HEDGING IN FOREX

(With Special Reference to Renowned Auto Products MFRS Ltd Hosur)

A MAJOR PROJECT REPORT

SUBMITTED BY
ISAIVANI.L
(Reg No: 07 PIT09)

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

UNDER THE GUIDANCE OF

Ms.K. Ramya, M.B.A, M.Phil.,

AVINASHILINGAM SCHOOL OF MANAGEMENT TECHNOLOGY

AVINASHILINGAM UNIVERSITY FOR WOMEN
COIMBATORE –641 043

MARCH 2009
 HEDGING IN FOREX
(With Special Reference to Renowned Auto Products MFRS Ltd Hosur)

A MAJOR PROJECT REPORT

SUBMITTED BY
ISAIVANI.L
(Reg No: 07PIT09)

A MAJOR PROJECT REPORT SUBMITTED FOR

AVINASHILINGAM SCHOOL OF MANAGEMENT TECHNOLOGY
AVINASHILINGAM UNIVERSITY FOR WOMEN
COIMBATORE -641 043

IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

MARCH 2009
CERTIFIED AS BONAFIDE RESEARCH WORK

SIGNATURE OF THE SIGNATURE OF THE SIGNATURE OF THE

DEAN EXTERNAL EXAMINER GUIDE

 ACKNOWLEDGEMENT

“HEARTFELT GRATITUDE IS THE GREATEST OF ALL VIRUTES”

The researcher is greatly obliged to the Chancellor Mr.T.K. Shanmuganandham, BA.,

BL., and the Vice Chancellor, Mrs. Saroja Prabhakaran M.A., Dip.Ed., Ph.D., and the
Registrar Mrs.Gowri Ramakrishan M.Sc., M.Phil., Ph.D., of Avinashilingam
University for Women, Coimbatore for having given me an opportunity to undertake this
project work which forms part of the curriculum.

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 owes her heart-felt gratitude to Ms.P.Shanmugapriya, Company

Secretary, Renowned Auto Products MFRS Ltd and all the staff members for providing
the researcher necessary information for the successful completion of 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

CHAPTER TITLE PAGE

NO
SYNOPSIS
LIST OF TABLES
LIST OF CHARTS
I INTRODUCTION
1.1 AUTOMOBILE INDUSTRY 1
1.2 RENOWNED AUTO PRODUCTS 5
MFRS LTD
1.3 HEDGING IN FOREIGN EXCHANGE 14
1.4 OBJECTIVES 17
1.5 LIMITATIONS 18
1.6 SCOPE 19

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

Table Title Page no

No
1 Foreign Exchange Earnings and 34
Outgo
2 Value of Imported and Indigenous 36
Raw Materials
3 Foreign Exchange Outgo 38
4 ABC Analysis to Determine the 39
Major Vendors
5 Major vendors in import of Raw 41
Materials and Components
6 ABC Analysis to Determine the 43
Major Customers
7 Major Customers in the Exports 45
sales
8 Vendors in the World 46
9 Balance Of Payments 48
10 Forward cover for Forex Inflow 50
and Outflow –USD in 2006-2007
11 Forward cover for Forex Inflow 52
and Outflow –USD in 2007-2008
12 Forward Cover for Forex Outflow 55
on 2007-2008 –USD
13 Forward Cover for Forex Inflow 57
and Outflow on 2006-2007
-EURO
14 Forward Cover for Forex Inflow 59
and Outflow on 2007-2008
-EURO
 List of Charts

Chart Title Page

No no
1 Foreign Exchange Earnings and 35
Outgo
2 Value of Imported And Indigenous 37
Raw Materials
3 ABC Analysis to Determine the 40
Major Vendors
4 Major vendors in import of Raw 42
Materials and Components
5 ABC Analysis to Determine the 44
Major Customers
6 Vendors in the World 47
7 Balance Of Payments 49
8 Forward cover for Forex Inflow and 51
Outflow –USD in 2006-2007
9 Forward cover for Forex Inflow and 54
Outflow –USD in 2007-2008
10 Forward Cover for Forex Outflow on 56
2007-2008 –USD
11 Forward Cover for Forex Inflow and 58
Outflow on 2006-2007
-EURO
12 Forward Cover for Forex Inflow and 60
Outflow on 2007-2008
-EURO
 CHAPTER I

