Analysis of foreign exchange exposure

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International Journal of Multidisciplinary Research
Vol.1 Issue 5, September 2011, ISSN 2231 5780
www.zenithresearch.org.in83
AN ANALYSIS OF FOREIGN EXCHANGE EXPOSURE MANAGEMENT
BY MNCs IN INDIA
DR. MANISHA GOEL*; PROF. S.L. GUPTA**; MR. LALIT GOEL***
*Associate Professor, YMCA University of Science & Technology,
Faridabad, Haryana, India.
**Department of Management Studies, Kurukshetra University,
Kurukshetra, Haryana, India.
***Assistant General Manager, Mahavier Die Casters Pvt Ltd.,
Faridabad.
ABSTRACT
With globalization and liberalization being adopted by almost all countries, scope as well as
sphere of international business has become much larger. The high volatility of exchange rates is
a fact of life faced by every company engaged in international business, bringing in uncertainties
in their bottom line. In recent years, variations in value of rupee have been very impulsive and
unpredictable. These fluctuations have had a profound impact on domestic and foreign sales,
profit levels and profit margins of MNCs operating in India. Many of the companies have turned
into ashes as a result of unfavorable exchange rate fluctuations. The present study portrays a
thumbnail sketch of foreign exchange exposure management as practiced by various
multinational companies in India. Due to the international dependence of its economy, India is
extremely well suited as subject for this kind of study. This article is based on a questionnaire
study undertaken in 2004-2008 using a sample of 200 Indian and foreign MNCs operating in
India. The purpose of this study is to make a comparative analysis of management of foreign
exchange exposure by banking and non banking as well as foreign and Indian MNCs operating
in India. This study deals with various other questions such as what is their attitude towards
exposure management and their policy for management of foreign exchange exposure. Whether
or not there is a separate management system for management of their foreign exchange
exposure? The results of the study evidence that majority of firms face all of three foreign
exchange exposures; transaction exposure, translation exposure and economic exposure. More
over majority of the companies under study have proper exposure management system. There is
not so significant difference between attitude of foreign and Indian MNCs towards development
of separate management system to hedge their foreign exchange exposure. Most of the
companies who are aware of foreign exchange exposure make estimation of their exposure
despite their level of exposure. There is significant effect of objective of management on
estimation of exposure. Most of the companies under the present study are managing only their
transaction exposure. Few of them are managing both transaction as well as economic exposure.
There is no significant difference between attitude of Indian and Foreign companies towards
review of their exposure and hedging policy regularly.
KEYWORDS: Exchange Rate Fluctuations, Foreign Exchange Exposure, Economic Exposure,
Exposure Management, International Business, Transaction Exposure, Translation Exposure.

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INTRODUCTION
The turmoil in the global financial markets, the volatility of the foreign exchange rates and the
intensified global competition in the product and the resource market have complicated the
decision making process and have increased the level of uncertainty regarding the outcome of
international business activities. Undoubtedly, Indian economy has proven to be resilient to
substantial exchange rate fluctuations. Arguably, this resilience has strengthened over time, as
firms have learned to adapt to exchange rate variability, including through the development of
the hedging practices of financial institutions and non-financial firms. Changes in information
technologies have also increased the speed and the accuracy of information while the surge of
financial innovations is providing the decision makers with new hedging techniques to deal with
the uncertainty regarding financial flows.
The magnitude of foreign exchange exposure has increased at a mind boggling rate in the recent
times. Foreign exchange exposure is what is at risk of exchange rate variations. It is a measure of
sensitivity of firm’s cash flows of changes in exchange rate. This exchange rate risk may be
transaction exposure, translation exposure or economic exposure. Transaction exposure is
adverse movements of the exchange rate from the time foreign currency denominated
transactions are initiated till the time of their final settlement. The exposure arises due to
conversion of transactions from one currency into another currency. While buying or selling
products in any foreign currency, there is always a time gap between the dates of entering into a
contract and its final settlement. During this time gap, the business firm is exposed to exchange
rate fluctuations. These fluctuations may be favorable as well as unfavorable. The unfavorable
fluctuations may turn a profitable deal unprofitable by the time of actual settlement of contracts;
the longer the gap between the signing of a contract and its completion, the higher the level of
exchange rate risks. Businesses that source their products from foreign countries also face the
exchange rate risk. The exchange rate movements erode gross margins if competition prevents
selling prices from rising in tandem.
Translation exposure arises from the need to "translate" foreign currency assets or liabilities into
the home currency for the purpose of finalizing the accounts for any given period. Multinational
corporations having operations in many countries have to prepare their consolidated financial
statements to have a complete knowledge of result of all their business operations. Usually,
foreign subsidiaries prepare their accounting records and financial statements in the currency of
the country where they operate. For this, it is necessary to translate foreign currency
denominated accounts of subsidiary companies into the currency of parent company. But the
currency fluctuations can create currency gains or losses from such translations. Economic
exposure reflects the extent to which the present value of future cash flows is affected by
exchange rate movements. A change in the rate affects the company's competitive position in the
market and hence indirectly the bottom-line that it affects the profitability over a longer time
span than transaction and even translation exposure. It has neither time limit nor a defined
direction of movement. It is simple to spot the influence of the expected change in exchange
rates on forecasted sales volumes.
The foreign exchange exposures emanating from unexpected corner have a definite impact on
the company. Tackling these exposures is the biggest challenge that companies face today. It

