Foreign Exchange Risk refers to the risk of an unfavorable change in the settlement

value of a transaction entered in a currency other than the base currency (domestic
currency). This risk arises as a result of movement in the base currency rates or the
denominated currency rates and is also called exchange rate risk or FX risk or currency
risk.

There are three main types of foreign exchange risks

 Transaction risk
 Translation risk
 Economic risk

Transaction risk

When companies are involved either in trade transaction (export and import), financial
transaction (borrowing and lending in foreign currency) dividend payment/receipts, they
are exposed to transaction risk. Such companies face Transaction risk, which could be
defined as the risk that exists because of possible changes in currency rates between
transaction date and its settlement date.

The corporate risk management policy should state what degree of exposure is

acceptable. This will probably be dependent on whether the Treasury Department is
been established as a cost or profit centre

There are many ways to hedge the transaction risk

Hedging is a strategy used to protect one's position in a currency pair from an adverse
move. 

Hedging transaction risk

Internal methods

1. Invoice
2. Matching and Netting
3. Leading and lagging
1. Invoice -

Which involves billing the transaction in the currency that is in the companies favor. This
may not eradicate exchange risk, however, shifts the liability to the other party. A simple
example is an importer invoicing its imports in the home currency which shifts the
fluctuation risk onto the shoulder of the exporter.

2. Matching and Netting agreements-

Netting is a method of reducing risks in financial contracts by combining or aggregating

multiple financial obligations to arrive at a net obligation amount. Netting is used to
reduce settlement, credit, and other financial risks between two parties. 

Matching extends this concept to include third parties such as external suppliers and
customers.

3. Leading and lagging-

If an importer (payment) expects that the currency it is due to pay will depreciate, it may
attempt to delay payment. This may be achieved by agreement or by exceeding credit
terms.

If an exporter (receipt) expects that the currency it is due to receive will depreciate over
the next three months it may try to obtain payment immediately. This may be achieved
by offering a discount for immediate payment.

Hedging transaction risk

External

1. Forward

2. Money market hedge

3. Futures

4. Options

5. Forex swaps
 6. Currency swaps

1.Forward

Forward contracts are agreements between two parties to exchange two designated

currencies at a specific time in the future. These contracts always take place on a date
after the date that the spot contract settles and are used to protect the buyer from
fluctuations in currency prices.

It is the most commonly used method of hedging.

2. Money market hedge

Using money market, the company can hedge against currency risk by borrowing in
foreign currency now, an amount equal to the present value of the sum receivable in
future. The basic idea is to avoid future exchange rate uncertainty by making the
exchange at today's spot rate instead. This is achieved by depositing/borrowing the
foreign currency until the actual commercial transaction cash flows occur.

3.Futures

 It means to exchange a currency for another at a fixed exchange rate on a specific date
in the future. Since the value of the contract is based on the underlying currency
exchange rate, currency futures are considered a financial derivative. These futures are
very similar to currency forwards however futures contracts are standardized and traded
on centralized exchanges rather than customized.

4.Options

A currency option is a contract that gives the buyer the right, but not the obligation, to
buy or sell a certain currency at a specified exchange rate on or before a specified date.

 If there is a favourable movement in rates the company will allow the option to lapse, to
take advantage of the favourable movement. The right will only be exercised to protect
against an adverse movement, i.e. the worst-case scenario.

A call option gives the holder the right to buy the underlying currency.

A put option gives the holder the right to sell the underlying currency.

Options are more expensive than the forward contracts and futures but result in an
asymmetric risk exposure.
5.Forex Swaps

It is an agreement between two parties to exchange a given amount of one currency for
an equal amount of another currency based on the current spot rate. The two parties
will then give back the original amounts swapped at a later date, at a specific forward
rate. The swap rate and amount of currency agreed between the parties in advance is
called a fixed rate/fixed rate swap.