INTRODUCTION

1.1 AUTOMOBILE INDUSTRY

A well-developed transport network indicates a well developed economy. For rapid
development a well-developed and well-knit transportation system is essential. As India's
transport network is developing at a fast pace, Indian Automobile Industry is growing
too. Also, the Automobile industry has strong backward and forward linkages and hence
provides employment to a large section of the population. Thus the role of Automobile
Industry cannot be overlooked in Indian Economy. The Automobile Industry produces all
kinds of vehicles. India Automobile Industry includes the manufacture of trucks, buses,
passenger cars, defense vehicles, two-wheelers, etc. The industry can be broadly divided
into the Car manufacturing, two-wheeler manufacturing and heavy vehicle-
manufacturing units.

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:

• Two wheelers - 2nd largest in the world

• Commercial Vehicle - 4th largest in the world
• Passenger car- 11th largest in the world

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 MODERN AUTOMOBILE MARKET IN INDIA HAS BEEN

CONSIDERING KEY ISSUES IN THE PROCESS OF GROWTH

• Customer care, and not just 'service'

• Domestic as well as multinational investments
• Searing through cut-throat competition
• Road safety
• Anti-pollution norms
• Coordination with the government to enable advancement
• Used vehicle trade

EMERGING MARKET TRENDS

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.

♦ International companies like Hyundai, Honda are gaining market share.

♦ Technological up gradation will be primary requisite for success in the market.

♦ 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.

FUTURE OF INDIAN AUTOMOBILE MARKET

The future of Indian Automobile market is bright as it looks forward to

manufacturing and implementing new innovations such as electric cars as provided by
Reva, alternate fuels like CNG and LPG, and probably customized Internet automobile
orders.

• 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.

Turnover of the Indian auto component industry is forecasted to surpass US$ 50

Billionin2014-15.

3
INDIAN MARKET CONDITIONS

The automobile Industry witnessed a growth of about 13.50% in April-March

2008 compared to corresponding period April-March 2007.

DOMESTIC SALES

The cumulative growth of the passenger vehicles segment during April-March

2008 was 14.75% passenger cars grew by 15.49%, Utility Vehicles by 10.36% and Multi
purpose Vehicles by 10.36% 2007-2008, for the passenger vehicle segment expected
growth would be 16% in 2009-2010 and 94% 2014-2015 with respect to year 2006-2007
vehicle production.
India has been identified as a Hub for small car manufacturing for both Domestic
and Export requirements. Following are the vehicle production plan and investment plan
for the major global car manufactures in India.

Exports

Automobile exports registered a growth of 12% during April-March 2008 over

the same period last year.

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

Is to delight our customers as No 1 technology, driven global manufacture and

marketer of value differentiated ride-control, emission control and customer products and
systems. We will strengthen our leading positions through a shared value culture of
employee involvement where an intense focus on continued improvement delivers
shareholders value in ever thing we do

Vision

Pioneering global ideas for cleaner, quieter and safer transportation.

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

They Serve More Than 30 Original Equipment Manufacturers Worldwide. Our

Products Are On Many Of The Strongest Selling Vehicles Produced In North America
And Europe.

TENNECO ORIGINAL EQUIPMENT CUSTOMERS IN INDIA

INCLUDE

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 .

COMMERCIAL VEHICLE AND SPECIALTY MARKETS

• 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

Since becoming a standalone company in 1999, Tenneco (NYSE: ten) has

significantly improved its financial position and enhanced its operating results. It has
grown to become one of the world's leading suppliers of automotive emission control and
ride control products. The company is well balanced across product lines, markets served
and geographic regions.