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requires a broad based proactive risk management approach at the strategic level. Unmanaged
foreign exchange exposure can cause significant fluctuations in the earnings and the market
value of the firm. A very large exchange rate movement may cause special problems for a
particular company, perhaps because it brings a competitive threat from a different country. At
some level, the currency change may threaten the firm’s viability, bringing the costs of
bankruptcy to bear. It is more advisable to bear certain costs rather than giving chance to
uncertainties to cause disproportionately high costs to the firm. Foreign exchange exposure not
only affects firm’s financial position but also its competitive position in the market and value of
firm, if ignored it can paralyze the financial position of the company.
Success of a business firm largely depends on how effectively it manages foreign exchange risk.
Foreign exchange exposure management is a multi-staged process that begins with the
identification of foreign exchange exposure. Foreign exchange exposure is then monitored,
quantified and corrected on a daily or weekly basis to ensure that the risk profile of the firm
remains aligned with the objectives of foreign exchange exposure management. They must
regularly enter into hedging strategies that minimize the impact of exchange rate fluctuations on
their operating costs. Hedging refers to a strategy that strives to minimize the risk of exchange
rate fluctuations, thereby minimizing the uncertainty of future transactions denominated in a
foreign currency and providing some stability to earnings and cash flows. The task of managing
these risks has been facilitated by the increasing availability of a variety of instruments to
transfer financial price risks to other parties. This may be one of the reasons that the market for
derivative instruments has grown at a breathtaking pace in the past few decades in India. Foreign
exchange exposure management can not eliminate foreign exchange exposure completely. But
the planned course of action brings risk to manageable level.
2. LITERATURE REVIEW
Foreign exchange exposure is very crucial now a days as cross border trade is increasing day by
day at a very fast pace. But it is also regarded as very complex. One possible reason for the
absence of empirical evidence in the literature may be related to the difficulty in devising the
appropriate measures of a firm’s ability to construct its hedging strategies. There is a dearth of
good literature on this subject, especially in India. Some of the studies identified in this area are
as follow;
Bengt Pramborg, in this study, “Foreign Exchange Risk Management by Swedish and Korean
Non Financial Firms: A Comparative Survey”, 2002, makes a comparison of hedging practices
of Swedish and Korean Firms. The evidence suggests that Korean firms are more concerned
about fluctuations in their cash flows whereas Swedish firms focus on accounting numbers.
Derivatives usage is more popular for hedging among Swedish firms as compared to Korean
firms. It may be a result of relative immaturity of Korean derivative markets. In both of the
countries, majority of firms use a profit based approach to evaluate any risk management
strategy. The study depicts that the decision to hedge foreign exchange exposure is driven by the
level of exposure and size of a firm.
Bradford Cornell and Alan C. Shapiro, in their article, “Managing Foreign Exchange Risks”,
provide step by step guidance for the formulation of an effective strategy for managing currency

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risk. First step is to determine the extent of its exposure to currency risk. Second step is to
identify the objectives of its exchange risk management program. Third step is to design a set of
companywide policies to achieve its objectives. It is observed that the changes in security prices
generally reflect changes in cash flows rather than reported earnings. Currency risk affects all the
facets of a company’ operations and therefore, should not be the concern of financial managers
alone. Operating managers should develop marketing and production initiatives that help to
ensure profitability over the long run. It also pointed out the alarming need for the creation of a
committee including senior officers and top functional executives in order to adopt an integrated
approach for managing foreign currency exposure.
Chand Sooran, in his article, “What is hedging? Why do companies hedge?” presents his views
on hedging of exposures. This article will give a brief overview of the different ways in which
firms approach their financial price risk. They also introduce the rationale for using derivative
products. Companies attempt to hedge the price changes because these risks are peripheral to the
central business in which they operate. Another reason for hedging the exposure of the firm to its
financial price risk is to improve or maintain the competitiveness of the firm. In this article, he
points out that hedging objectives vary widely from firm to firm. The core problem when
deciding upon a hedging policy is to strike a balance between uncertainty and the risk of
opportunity loss.
Chris Becker and Daniel Fabbro, in their paper, “Limiting Foreign Exchange Exposure Through
Hedging: The Australian Experience, 2006-09, examine foreign exchange hedging of direct
balance sheet and transaction exposures and assesses their broader implications for the
Australian economy. This study makes use of quantitative results of Australian Bureau of
Statistics (ABS) surveys in 2001 and 2005 for comprehensive data on foreign currency
exposures and hedging practices. This paper examines the available evidence on the nature and
extent of this hedging behavior. In this paper, they show that foreign currency-denominated
assets exceed foreign currency-denominated liabilities, even before accounting for hedging,
thereby conferring a transfer of wealth from the rest of the world to Australian residents in the
event of exchange rate depreciation. Furthermore, overseas demand for Australian Dollar assets
has allowed Australian residents to further hedge their net foreign currency exposures back into
local currency terms through the use of derivatives, insulating the economy against the wide
fluctuations that can be observed in the exchange rate. They have also observed that despite wide
swings in the Australian Dollar, the economy and, specifically, the banking sector, have proved
resilient to variability in the nominal exchange rate.
DAO Van Quynh, writes an essay on “Hedging Foreign Exchange Exposures in a Multi-National
Computer Peripheral Manufacturing Business”, 2004-2005. In this essay, he has discussed
various methods and procedures that a MNC can use to hedge its cash flows and investments
against foreign exchange risk through an example of an unreal MNC – ABC Inc. As MNCs have
subsidiaries located in different countries and products sold to different countries, they bear
heavily the risk of exchange rate changes. However, like domestic firms, MNCs also expose to
other risks that are not less importance than foreign exchange one, for example, interest rate or
commodity prices exposures. These exposures can also be hedged using various kinds of
financial derivatives such as swap, forward contract and option contract.