7.Currency swap

A currency swap allows the two counter parties to swap interest rate commitments on
borrowings in different currencies.

In effect a currency swap has two elements:

An exchange of principal in different currencies, which are swapped back at the original
spot rate - just like a forex swap.

An exchange of interest rates - the timing of these depends on the individual contract.

The swap of interest rates could be fixed for fixed or fixed for variable.

Translation risk

Translation risk/translation exposure are corporate treasury concepts used to define the
risks posed by exchange rate volatility to the value of a company’s foreign assets and
liabilities.

Multinational companies with overseas subsidiaries, operations, assets or liabilities

denominated in foreign currencies need to translate the value of all those assets and
liabilities into the company’s functional currency during the consolidation of financial
statements.

Since exchange rates fluctuate continuously, this triggers foreign currency risk at the
accounting level as it causes the value of assets to go up or down. This, in turn,
generates FX gains and losses from non-operating activity that may distort the
company’s overall performance.
It involves balance sheet items such as long term assets and liabilities which are difficult
to hedge due to their long term nature. And this risk is hedged very occasionally.

Economic Risk

A company faces economic risk when the volatility in the exchange rate market can
cause changes in the market value of the company. It basically represents the effects of
exchange rates movement on revenues and expenses of a company which ultimately
affects the future operating cash flows of the company and its present value.

Economic risk is the residual risk and is often hedged at last and in many cases, left
unhedged.
History of foreign exchange market in India

After the breakdown of the Bretton woods system in 1971, globally operations in the
foreign exchange market started in a major way and it also marked the beginning of
floating exchange rate in several countries. The decade of the 1990s witnessed a
perceptible policy shift in many emerging markets towards reorientation of their
financial markets in terms of new products and instruments, development of
institutional and market infrastructure and realignment of regulatory structure
consistent with the liberalised operational framework.

The foreign exchange market came into existence in India in the year 1978 when RBI
permitted banks to under-take intra-day trading in foreign exchange. Consequently, the
stipulation of maintaining “square” or “near square” position was to be complied with
only at the close of business hours each day.

A square position is a situation where a trader or portfolio has no market exposure.

With growing emergence of profit opportunities, the major banks began quoting two-

way prices against the rupee as well as in cross currencies. This led to an increase in

trading volume. The RBI played the role of a market clearer on day-to-day basis. This

obviously introduced some variability in the size of reserves.

During the period 1975- 1992, the exchange rate of rupee was officially determined by

the RBI in terms of a weighted basket of currencies of India’s major trading partners and

there were significant restrictions on the current account transactions as government

intervention was the only risk management tool available to corporate enterprises in the

pre liberalization era.

The exchange rate of the rupee, that was pegged earlier was floated partially in March

1992 and fully in March 1993 following the recommendations of the Report of the High

Level Committee on Balance of Payments (Chairman: Dr.C. Rangarajan)

With effect from 1st March,1993 the unification of the exchange rate of the rupee marks

the beginning of the era of the market determined exchange rate regime of rupee

based on demand and supply in the forex market.

Current account convertibility was achieved in August 1994.

Current account convertibility means freedom to convert domestic currency into foreign

currency and vice versa for trade in goods and invisibles (services, transfers or income

from investment). Individuals and entities can convert currencies in the foreign exchange

market. 

The appointment of an expert Group on Foreign exchange(known as the Sodhani

committee was an impetus to the development of the foreign exchange market in India
as they cam eupp with a lot of recommendations to deepen and widen the forex
exchange market.

The Foreign Exchange Management Act, 1999 or FEMA regulates the whole Foreign

Exchange Market in India.

Since 2001, clearing and settlement functions in the foreign exchange market are largely
carried out by the Clearing Corporation of India Limited (CCIL)
 Market participants in the foreign exchange market

The forex market is made up of

Authorised Dealers
(generally banks), some intermediaries with limited authorisation and end users viz.,
individuals, corporates, institutional investors and others. Market making banks
(generally foreign banks and new private sector banks) account for a significant
percentage of the overall turnover in the market.