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

SHOCK ABSORBERS AND STRUT

 Acceleration Sensitive Damping Shock Absorber (ASD)

 Frequency Dependent Damping Shock Absorber (FDD)
 Performance shock absorbers
 Monotone shock absorbers

SUSPENSION MODULES & SYSTEMS

• Corner & Full Axle Modules

• Continuously Controlled Electronic Suspension (CES)
• Kinetic Suspension Technologies

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

COMMERCIAL AND SPECIALTY VEHICLES

• Diesel Particulate Filters

• Selective Catalytic Reduction (SCR)
• DeNOx Converter After treatment Systems
• Diesel Oxidation Catalysts (DOC)
• Heat Exchanger
• Lean NOx Traps

With the most advanced computer-assisted design, engineering, and manufacturing

technologies, Tenneco provides leading edge elastomer products for automotive and
heavy truck applications.

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:

• The Performance Alignment Process to align individual performance with

business objectives.
• The Individual Development Plan (IDP) helps employees prepare for career
moves by acquiring specific skills, competencies and experience needed for
professional growth.
• The annual Succession Planning Process identifies key positions, replacement
candidates and high potential individuals around the globe.

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

Original customer of the company

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.

S.NO YEAR DETAILS OF AWARDS

1 2004 Automotive news shareholder value(for both 1 & e years period)
2 2004 Speedy repairs centers suppliers golden award
3 2004 Automotive news PACE award
4 2004 Automotive news PAPC Honorable mention award(2)
5 2003 Toyota excellence award in value improvement.
6 2003 Toyota excellence award for the 1 exus Rx 300 launch
7 2003 General motors’ 2003- suppliers award
8 2003 Ford recognition of achievement award
9 2003 VW group award.
10 2003 Auto parts 2003 vendors of the year
11 2002 Ford silver world excellence award
12 2002 Nissan master of quality award
13 2002 Gold ward –Australian Automotive aftermarket award
14 2002 Best suppliers award

1.3 HEDGING IN FOREIGN EXCHANGE

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]

Market size and liquidity

The foreign exchange market is unique because of

 its trading volumes,

 the extreme liquidity of the market,
 its geographical dispersion,

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.

Forex hedging is an excellent risk management tool to avoid unnecessary foreign

currency losses on your foreign currency assets or liabilities. Forex hedging protects you
or your company from adverse changes in foreign currency exchange rates on your
foreign currency assets and liabilities. Basic Concept: The forex hedge’s change in value
is opposite to the change in value of the foreign currency exposure (hedged item). These
two amounts offset each other to obtain cost certainty or revenue certainty by fixing the
foreign exchange rate for your transaction. Main foreign exchange market turnover, 1988
- 2007, measured in billions of USD.

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:

• $1.005 trillion in spot transactions

• $362 billion in outright forward
• $1.714 trillion in foreign exchange swaps
• $129 billion estimated gaps in reporting

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

 To study the hedging approaches followed by the company at present.

 To analyse the level of hedging across various currencies.

16
  To analyse which is best Individual currency hedging or Net hedging.

1.5 LIMITATIONS

• Findings cannot be extrapolated for other periods due to unpredictable fluctuation

in exchange rate.

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

Review of literature is to analyze critically a segment of a published body of

knowledge through summary, classification and comparison of prior research studies,
reviews of literature, and theoretical articles.

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

According to Niclas Hagelin and Bengt Pramborg (1975) investigated Swedish

firms’ use of financial hedges against foreign exchange exposure. The survey data helps
distinguish between translation exposure and transaction exposure hedging. Survey
responses indicate that over 50% of the sampled firms employ financial hedges, and that
transaction exposure is more frequently hedged than is translation exposure. The
likelihood of using financial hedges increases with firm size and exposure, and liquidity
constraints are important in explaining transaction exposure hedging. Importantly, the
existence of loan covenants accounts for translation exposure hedging, suggesting that
firm’s hedge translation exposure to avoid violating loan covenants.2

According to Spencer Star (1996) International corporations present their

financial statements in terms of a single currency, often based on the currency of the
home office or on the dollar, even though a large part of their foreign operations are
completed using other currencies. Unanticipated moves in the volatile foreign exchange
markets can severely distort the year-end results, sometimes causing large losses in an
otherwise profitable year. Recent innovations in the markets for foreign currency futures
and options allow corporations to implement complex hedging strategies to reduce
foreign exchange risk. A good hedging strategy requires both a statistical analysis and
expert judgment as to how to combine this analysis with specific corporate foreign
currency demands and the desire for reduced risk. This paper is a progress report on our
attempt to build an expert system to make decisions on hedging strategies that reduce
foreign exchange risk. In original aspect of the approach is that they analyzed the