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David A. Carter, Christos Pantzalis and Betty J. Simkins, in a study, “Asymmetric Exposure to
Foreign – Exchange Risk: Financial and Real option Hedges Implemented by U.S. Multinational
Corporations”, 2003, argue that exchange risk exposure and hedging are endogenous. The study
proves that the magnitude of foreign exchange exposure affects the hedging decisions of the firm
and in turn hedging decisions affect the firm’s exposure to fluctuations in exchange rates. It
demonstrates that operational hedges and financial hedges can effectively reduce foreign
currency exposure. The real option aspect of multi-nationality allows the firm to utilize its
network structure to increase exposure to favorable currency movements and minimize exposure
to unfavorable currency movements.
Ian H. Giddy and Gunter Dufey, in their article “The Management of Foreign Exchange risk”,
explore the impact of currency fluctuations on cash flows, on assets and liabilities and on the real
business of the firm. It is demonstrated that there are numerous realistic situations where the
economic effects of exchange rate changes differ from those predicted by the various measures
of translation exposure. It emphasizes the distinctions between the currency of location, the
currency of denomination and the currency of determination of a business. It suggests some basic
principles for managing foreign exchange risk.
Sohnke Bartram, in his paper presents the results of his comprehensive study of the foreign
exchange rate exposure of 447 German non-financial corporation during the period of 1981-95.
The empirical evidence indicates that the firms with more international sales exhibit
systematically larger and more significant foreign exchange rate exposures. In addition, firm
liquidity variables, especially cash flow/total assets, are significantly negatively related to the
exposure. Moreover, industry sectors are important determinants of the foreign exchange rate
exposure. As the choice of hedging tools is determined by the exposure profile, nonlinear foreign
exchange rate exposures suggest the use of hedging instruments with nonlinear payoff profiles
such as financial and/or real options.
3. SIGNIFICANCE OF STUDY:
It has been well documented that the vast size of daily foreign exchange trading, combined with
the global interdependencies of the foreign exchange market and payment systems involves risks
stemming from exchange rate fluctuations. Continuous fluctuations in exchange rate impose
threats for international business. As a result of change in exchange rate, importers may require
to pay extra for their imports, exporters may get lesser value for their exports, borrowers may
required to pay extra and lenders may recover also possible that a viable foreign investment
project may twin into a exchange rate fluctuations. Moreover the financial position and
profitability of a foreign subsidiary may also change. Large scale fluctuations can even bring
dramatic changes in the competitive structure of markets which may even cause some companies
to be driven out of the market. It results in too many questions; whether or not companies in
Indian, are seriously managing their foreign exchange exposure? If not, what is the reason? All
of these questions are required to be answered which initiate this research work.

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4. OBJECTIVES OF STUDY
While the risk management strategy of non-financial firms has been the subject of intense
theoretical and empirical research, very little is known about the actual hedging practices of
multinational firms. This article includes the study of existence of various types of foreign
exchange exposures in MNCs operating in India. Transaction exposure arises at the actual
conversions of unsettled contracted cash flows from one currency to another at the time of their
final settlement. Translation exposure is the result of translation of foreign currency assets or
liabilities into the home currency for the purpose of finalizing the financial statements. Economic
exposure is the adverse effect of exchange rate movements on the present value of expected
future cash flows. It also brings into light various factors affecting foreign exchange exposure
management by the companies. The present study examines the available evidence on the nature
and extent of hedging behavior of companies in India. The focal point of the study is
identification, measurement and management of foreign exchange exposure in selected corporate
sector units in India. Other objectives of the study have been to determine the factors which are
of special importance while managing foreign exchange exposure, examine the facilities
available for managing foreign exchange exposure in India, investigate and verify the techniques
used for managing foreign exchange exposure by corporate units in India.
5. HYPOTHESIS
In this research the following hypothesis have been tested;
1. 20 % of companies do not manage their exposure.
2. Management system of companies does not depend on consideration for effect of
fluctuations and objective of exposure management.
3. Only 40 % of companies managing exposure follow the policy of active management.
4. There is no significant effect of objective of management, management system and
management policy on decision of estimation of exposure.
5. There is no significant effect of origin of company on periodicity of review of their
exposure & hedging policies.
6. There is no significant effect of objective, management system and management policy
on periodicity of review of their exposure and management policies.
6. RESEARCH METHODOLOGY
Using a field study and proprietary data, it unfolds the difference between attitude of various
banking and non banking Indian and foreign MNCs engaged in international business in India
towards management of their various foreign exchange exposures. The results presented in this
study are based on a questionnaire study undertaken in 2004-2008. As such the aim is not to
create a large sample selected randomly but to create a sample of information rich cases selected
purposefully. The sample is composed of 200 companies out of fortune 500 companies which