Commercial banks

Commercial Banks are the major operators in the foreign exchange market. They buy
and sell currencies on behalf of their customers. They can also operate on their own
initiative. For transactions, involving large volumes, banks may deal directly among
themselves.

Foreign exchange brokers

FE brokers do not buy or sell the foreign currency on their own account, as done by
market makers. They are working as an intermediary between two parties, to satisfy their
respective needs. As they are working as a bridge between buyers and sellers of the
foreign currency, they are only earning the fees in the form of brokerage charges.

Cutomers , Indivivduals and Corporates

Big business houses, International investors and Multinational Corporations may operate
in the foreign exchange market, either for meeting their genuine trade requirements or
investments or for purposes of speculation. They may buy or sell currencies, with a view
to speculate with in the framework of foreign exchange regulations.

Central banks, which represent their nation's government, are extremely important
players in the forex market. Open market operations and interest rate policies of central
banks influence currency rates to a very large extent.

A central bank is responsible for fixing the price of its native currency on forex. This is
the exchange rate regime by which its currency will trade in the open market. Exchange
rate regimes are divided into floating, fixed and pegged types.
Fundamental and technical analysis

Trading in foreign exchange would require relying on two basic forms of analysis

Fundamental analysis

Technical analysis

Fundamental analysis

Fundamental Analysis is a broad term that describes the act of trading based purely on
global aspects that influence supply and demand of currencies, commodities, and
equities. 

The basic skill involved in fundamental analysis in forex trading requires an analyst to
determine how a currency will react to macro-economic events, central bank monetary
policy shifts, and political and social news from the currency’s nation of origin when
compared to the other currency in a currency pair.  In the case of a common regional
currency, such as the Euro, the analysis of each member state in addition to the entire
regional economy as a whole is required to make an accurate fundamental evaluation of
the currency.

Factors affecting fundamental analysis

Seasonality

For instance, at the end of the calendar year many investors will sell equities that have
declined throughout the year in order to claim capital losses on their taxes. Sometimes it
may be beneficial to exit positions before the year-end selloff begins. On the other side
of that equation, investors typically come back to equities in droves in January, a
phenomenon called “The January Effect.” The end of a month can be rather active as
well as businesses that sell products in multiple nations look to offset their currency
hedges, a practice termed “Month-End Rebalancing.”

Geopolitical tensions

The term geopolitical risk is used to describe a wide range of issues, from military
conflict to climate change and Brexit. It relates to, but is not the same as, the risk posed
by populism. For our purposes we are looking at the relationships between nations at a
political, economic or military level. Geopolitical risk occurs when there is a threat to the
normal relationships between countries or regions. From an investor perspective we are
focused on how shifts in these relationships can impact the economy and create
volatility in financial markets1

Central banks

Each major economy has a central bank that typically manages its currency, benchmark
interest rates and money supply. Central bank activities and speeches by central bank
officials are closely watched by fundamental traders for clues about future monetary
policy shifts.

Economic releases

Fundamental traders use economic news and data releases to initiate and liquidate short
term trades based on the results of the release. In fundamental news, often the market
will not react as expected, or in many cases it will move in a completely opposite
direction to what traders would intuitively expect.
 TECHNICAL ANALYSIS

In technical analysis, the price and volume data are analysed to be able to predict future
movements. The analysis of trends is necessary for trading in the forex because in the
forex you can gain in a bull market and a bear market as you buy one currency and sell
the other

Technical analysis boils down to two things:

1. identifying trend
2. identifying support/resistance through the use of price charts and/or timeframes

There are different technical indicators such as:

1. Bollinger bands
2. Parabolic SAR
3. MACD
4. Stochastic Oscillator
5. Ichimoku Kinho Hyo
6. RSI
7. Candlestick chart
8. Fibonacci Retracement
INTRODUCTION
Foreign Currency Exchange, also known as ‘forex’ is the process by which one currency is
exchanged for another. The exchange, or transfer, is conducted in the foreign currency
market, with the value of one currency relative to another. It is the biggest market in
terms of liquidity.
About two thirds of the massive $4 trillion dollar Forex volume is transacted in just
4 currency pairs! These 4 pairs are referred to as the major currencies. The
movement in these pairs is the most watched metric in the Forex market and is
considered to be the overall barometer of the market
Today, we live in a world where the exchange of goods and services happens for money.
This money is in the form of a particular currency. Now, the value of one currency will
not be the same as that of another. This is why Foreign Currency is the spine of
international investments and global trading. Without it, it would be nearly impossible
to determine the value of goods and services imported and exported by different
countries to each other. And without having the possibility to trade, companies that rely
on overseas resources and talent would be completely crippled. Also, there would be
major problems for foreign travellers to buy or sell anything while abroad.
The Indian foreign exchange market is a decentralized multiple dealership market
comprising two segments – the spot and the derivatives market.
In the spot market, currencies are traded at the prevailing rates and the settlement or
value date is two business days ahead. The two-day period gives adequate time for the
parties to send instructions to debit and credit the appropriate bank accounts at home
and abroad.
A derivative contract is an agreement that allows for the possibility to purchase or sell
some other type of financial instrument or non-financial asset.
There are four main types

Options

Forward

Futures

Swap
Foreign Exchange rates

Exchange rates are determined by demand and supply. But governments can influence
those exchange rates in various ways.

The three main types of exchange rates are:

Fixed exchange rate

A fixed exchange rate, also referred to as pegged exchanged rate, is an exchange rate
regime under which the currency of a country is fixed, either to another country’s
currency, a basket of currencies or another measure of value, such as gold.  A country’s
monetary authority determines the exchange rate and commits itself to buy or sell the
domestic currency at that price. To maintain it, the central bank intervenes in the foreign
exchange market and changes interest rates.

The gold standard was also an international standard determining the value of a
country’s currency in terms of other countries’ currencies. Because adherents to the
standard maintained a fixed price for gold, rates of exchange between currencies tied to
gold were necessarily fixed. 

Because exchange rates were fixed, the gold standard caused price levels around the
world to move together.

The Bretton Woods Agreement

The Bretton Woods agreement was created in a 1944 conference of all of the World War
II Allied nations. It took place in Bretton Woods, New Hampshire.

Under the agreement, countries promised that their central banks would maintain fixed

exchange rates between their currencies and the dollar.2 If a country's currency value
became too weak relative to the dollar, the bank would buy up its currency in foreign
exchange markets.

Free floating system

Flexible exchange rate system refers to a system in which exchange rate is determined

by forces of demand and supply of different currencies in the foreign exchange market.
1. The value of currency is allowed to fluctuate freely according to changes in demand

and supply of foreign exchange.

2. There is no official (Government) intervention in the foreign exchange market

Managed float system

Governments and central banks often seek to increase or decrease their exchange rates
by buying or selling their own currencies. Exchange rates are still free to float, but
governments try to influence their values. Government or central bank participation in a
floating exchange rate system is called a managed float.

Countries that have a floating exchange rate system intervene from time to time in the
currency market in an effort to raise or lower the price of their own currency. Typically,
the purpose of such intervention is to prevent sudden large swings in the value of a
nation’s currency
Industry analysis

The financial services sector can be broken down into eight smaller sub-sectors.
The largest of these by far are banks, which make up a little more than half of the
total sector value.

Insurance providers are the largest of the remaining seven sub-sectors. This
includes health insurance, property and casualty insurance, and life insurance.
Next in size are capital markets and real estate investment trusts (REITs).

The four remaining subsectors combine to make up only a little more than 10
percent of the financial services industry. They are diversified financial services,
consumer finance, real estate services, and thrifts and mortgage finance.