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

According to Peter Crabb (1979) says Foreign exchange risk remains a

significant problem for microfinance institutions (MFIs). Many sources of potential
funding for MFIs remain untapped due to the high risks of currency devaluation faced by
these funding sources. Specifically, debt capital is available for MFIs but foreign
exchange risk is a potential deterrent. This paper reviews current practices in the
management of foreign exchange risk for and by MFIs. The advantages and
disadvantages of these practices are discussed and alternative practices proposed.

21
Microfinance institutions (MFIs) generally raise capital denominated in hard currencies
(U.S. Dollars, Euros, etc.). 5

According to G Allavannis and JP Weston (1998) the use of foreign currency

derivatives (FCDs) in a sample of 720 large U.S. nonfinancial firms between 1990 and
1995 and its potential impact on firm value. Using Tobin's Q as a proxy for firm value,
we find a positive relation between firm value and the use of FCDs. The hedging
premium is statistically and economically significant for firms with exposure to exchange
rates and is on average 4.87% of firm value. We also find some evidence consistent with
the hypothesis that hedging causes an increase in firm value. 6

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

According to Gregory, W Brown (1973) investigates the foreign and risk

management program of HDG Inc (Pseudonym), a us based manufacturer of durable
equipment, precise examination of factors affecting why and how the firm manages its
foreign and exposure are explored through the use of internal firm, doc discussions with
managers and data on 3110 Foreign exchange derivates transaction. Informational
asymmetries, facilitation of internal contracting and competitive pricing concerns appear
to motivate the firm hedges, how hedging hedges depends on accounting treatments

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 to Lei Li NiannianMa (2001) Companies especially multinational

companies are now exposed to risks caused by unexpected movements in exchange rate.
The management of foreign exchange risk has become essential for the survival of
companies in today’s volatile financial markets the traditional types of exchange rate risk
faced by firms, namely translation, transaction and operating risk, presents measurement
and management method for foreign exchange exposure and objectives of foreign
exchange management.The central purpose of this thesis is to examine the foreign
exchange risk management in American, Japanese and Chinese companies by comparing
hedging practices among 30 companies, of which are 10 from each country. They
approach our research by analyzing the annual report of our sample companies in the year
of 2006, it is found that American and Japanese companies tend to hedge foreign
exchange risk more than Chinese companies, also have more diversity of derivatives
usage. Although China has reformed the exchange rate policy from pegging US dollar to
a managed floating exchange rate system recently, it is still suggested that Chinese firms
are less active than American and Japanese firms in the foreign exchange management
activity. After the research, he found that the companies always put focus on hedging
transaction risk, the companies in China prefer to use home country currency as function
currency while American and Japanese companies prefer to use domestic currency as
function currency. 12

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 Chaudhry, Mukesh K., Sackley, William H., Christie-David,

Rohan A. (2005) foreign currencies' statistical relationship with other assets such as
energy and metals was examined due to the growing exposure of pension funds to assets
designated in foreign currencies. Results show that there is no integration between
currencies and other assets such as silver, gold, coffee and sugar, which present
opportunities for cross hedging. However, assets that are less co integrated such as
livestock provide opportunities for diversification.14

According to Haigh, Michael SHolt, Matthew T. (1998) Foreign exchange

hedging ratios are simultaneously estimated alongside freight and commodity ratios in a
time-varying portfolio framework. Foreign exchange futures are found to be by far the
most important derivative instrument to be employed in order to reduce uncertainty for
traders. Our results lend support to the decision by LIFFE to cease trading the BIFFEX
freight futures contract because of its low levels of trading activity, which likely resulted
from its apparent unattractiveness as a hedging instrument.15