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were ranked on the basis of their sales during the financial year from 1st
Jan to 31st
December
2003, as published in Economic Times in May 2004. Out of 200 companies, 95 companies
responded back to the questionnaire.
All companies are heavily internationally oriented as significant proportion of their turnover
originates from foreign markets as per their published accounts. The selected companies cover a
broad specter of players of various sectors such as automobiles, pharmaceuticals, oil, cement,
FMCG, chemicals, steel, IT, textile, nuts, consumer durables, electricity & energy, banking,
paper & paper products and miscellaneous. Management policies for managing foreign exchange
exposure have been divided into mainly three groups; Active management, Regular management
and no management. Three point scales has been used for this purpose. Number 3 has been used
for active management, 2 for regular management and 1 for no management of foreign exchange
exposure. A scale of 1 to 5 has been used to analyze results. Significance was discussed on 5 %
level in all tests used for hypothesis testing. Z test and ANOVA have been applied to test
hypothesis and interpret the results. Graphs and tables have also been used to facilitate the
analysis of data.
7. RESULT & DISCUSSION
On the basis of the study of management of foreign exchange exposure by MNCs in India, the
followings are the findings of the study;
7.1 EXISTENCE OF VARIOUS FOREIGN EXCHANGE EXPOSURES
The speed of international business activities has magnified the impact of variable exchange
rates on every business. MNCs have to face different types of foreign exchange exposures such
as transaction exposure, economic exposure and translation exposure. The results for existence of
various exposures are depicted in table 1 and chart 1.
TABLE 1 EXISTENCE OF VARIOUS FOREIGN EXCHANGE EXPOSURES
S. No. Type of Exposure Total
1 Both Transaction & Economic Exposure 22
2 All Three Exposures 73
3 No Exposure 0
Total 95

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CHART 1 EXISTENCE OF VARIOUS FOREIGN EXCHANGE EXPOSURES
Both Transaction &
Economic Exposure
23%
All Three Exposures
77%
Results of the study confirm the general view that the majority of the companies (approx. 77%
companies) face all of three exposures; transaction, economic and translation exposure. Even the
companies which do not have any foreign subsidiary are also facing translation exposure because
of their foreign currency assets and liabilities. There is not even a single company under study
which has been left untouched by any of these exposures.
7.2 COMPARISON OF ATTITUDE TOWARDS MANAGEMENT OF FOREIGN
EXCHANGE EXPOSURE OF BANKING AND NON BANKING COMPANIES
Usually it is observed that companies in India do not manage their exposure. On the basis of this
general observation, null hypothesis has been formulated and tested with the help of z test. A
comparison has also been made between banking and non-banking companies. The results of
comparison are depicted in table 2 and chart 2.
NULL HYPOTHESIS: 20 % of companies do not manage their exposure.
TABLE 2 & CHART 2
ATTITUDE TOWARDS MANAGEMENT OF FOREIGN EXCHANGE EXPOSURE
Companies Facing ExposureManage Do not Manage Total
Non Banking Companies 76 7 83
Banking Companies 12 0 12
Total 88 7 95

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Manage Exposure
93%
Do not Manage Exposure
7%
RESULT OF Z TEST
Ho:  = 0. 20 Sample
p = 7 / 95
P = 0.073 Z
= - 3.094
Results of Z test show that the computed value of z lies outside the acceptance region as
compared to the critical value of z = + 1.96 at 5 % level of significance, therefore, null
hypothesis is rejected. Hence, based on this data the hypothesis that 20 % of companies do not
manage their exposure is rejected. Graph depicts that most of the companies which identify the
effect of exchange rate fluctuations (approx. 93 % companies as shown in table 2) accept the
need of management of their foreign exchange exposure. Comparative study of banking and non-
banking companies shows that all of the banking companies accept the need for managing their
foreign exchange exposure as in India; it has been made mandatory by RBI for all the banks
dealing in foreign exchange in India. Only 7 % of companies (non-banking companies) which do
not accept even the effect of foreign exchange exposure do not realize any need for managing
their exposure.
7.3 OBJECTIVES FOR FOREIGN EXCHANGE EXPOSURE MANAGEMENT
Different companies have different objectives for their foreign exchange exposure management.
The results showing various objectives of MNCs under the present study are presented in table 3.

