Forex Risk Management Strategies for Indian IT Companies

Abstract

Foreign exchange risk is the effect that unanticipated exchange rate changes have on the value of the firm. There are a variety of strategies which are designed to manage foreign exchange risk. Each of them, however, is constructed under specific assumptions, for a specific risk profile. It is often the case that several strategies are applicable to a given scenario. The question arises as to which strategy would be expected to yield the best results in a given scenario. This study deals with the impact of currency fluctuations on cash flows of IT service providers (who would be receiving foreign currencies), and explores various strategies for managing transaction exposure from this viewpoint. The risk management strategies considered for the study are: forward currency contacts, currency options, and cross - currency hedging. The study analyzes and evaluates these foreign exchange risk management strategies to find out which of the strategies is appropriate in particular situations.

Keywords: foreign exchange risk, risk management strategies, forward currency contracts, currency options, cross-currency hedging

JEL Classification: F31