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

According to Kodres, Laura E. (1982) the enormous foreign exchange

market has the capacity to cripple the international financial system. The most recent
survey of forex markets by the Bank for International Settlements shows that the global
forex market, considered to be the oldest, largest and most extensive financial market in
the world, posted an average daily turnover of $1,190 billion in Apr. 1995. Despite its
vast liquidity and geographic breadth, the market entails significant structure and
settlement risks that stem from large cross-border settlements. One type of risk is the
Herstatt risk, or the risk that the other counterparty will go bankrupt after the first
counterparty has delivered its side of the transaction.18

According to Neville Johnson (1993) fledged in the liberalized exchange

market is enjoying a renew vigor and resurgence of confidence. The evidence is all
around to be seen. The major increase in foreign exchange flows into the foreign
exchange system is clear evidence of growth in the market. Foreign exchange inflows
into the interbank system increased by 21.4% for the first quarter of 1994, moving from
US$207 million in 1993 to US$251.3 million. At the same time, trading in foreign
currency accounts continue to grow at a rapid pace over the same period, by 100
percent.19

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

According to Lufthansa (1981), the German airline, contracted with Boeing to

purchase aircraft in the mid-1980 when the value of the dollar was increasing. The price
was set in dollars and Lufthansa was afraid that the dollar would strengthen, increasing
the Deutsche mark cost of the planes. In 1986 Lufthansa entered into forward contracts
for the dollars required to pay for the planes. Although Lufthansa feared a strengthening
of the dollar what actually happened is that the dollar weakened. The forward contracts
cost Lufthansa $140 to $160 million more for the planes than if it had simply waited and
purchased the dollars on the spot market. 21

According to Neville Johnson (2000) fledged in the liberalized exchange market

is enjoying a renew vigor and resurgence of confidence. The evidence is all around to be
seen. The major increase in foreign exchange flows into the foreign exchange system is
clear evidence of growth in the market. Foreign exchange inflows into the interbank
system increased by 21.4% for the first quarter of 1994, moving from US$207 million in
1993 to US$251.3 million. At the same time, trading in foreign currency accounts
continue to grow at a rapid pace over the same period, by 100 percent. 22

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

Foreign exchange risk remains a significant problem for microfinance institutions

(MFIs). Many sources of potential funding for MFIs remain untapped due to the high
risks of currency devaluation faced by these funding sources. Specifically, debt capital is
available for MFIs but foreign exchange risk is a potential deterrent. This paper reviews
current practices in the management of foreign exchange risk for and by MFIs. The
advantages and disadvantages of these practices are discussed and alternative practices
proposed. Microfinance institutions (MFIs) generally raise capital denominated in hard
currencies (U.S. Dollars, Euros, etc.)

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

Research methodology defines the activity of research, how to proceed, how to

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

Research methodology of the study on the study on “Hedging in forex” comprises

the following:

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.

SOURCES OF DATA COLLECTION

The task of data collection being after a research problem has been defined and
research design/Plan chalked out. While deciding about the method of data collection to
be used for the study the study, the researcher should keep in mind two types of data viz.,
primary and secondary.

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.

STATISCAL TOOL USED FOR DATA ANALYSIS

Percentage Analysis

The present study made use of the percentage analysis as a statistical tool to
analyze and interpret the collected data.

CHAPTER IV

ANALYSIS AND INTERPRETATION

Analysis of data in a general way involves a number of closely related operations,
which are performed with the purpose of summarizing the collected data organizing these

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

Foreign Exchange Earnings and Outgo

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

Value of Imported and Indigenous Raw Materials

35
 Particulars 2007-2008 % 2006-2007 %
RsIn’000s’ Rs In’000s’
Imported 71182 11.6 69884 12.4

Indigenous 542504 88.4 494414 87.6

Total 613686 100 564298 100

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

Value of Imported and Indigenous Raw Materials

36
 600000 542504
494414
500000

Amount in '000s'
400000

300000

200000
100000 71182 69884

0
2007-2008 2006-2007
Year

Imported Indigenous

Foreign Exchange Outgo

Raw Materials and components in 2007-2008

37
 Table No- 3

Foreign Exchange Outgo

Particulars 2007-2008 2006-2007

Rs In’000s’ % Rs In‘000s’ %

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.