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TABLE 3 OBJECTIVES OF EXPOSURE MANAGEMENT
Objective Responses Objective Respondents
Eliminate All Risk 31 Actively Seek Profits 3
Eliminate Risk Selectively 27 Improving Ability to Make Value
Adding Investments
3
Minimizing Net Foreign
Exchange Exposure
10 Reducing Stakeholders Perceived
Risk
4
Stabilization Purpose 5 Seek Competitive Advantages 2
Allow Profits 3
Results of the study do not comply with general view about companies in India. It shows that 35
% companies have proper management system in order to eliminate all of their exposure. 31 %
of the companies try to eliminate their risk selectively whereas 11 % of companies wish to
minimize their risk. Some of the companies follow the policy of stabilization. Only few of the
respondent companies have the other objectives in their mind.
7.4 COMPARISON OF INDIAN AND FOREIGN COMPANIES REGARDING
DEVELOPMENT OF SEPARATE EXPOSURE MANAGEMENT SYSTEM
Firm should take foreign exchange exposure management as a system which provides strategies,
techniques and an approach to recognizing and confronting any threat faced by a firm due to
exchange rate fluctuations. A proper foreign exchange exposure management policy is required
to be framed. The difference between attitude of Indian and foreign companies has been depicted
in table 4 and chart 4.
TABLE 4 & CHART 4 EXISTENCE OF SEPARATE EXPOSURE MANAGEMENT
SYSTEM
Origin of Company
Existence of Management System
Total
Yes No
Indian 56 26 82
Foreign 9 4 13
Total 65 30 95

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0%
20%
40%
60%
80%
100%
Indian
Foreign
No yes
Results of the study do not comply with general observation. It has been observed that there is no
significant difference between Indian and foreign companies regarding their attitude towards
development of management system to hedge their foreign exchange exposure.
7.5 FACTORS AFFECTING ESTABLISHMENT OF SEPARATE MANAGEMENT
SYSTEM FOR FOREIGN EXCHANGE EXPOSURE MANAGEMENT
Whether or not any company will establish a separate management system for management of its
foreign exchange exposure, it depends on many factors. But in this study two factors are
considered to be more important for this purpose. First foremost factor is the identification of
effect of exchange rate variations on the company. Those companies which do not agree that
such kind of variations in exchange rate can adversely affect their business; they will never
establish any system for its management. Another factor is the objective of exposure
management policy of the company. Any company who is willing to minimize or mitigate
exposure by applying various strategies will definitely have separate system for its management.
To study the dependence of management system of companies on these two factors, ANOVA
techniques has been applied where management system is the dependent variable and effect of
fluctuations and objective of exposure management are independent variables. The results are
depicted in table 5.
NULL HYPOTHESIS: Management system of companies does not depend on consideration
for effect of fluctuations and objective of exposure management.
Yes
32%
68%
31%
69%

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TABLE 5
FACTORS AFFECTING ESTABLISHMENT OF SEPARATE MANAGEMENT
SYSTEM FOR FOREIGN EXCHANGE EXPOSURE MANAGEMENT
Source Type III Sum of
Squares
df Mean
Square
F Sig.
Corrected Model 11.352(a) 2 5.676 54.782 .000
Intercept .419 1 .419 4.044 .047
Effect of Fluctuations .179 1 .179 1.729 .192
Objective of Exposure
Management
7.922 1 7.922 76.462 .000
Error 9.532 92 .104
Total 287.000 95
Corrected Total 20.884 94
a R Squared = .544 (Adjusted R Squared = .534)
The results of ANOVA show that at 5 % level of significance, objective of exposure
management affects significantly the management system of companies. It also shows that
management system of companies does not depend so much on their consideration for effect of
exchange rate fluctuations.
7.6 MANAGEMENT POLICIES OF COMPANIES
MNCs in India follow different management policies for management of their foreign exchange
exposure. There are mainly three policies; no management, regular management and active
management. It is usually stated that most of the companies ignore their foreign exchange
exposure. On the basis of general observation, hypothesis regarding the behavior of companies in
India has been formulated and tested with the help of Z Test. The results are depicted in table 6
and chart 5.
NULL HYPOTHESIS: Only 40 % of companies managing exposure follow the policy of active
management.
TABLE 6 & CHART 5
MANAGEMENT POLICIES OF COMPANIES
Management Policies of Companies Responses
Do not Manage 7
Actively Manage 55
Regularly Manage 33
Total 95

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Actively Manage
58%
Regularly Manage
35%
Do Not Manage
7%
RESULT OF Z TEST
Ho:  = 0. 40
Sample p = 55 / 88 P
= 0.625 Z
= 4.31
Results of Z test show that the computed value of z is beyond the acceptance region of the
critical value of z = + 1.96 at 5 % level of significance, therefore, null hypothesis is rejected.
Hence, based on this data the hypothesis that only 40 % of companies actively manage their
exposure is not true. Graph shows that majority of companies under study are managing their
foreign exchange exposure. The results depict that 35 % of companies manage their exposure
regularly whereas 58 % companies are actively managing their exposure.
7.7 ESTIMATION OF FOREIGN EXCHANGE EXPOSURE
Foreign exchange exposure management is not possible without accurate estimation of exposure.
Estimation of foreign exchange exposure requires expertise in applying various forecasting and
statistical tools such as VaR, regression, simulation etc. Not all the companies make estimation
of their foreign exchange exposure. Usually it has also been observed that foreign companies
possess expertise to make estimations whereas Indian companies do not indulge in such tedious
activities. The results showing attitude of companies towards estimation of their foreign
exchange exposure are depicted in table 7. Whether or not any company will make estimation of
their exposure also depends on many other factors. In this study hypothesis has been formulated
to judge the effect of objective, management system and management policy on estimation of
their exposure. The hypothesis has been tested with the help of ANOVA technique where
estimation of exposure is dependent variable and effect of fluctuations and effect of objective,