The MF industry’s Assets Under Management (AUM) has grown from Rs 10.96 trillion (US$ 156.82
billion) in October 2014 to Rs 28.18 trillion (US$ 403.32 billion) in January 2020.

Economic analysis

Economic conditions that affect the valuation of a nation's currency. Here we look

at some of the major fundamental factors that play a role in a currency's
movement.
GDP estimated by India Ratings and research (2020-2021)1.9%
The all-India general CPI inflation declined to 5.91% in March 2020 (new base
2012=100), compared with 6.58% in February 2020.

The interest rate as on March 2020 is 5.7% to 6%

The manufacturing PMI index is 51.8 points as on March 2020 and 27.4 points in April
2020

The services PMI index is 49.3 points as on March 2020 and 5.4 in April2020

The inflation March 2020 is 5.91%

During FY20, India’s exports contracted 4.8% to $314.3 billion while imports shrank
9.1% to $467.2 billion, leaving a trade deficit of $152.9 billion.
As per CMIE data the unemployment rate in India as on April 2020 is 23.52% and
8.74 % in March 2020
Cash reserve ratio is 3% as on May 2020.

Company Analysis
Company profile
Star Fing Private Limited is a stock, share, currency & commodity broking headquartered in India.
They operate on a retail focused stock trading model that provides trading platforms and expertise
to a diversified client base. And they are also into Event Management & Promotions, Holiday
Packages, and Tax Fillings Consultants. They are registered in Bombay Stock Exchange (BSE), National
Stock Exchange (NSE) and the two leading Commodity Exchanges in the county MCX & NCDEX..

training and educating individuals about

They offer advisory services such as
Financial market, courses offer a complete education and training experience
focusing on trading fundamentals, technical analysis, risk management
Financial service like financial planning, risk management and investment planning , Franchisee
services and Other services like real estate and insurance and property consulting.
MISSION Star Fing mission is to provide comprehensive and innovative brokerage solutions backed-
up by reliable support services at extremely competitive prices to our clients.

VISION Star Fing vision is to remove ‘complexity’ out of the ‘trading equation’. They also envisions
becoming one of the leading financial service providers in the country .

The broker for starfing is starnet ltd which is registered in UAE, DUBAI 2018, & in St. Vincent &
the Grenadines as a Business Company
The objects of the company are in particular but not exclusively all commercial, financial,
lending, borrowing, trading, service activities and the participation in other enterprises as
well as to provide brokerage, training and managed account services in currencies,
commodities, indexes, CFDs and leveraged financial instruments.
 A Report on
Foreign Exchange
and risk
management

College Project guide: Submitted By:

Prof. HariPrasad Soni R.Anusha
Company Project guide: PRN:
Nanda Kumar 19021141080
Batch:2019-2021
2019-2021
Symbiosis Institute of Business Management,
Hyderabad
Authorization

This is to certify that as per best of my belief the project entitled “Foreign exchange and
risk management” is carried out by R.Anusha, PRN 19021141080 student of MBA,
Symbiosis Institute of Business Management, Hyderabad during April-May,2020, in
partial fulfillment of the requirements for the Degree of Master of Business
Administration.
She has worked under my guidance.

--------------------
Name: Prof. HariPrasad Soni
Research Project Guide
Date: 07/05/2020

Counter Signed By

………………………………
 Acknowledgement
First and outmost my gratitude goes to symbiosis Institute Of Business Management,
Hyderabad (SIBM- HYD) for providing me the opportunity to have summer internship
program which has truly enriched my postgraduate learning and experience.

I would like to show my gratitude to my faculty guide Mr Hariprasad Soni and company
guide Mr Nanda Kumar for their guidance and encouragement.

I would also like to expand my gratitude to all those who have directly and indirectly
guided me in writing this assignment who extended their kind help, guidance and
suggestions without which it could not have been possible for me to complete this
project report.