Major vendors in Import of Raw Materials and Components

38
 Table No – 4

ABC Analysis to Determine the Major Vendors

Segment Vendors % of Total % of

Vendors Imports Imports
A Segment 3 60 1825632 3
B Segment 1 20 50466778 92
C Segment 1 20 3030697 5
Total 5 100 55323107 100

Segment A consists of nearly 60% of vendors contributing to 3.29% of the total

imports which comes from 3 vendors, Segment B consists of nearly 20% of the vendors
contributing nearly 91.22% of imports which comes from 1 vendor and Segment C
consists of 20% of vendors contributing 5.49% of the imports which comes from 1
vendor.

39
 Chart No – 3

ABC Analysis to Determine the Major Vendors

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

Major Vendors in Import of Raw Materials and Components

Vendors Vendors No Total Value % of Sales

V1 VA351 817670 61.76
V2 VT388 157866 11.92
V3 VI398 348374 26.32
Total 1323910 100

Vendor V1 contributes 61.76% of the total sales while and Vendor V2

contributes 11.92% of the total sales and Vendor V3 contributes 26.32% of the total
sales.

Chart No – 4

Major Vendors in import of Raw Materials and Components

41
 70
61.76
60

50
Percentage

40

30 26.32

20
11.92
10

0
V1 V2 V3
Vendors

Major Customers Contributing to the Exports Sales

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

ABC Analysis to Determine the Major Customers

Segments Customers % of Customers Total Exports % of Exports

A Segment 1 33.33% 35831245.56 49%
B Segment 1 33.33% 29807411.23 40%
C Segment 1 33.34% 8323202.70 11%
Total 3 100 73961859.49 100

Segment A consist of nearly 33.33% of the customers contributing to 48.45% of

Exports, Segment B consist of nearly 33.33% of customers contributing to nearly 40.30%
of Exports, Segment C consists of nearly 33.33 % of the customers contributing to
11.25% of Exports. 48.45% of exports sales come from one customer in segment A.
40.30% of exports sales come from one customer in segment B. 11.25% of exports sales
come from one customer in segment C.

Chart No – 5

ABC Analysis to Determine the Major Customers

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%

49% A S egm ent

B S egm ent
C S egm ent

40%

Major Customers in the Export Sales

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

S.No Customer Total amount(Rs) % of Sales

1 EZGO 35831245.56 100
Total 35831245.56 100

Table No-8

Total Suppliers in the World in 2007-2008

Year Country Name Import %

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 -

The company imports majority of their materials from Belgium since of

the cost of the Raw materials are low when compared to the others. The import from
Japan contributes to 15% of the total suppliers, as the major components of automobile
are cheaper in Japan.

Chart No-6

Total vendors in the world

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

2006-2007 47311 163399 44 54 116088

2007-2008 60715 137915 56 46 77200

TOTAL 108026 301314 100 100

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

Forward cover for Forex Inflow and Outflow –USD in 2006-2007

Forward cover is booked for both inflow and outflow separately.

Month Forex Fwd Fwd Forex Fwd Fwd Fwd

Outflow Rate Cover in Inflow Rate Cover Cover in

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

Forward Cover for Forex Inflow and Outflow-USD

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.

Forex Fwd Rate Fwd Forex Fwd Fwd Fwd

Outflo Outflow Cover in Inflow Rate Cover Cover in
w INR Inflow INR-Fwd

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

Forward cover Rate on USD on 2007-2008

53
 Table No-12

Forward Cover for Forex Outflow on 2007-2008 –USD

Forward cover is booked for outflows separately.

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

20-02-08 5456.29 39.35 214705.01 37.89 206738.83 -1.46 -7966.18

24-03-08 3555 40.2 142911 41.34 146963.7 1.14 4052.7
39.09
31-03-08 3574.51 40.2 143695.30 139727.60 -1.11 -3967.71
31-03-08 6936 39.7 275359.2 40.98 284237.28 1.28 8878.08
TOTAL 126837.38

From the analysis it is shown that there is a profit of Rs 126837.38 if forward

contract is booked for USD in the year 2007-2008. This is due to the loss in the
subsequent months from April to Feb.

