 1970's and most of the transaction done through banks. Many companies in India emerged as a global player during this period, but they need to face the exchange rate risk of volatility in the global trade as the exchange rate against US dollar has raised five folds during this period. Importantly the risk exposure of Indian companies to its foreign trade has also increased dramatically. Conceptually the foreign exchange market faces risks of transaction exposure, translation exposure, and operating exposure which seems to be part of the exchange rate determination system. The hedging measures to be part of the risk management practices in the foreign exchange system across the global market. The exchange currency of US dollar is taken in the account of the foreign exchange market and its impact corporate profitability is being discussed with reference to information technology major Infosys. As exchange rate has challenged Indian corporate at many periods of interval, due to volatile movement of exchange rate directly impact on the corporate profitability. Infosys risk hedging being analyzed to know how it manages the exchange risk volatility and impact on corporate profitability is studied reference to information technology (IT) industry. The historical picture of the exchange rate of INR against major currencies like US dollar, Euro, Pound sterling, and Yen, surprised many corporate as it had direct impact on the corporate profit. This paper brings out the problem of exchange rate risk and its effect on corporate profitability on IT industry.