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management system and management policy are independent variables. The results of the test are
TABLE 7 & CHART 6 ESTIMATION OF FOREIGN EXCHANGE EXPOSURE
0%
20%
40%
60%
80%
100%
Indian
Foreign
No yes
Results show that most of the companies who are aware of foreign exchange exposure make
estimation of their exposure. It denies the general view that Indian companies do not estimate
their exposure. Indian companies also estimate their foreign exchange exposure despite their
Origin of Company
Estimation of Exposure
Total
Yes No
Indian 76 6 82
Foreign 12 1 13
Total 88 7 95
7%
93% 8%
92%
E
S
T
I
M
A
T
I
O
N
ORIGIN
7%
93%

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level of exposure. It has also been observed that majority of companies rely on expectations of
foreign exchange market for measurement of their foreign exchange exposure. Some of the
companies also consider major indicators such as exchange controls, import restrictions, interest
rates and inflation rate while making the analysis of fluctuations in foreign exchange rate.
NULL HYPOTHESIS: There is no significant effect of objective of management, management
system and management policy on decision of estimation of exposure.
TABLE 8 EFFECT OF VARIOUS FACTORS ON DECISION OF
ESTIMATION OF FOREIGN EXCHANGE EXPOSURE
Squares
df Mean
Square
F Sig.
Intercept 1.584 1 1.584 13.983 .000
Management System .012 1 .012 .106 .746
Objective 4.542 1 4.542 40.089 .000
Management Policy .094 1 .094 .832 .364
Error 10.309 91 .113
Total 197.000 95
The results of ANOVA show that at 5 % level of significance, there is significant effect of
objective of management on estimation of exposure. But the effect of management system and
management policy on estimation of exposure is not so significant.
7.8 REASONS FORCING EXPOSURE MANAGEMENT
Foreign exchange exposure, if ignored, can put survival of any company in danger any moment
which may result in huge losses of financial distress. Moreover it has always been arduous to
harmonize investment and financing activities of the company which usually pose the problem of
currency, amount or timing disparity of cash flows. Managers and shareholders of the company
have different interest. Shareholders are more interested in market value of the firm where as
mangers pay more attention towards profits. It may result in agency conflicts about the decision
of management of foreign exchange exposure. Convexity of tax functions also poses threat to
the companies. Usually it is observed that companies consider the question of hedging foreign
exchange exposure as a critical activity as they wish to evade the loss of financial distress. The
results of the study showing the reasons for which companies in India management their foreign
exchange exposure are depicted in table 9 and chart 7.
TABLE 9
REASONS FORCING EXPOSURE MANAGEMENT
Reasons Forcing Exposure Management Responses % age
Costs of Financial Distress 60 63

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Problems of Synchronizing Investments & Financing Activities 40
42
Costs of External Funding 45 47
Agency Conflicts Between Managers and Shareholders 20 21
Convexity of Tax Function 22 23
Costs of Financial
DistressProblem of
Costs of External
Funding
Agency conflicts
of tax
Synchronization
Convexity
Results of the study match with general statements. It shows that most of the companies in India
are worried about the costs of financial distress. Problems of synchronizing investments and
financing activities also force them to take care of their foreign exchange exposure. Few of the
companies consider the force of cost of external funding, agency conflicts and convexity of taxes
while considering the issue of management of their foreign exchange exposure.
7.9 MANAGEMENT OF VARIOUS EXPOSURES
Though everyone knows that unmanaged foreign exchange exposure can cause significant
fluctuations in the earnings and the market value of the firm yet it is also argued that hedging is
not so simple exercise. In fact, risk management, essentially, is a strategic function. It requires
specialized skills. It has been observed that companies have different attitude towards
management of their various foreign exchange exposures. This study makes a comparison
between attitude of banking and non-banking companies towards their various foreign exchange
exposures. The results are depicted in table 10 and chart 8.
TABLE 10 MANAGEMENT OF VARIOUS EXPOSURES
Type of Exposure Non Banking CompaniesBanking Companies Total
Only Transaction Exposure 48 0 48
All Three Exposures 20 11 31
Both Transaction & Economic Exposure 7 1 8
Only Economic Exposure 1 0 1
No Hedging 7 0 7

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Total 83 12 95
CHART 8 MANAGEMENT OF VARIOUS EXPOSURES
The results of the study confirm the general observation. It shows though 77% of companies
under study face all of three exposures; transaction, economic and translation exposure yet only
24 % of companies are managing all of their exposures. Most of the companies (approx. 60 %)
are managing only their transaction exposure. 8 % of companies are managing their transaction
and economic exposure. Only 7 % of companies (non-banking companies) which do not accept
even the effect of foreign exchange exposure do not manage their exposure.
7.10 FACTORS OF CONSIDERATION FOR EXPOSURE MANAGEMENT
There are many factors which should be duly taken care of while considering any decision of
foreign exchange exposure management. The results of the study show that most of the
companies are worried about few of the factors like inflow-outflow mismatches, timing
mismatches, benefits of hedge and contracted foreign currency cash flows etc. They are not so
serious about many of the other crucial factors such as degree of foreign involvement by foreign
subsidiaries, variability of expected future cash flows, location of subsidiaries, their accounting
methods, elasticity of demand of their inputs and out puts, strategies of its competitors and
flexibility of their production processes etc. which if duly taken care of, may be prove to be boon
for the company in case of adversities.
7.11 NUMBER OF TECHNIQUES USED FOR EXPOSURE MANAGEMENT
Generally it is observed that companies in India do not manage their foreign exchange exposure
as actively as they do not take it so seriously. Moreover, not many options are available to for