Chart No-10

55
 Forward Cover for Forex Outflow –USD-on 2007-2008

Table No-13

Forward Cover for Forex Inflow and Outflow on 2006-2007

56
 -EURO

Forward cover is booked for both inflow and outflow separately.

Month Forex Fwd Rate Fwd Forex Fwd Fwd Profit/Loss

Outflow Outflow Cover Inflow Rate Cover (Fwd
(Export) (Received in INR (Import) Inflow Cover in
Rate) INR-Fwd
Cover)
April-07 95746 55.67 54 33475 57.23 55.67 1.67
May-07 49.89 50.45
June-07 4651 58.09 47.09 5185 59.12 49.45 -2.36
July-07
Aug-07
Sep-07 119307 59.95 45.89 50.30 -4.41
Oct-07 74498.40 59.20 43.69 50.56 -6.88
Nov-07 8601 58.70 46.45 66099 59.05 44.45 2
Dec-07 68364 57.98 48.34 47.02 1.32
Jan-08 81092 58.75 42.45 6657 59.19 41.34 1.11
Feb-08 828.43 57.65 44.39 43.98 0.41
Mar-08 15106 58.45 44.32 6065 59 42.34 2

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

Forward Cover for Forex Inflow and Outflow on 2006-2007

-EURO

57
 Table No-14

Forward Cover for Forex Inflow and Outflow on 2007-2008

-EURO

Forward cover is booked for both inflow and outflow separately

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

Forward Cover for Forex Inflow and Outflow on 2007-2008-

EURO

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

Payment of Auditors 31-03-08 31-03-07

Audit fees 45000 449440
Other services 50000
Reimbursement of out of pocket expenses 149525 40583

TOTAL 194525 540023

Expenditure in R&D
Recurring Expenditure 1342578 140208

Capacities and production

Units Installed Capacity Production Capacity
2008 2007 2008 2007
Class of Goods stock 2760000 2760000 2122273 2093762
absorbers & struts

Purchase of Traded Goods

Purchase of Traded goods
31-3-08 31-3-07
Unit Value in
s Qty Rs. Qty Value in Rs.
Stock absorbers Nos. 1196 1461978
Components Nos. various types 4528421 Various types 4732489
Inventory and Sales
31-3-2008 Opening stocks Sales Closing stock
Units Qty value Qty value Qty Value
Stock and Struts Nos.
Traded goods & Nos. 319886 33298787 2112730 816504017 154942 33912811
components - - Various 4528421 1196 1461978
31-3-2007 types
Stock & Struts

Traded goods & 148103 27325075 1921979 757896573 319886 33298787

components - - Various 4732489 - -
types

Consumption of Raw Materials & Components

Consumption of Raw Materials & Components

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

TOTAL 613686829 564298705

Raw Material & Components
31-3-2008 31-3-2007
RAW MATERIAL Value in
& COMPONENT % Rs. % Value in Rs.
Imported 12 71182028 12 69884114
Indigenous 88 542504801 88 494414591

TOTAL 100 613886829 100 564298705

Stores & Spares

31-3-2008 31-3-2007
STORES & Value in
SPARES % Rs. % Value in Rs.
Imported 14 1969143 9 1030649
Indigenious 86 11625668 91 11003225

TOTAL 100 13594811 100 12033874

Value of Imports on CIF Basis

VALUES OF IMPORTS
ON CIF BASIS 31-3-08 31-3-07
Components &
Consumables 65831697 6897095
Capital Goods 594830

TOTAL 65831697 7491925

Expenditure in Foreign Currency

EXPENDITURE IN
FOREIGN CURRENCY 31-3-08 31-3-07
Travelling Expences 924821 119774
Warehouse Rental
Charges 90829 23704

TOTAL 1015650 356816

Earnings in Foreign Currency

EARNINGS IN FOREIGN
CURRENCY 31-3-08 31-3-07

FOB Value of Exports 66512923 54989289

Freight & Insurance
recovered on Export 79581 4328820

TOTAL 66592504 59318109

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

TOTAL 148002359 159156872

Assets
ASSETS 2007-2008 2006-2007
Receivable 51967684 41583268
Inventory 13854358 2813568

TOTAL 65822042 44396836