UNIVERSITY OF MUMBAI

PROJECT ON EXCHANGE RATE RISK (ECONOMICS)

MASTER OF COMMERCE (BANKING AND FINANCE) SEMESTER 2 2013-14

In Partial Fulfillment of the Requirement under Semester Based Credit and Grading System for Post Graduates (PG) Programme under Faculty of Commerce

SUBMITTED BY RUCHI JOSHI ROLL NO: 39

PROJECT GUIDE Ms. Mrunalini Ravalekar

K.P.B. Hinduja College of Commerce, 315 New Charni Road, Mumbai-400004.

M.COM (BANKING & FINANCE) 2nd SEMESTER

EXCHANGE RATE RISK

SUBMITTED BY RUCHI JOSHI ROLL NO: 39

CERTIFICATE

This is to certify that Ms. RUCHI JOSHI of M.Com.Banking and Finance Semester 2nd [201314] has successfully completed the Project on EXCHANGE RATE RISK under the guidance of Ms.Mrunalini Ravalekar.

Project Guide

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Course Coordinator

________________

Internal Examiner

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External Examiner

________________

Principal

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Date: _______________ Place: Mumbai

DECLARATION

I Ms. RUCHI JOSHI the student of M.Com-Banking and Finance, 2nd Semester [2013-14], hereby declare that I have completed the project on EXCHANGE RATE RISK.

The information submitted is true and original to the best of my knowledge.

RUCHI JOSHI

(Signature)

ACKNOWLEDGEMENT

With great pleasure I thank My Project Guide Mrunalini Ravalekar as well as Coordinator of K.P.B Hinduja College of Commerce Dr. (Ms.) Minu Madlani, for being an inspiration in the completion of this project. I thank them for their invaluable help provided during the completion of this project. I also thank them for providing me guidance and numerous suggestions throughout the project. I am thankful to the librarians who gave me full support with the available resources.

EXECUTIVE SUMMARY

The exchange rate is a key financial variable that affects decisions made by foreign exchange investors, exporters, importers, bankers, businesses, financial institutions, policymakers and tourists in the developed as well as developing world. Exchange rate fluctuations affect the value of international investment portfolios, competitiveness of exports and imports, value of international reserves, currency value of debt payments, and the cost to tourists in terms of the value of their currency. Movements in exchange rates thus have important implications for the economys business cycle, trade and capital flows and are therefore crucial for understanding financial developments and changes in economic policy.

The study covers two main topics: first, various aspects of economic policy with respect to the exchange rate, and second, modeling and forecasting the exchange rate. Accordingly, the study analyses Indias exchange rate story and discusses the structure of the foreign exchange market in India in terms of participants, instruments and trading platform as also turnover in the Indian foreign exchange market and forward premia. The Indian foreign exchange market has evolved over time as a deep, liquid and efficient market as against a highly regulated market prior to the 1990s. The market participants have become sophisticated, the range of instruments available for trading has increased, the turnover has also increased, while the bidask spreads have declined. This study also covers the exchange rate policy of India in the background of large capital flows,

The study then attempts to develop a model for the rupee-dollar exchange rate taking into account variables from monetary and micro structure models as well as other variables including intervention by the central bank.

INDEX