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hedging exposure completely. Companies use few of techniques for hedging their exposure. No.
of techniques used for exposure management has been treated as an indicator of their seriousness
towards exposure management. The results are depicted in table 11 and chart 9.
TABLE 11 & CHART 9 NUMBER OF TECHNIQUES USED FOR EXPOSURE
MANAGEMENT
7%
54%16%
5% 14%
4%
Do not Hedge Use 1 Technique Use 2 Techniques Use 3 Techniques Use 4 Techniques Use 5 Techniques
RESULTS OF STATISTICAL ANALYSIS
Mean = 1.778947368
Median & Mode = 1
Standard Deviation = 0.46588033
No. of Techniques Responses
0 7
1 51
2 15
3 5
4 13
5 4
More Than 5 0
Total 95

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Skewness = 1.671980549
Statistical analysis shows that frequency of companies using only one technique is highest.
Graph depicts that 54 % of companies are using only one technique to manage their exposure. 16
% of companies use two techniques. Very few companies use more than two techniques. 5 % of
companies are using three techniques. 14 % of companies are more serious about their exposure
management and use four techniques for hedging their exposure. Whereas only 4 % of
companies apply 5 or more than 5 techniques as they make their best efforts to eliminate
exposure completely.
7.12 COMPARISON OF ATTITUDE OF INDIAN & FOREIGN COMPANIES
TOWARDS REVIEW OF EXPOSURE / HEDGING POLICIES
Success of exposure management requires not only establishment of exposure management
system or applying various hedging strategies. There should be periodic reporting and evaluation
of effectiveness of those hedging policies. System should be developed to smell out danger at the
earliest stage and quicker decision making to handle it. Having a foreign exchange exposure
management system in place will not protect a firm or enhance its performance unless it is
embedded in a risk aware corporate culture. Moreover constant eye on market fluctuations and
exposure is also essential. On one hand, some of the companies do not pay attention for review
of their exposure and hedging policies on the other hand; some of the companies have the system
of daily review. Some of the companies even follow the policy of weekly, monthly or quarterly
review system. Usually it is observed that foreign companies take exposure management very
seriously and they develop systematic periodic review system for regular evaluation of
effectiveness of their hedges whereas Indian companies are no so serious about review and
evaluation. To study the difference in attitude of Indian and foreign companies towards
periodicity of review of exposure and hedging policies, hypothesis has been formulated. The
hypothesis has been tested with the help of ANOVA where periodicity of review is the
dependent variable and origin of company (Indian or Foreign) is independent variable. The
results of comparison are depicted in table 12 and table 13.
NULL HYPOTHESIS: There is no significant effect of origin of company on periodicity of
review of their exposure & hedging policies.

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TABLE 12 COMPARISON OF ATTITUDE OF INDIAN & FOREIGN COMPANIES
Origin of
Company
Periodicity of Review
No
Review
Total
Daily/
weekly
Monthly Quarterly Yearly
Indian 45 27 4 4 7 82
Foreign 6 3 2 1 1 13
Total 51 30 6 4 7 95
TABLE 13 COMPARISON OF ATTITUDE OF INDIAN & FOREIGN COMPANIES
Source Type III Sum
of Squares
df Mean Square F Sig.
Corrected Model .310(a) 1 .310 .875 .352
Intercept 35.527 1 35.527 100.344 .000
Origin of Company .310 1 .310 .875 .352
Error 28.678 81 .354
Total 357.000 83
a R Squared = .011 (Adjusted R Squared = -.002)
Graph shows that there is both Indian and foreign companies have similar attitude for review of
their exposure and hedging policies. Most of the Indian as well as Foreign companies review
their exposure and hedging policy on regular basis. ANOVA table shows that at 5 % level of
significance, null hypothesis is accepted. So, there is no significant difference between Indian
and foreign companies regarding their periodicity of review of their exposure and hedging
policies.
7.13 FACTORS AFFECTING ATTITUDE OF COMPANIES TOWARDS REVIEW OF
EXPOSURE / HEDGING POLICIES

