Comparative Analysis of Foreign Exchange Risk Management Practices among Non Banking Companies in India

Foreign exchange rate risk in general is related to unexpected changes in foreign exchange rates. The importance of managing foreign exchange risk has increased with a global economic and financial integration, and the associated increase in global trade, liberalization of financial markets, and dismantling of capital controls. There are no exchange-traded currency derivatives in India. In terms of the growth of derivatives markets, and the variety of derivatives users, the Indian market has equaled or exceeded many other regional markets. While the growth is being spearheaded mainly by private sector institutions and large corporations, smaller companies and state-owned institutions are gradually getting into the act.This paper has tried to examine prior research on foreign exchange exposure and the use of operational and financial hedging to manage foreign exchange exposure by Indian Companies. Further this paper has attempted to examine Indian companies’ foreign exchange risk management practices. This paper has also tried and present some of the main issues in the measurement and management of exchange rate risks faced by companies, with particular attention to the traditional types of exchange rate risk (transaction, translation, and economic), and the advantages and disadvantages of various exchange rate risk management approaches (tactical vs. strategic, passive vs. active). It has also tried to outline a set of widely accepted best practices in currency risk management, and review the use of some of the widely used hedging instruments in the OTC and exchange traded markets.