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The attitude of any company towards periodicity of review of their exposure and hedging
policies depends on many factors. In this article, to study the effect of objective, management
system and management policy on periodicity of review of their exposure and hedging policies
hypothesis has been formulated. ANOVA has been applied to test the hypothesis where
periodicity of review is dependent variable and effect of fluctuations and effect of objective,
management system and management policy are independent variables. The results of the test are
NULL HYPOTHESIS: There is no significant effect of objective, management system and
management policy on periodicity of review of their exposure and management policies.
TABLE 14 FACTORS AFFECTING ATTITUDE OF COMPANIES TOWARDS
REVIEW OF EXPOSURE / HEDGING POLICIES
Squares
df Mean Square F Sig.
Intercept 3.693 1 3.693 46.899 .000
Objective 10.932 1 10.932 138.813 .000
Management System .001 1 .001 .016 .899
Management Policy .145 1 .145 1.835 .179
Error 7.167 91 .079
Total 430.000 95
Since value of p is 0.899 for management system and 0.179 for management policy which is
higher than 0.05 (5 % level), management system and management policy do not have any
significant effect on periodicity of review of their exposure and hedging policies. But objective
of exposure management have significant effect on periodicity of review.
8. CONCLUSION
Majority of the companies face all of three exposures; transaction, economic and translation
exposure. Even the companies which do not have any foreign subsidiary are also facing
translation exposure because of their foreign currency assets and liabilities. Comparative study
shows that as most of the banking companies have spread their wings in international market, no
banking company under the study has been escaped of foreign exchange exposure. Only those
non banking companies which have neither any foreign subsidiary nor any foreign currency
denominated asset or liability are not facing translation exposure. There is not even a single
company under study which has been left untouched by any of these exposures.
All of the banking companies accept the need for managing their foreign exchange exposure as
in India; it has been made mandatory by RBI for all the banks dealing in foreign exchange in

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India. Few of the non-banking companies do not accept even the effect of foreign exchange
exposure do not realize any need for managing their exposure. Majority of the companies have
proper management system in order to eliminate all of their exposure. Some of the companies try
to eliminate their risk selectively whereas some of them also try actively to seek profits or
competitive advantages. Few of them follow the policy of stabilization. Companies also consider
other objectives such as to reduce stake holder’s perceived risk, to improve their ability of
investments and to minimize their risk. Both foreign and Indian MNCs have similar attitude
towards development of separate management system to hedge their foreign exchange exposure.
The results also show that management system of companies does not depend so much on their
consideration for effect of exchange rate fluctuations.
Most of the companies who are aware of foreign exchange exposure make estimation of their
exposure. Both Indian and foreign companies estimate their foreign exchange exposure despite
their level of exposure. There is significant effect of objective of management on estimation of
exposure. But the decision of estimation of exposure is not so much affected with existence of
separate management system and management policy of the company. Most of the companies in
India are worried about the costs of financial distress. Problems of synchronizing investments
and financing activities also force them to take care of their foreign exchange exposure. Few of
the companies consider the force of cost of external funding, agency conflicts and convexity of
taxes while considering the issue of management of their foreign exchange exposure. Majority of
companies under study are actively managing their foreign exchange exposure. Though most of
the companies suffer from all of the exposures; transaction, economic and translation exposure
yet only few of them are managing all of their exposures. Most of them are managing only their
transaction exposure. Few of them are managing both transaction as well as economic exposure.
Majority of the companies are using only one technique to manage their exposure. Very few
companies are taking help of two or more than two techniques. These include those companies,
which make their best efforts to eliminate exposure completely. Both Indian and foreign
companies have similar attitude for review of their exposure and hedging policies. Most of the
Indian as well as Foreign companies review their exposure and hedging policy on regular basis.
Management system and management policy do not have any significant effect on periodicity of
review of their exposure and hedging policies. But periodicity of review is significantly affected
by objective of exposure management.
9. BIBLIOGAPHY
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Real Hedging”, Journal of E-Business, Vol. 1, Issue-1 June 2001.
Aliber, Robert Z., 1978, “Exchange Risk and Corporate International Finance”, Hasted Press,
New York.
Allayannis, George and E. Ofek, 1997, “Exchange rate Exposure, Hedging, and the Use of
Foreign Currency Derivatives”, Working Paper, University of Virginia.

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Davis, Henry A., and Frederick C. Militello, Jr., 1995, “Foreign Exchange Risk Management: A
Survey of Corporate Practices”, (Financial Executives Research Foundation, Morristown, New
Jersey, USA) 44
He, Jia and Lilian K. Ng, 1998, “The Foreign Exchange Exposure of Japanese Multinational
Corporations”, the Journal of Finance 53 (2), 733-753.
Hiten Jhaveri, “Strategies for Managing Risks”, Chartered Financial Analyst, Dec. 2002.
Jorion, Philippe, 1990, “The Exchange Rate Exposure of U.S. Multinationals”, Journal of
Business 63 (3), 331-45.
Laurent L. Jacque, “Management of Foreign Exchange Risk: A Review Article”, Journal of
International Business Studies, Spring/Summer 1981.
Pringle, John J., 1991, “Managing Foreign Exchange Exposure”, Journal of Applied Corporate
Finance 73-82.
Schrand, Catherine, and Haluk Unal, 1998, “Hedging and Coordinated Risk Management:
Evidence from Thrift Conversions”, Journal of Finance, Vol. 53, No. 3, 979-1013.
Shapiro, Alan C., and Sheridan Titman, 1986, “An Integrated Approach to Corporate Risk
Management”, in Joel Stern and Donald Chew, Eds.: The Revolution in Corporate Finance (Basil
Blackwell, Ltd. Oxford, England and Basil Blackwell, Inc., Cambridge, Mass.).
Shapiro, Alan C., 1996, “Multinational Financial Management”, 5 th edition, Prentice Hall Inc.,
Upper Saddle River, New Jersey.
T. Ramanan, “Risk Management”, Chartered Financial Analyst, Feb. 2003.

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