Organizations are becoming increasingly more globalized. Currency transactions and risks there upon influence an organization portfolio. Firms are finding it necessary to pay special attention to foreign exchange exposure and accordingly design and implement suitable hedging strategies. The Foreign Exchange management decisions are affected by the level of risk that a given currency environment creates. MNCs need greater sophistication in managing currencies that revalue quite often. Two mechanisms, which are useful and generally used by MNCs in covering their transaction exposure, are prediction of currency volatilities over time and finding out correlation between currencies in which they are dealing. The present focuses on these mechanisms for hedging transaction exposure using simple correlation and covariance analysis. Here in this dissertation, it presents the reasoning and empirical evidence behind currency volatility and correlation over the period of time.
Basically this chapter deals with the background of the study or genesis of the problem to be studies and the statement of the problem to be analyzed in this dissertation. Similarly, it also covers the need and importance of this study and the main objective.
The globalization of financial markets brought about by recent technological changes, financial market liberalization and the removal of capital controls have impressed upon all MNC with international cash flows the necessity to manage foreign exchange exposure that a floating exchange system creates. Today multinational firms are trying to develop techniques and strategies for effective foreign exchange exposure management. The foreign exchange strategy adopted is critical to a MNC in the present day environment due to the high variability in the exchange rates and need to evolve with the changing structure of the company.
[...] Exploratory research is a study undertaken to define nature of problem and opportunity and to gain a better understanding of the environment within which the problem and opportunity has occurred. The objective of exploratory research is to develop hypothesis rather than testing SAMPLING TECHINIQUE Among the various types of sampling technique, simple random sampling technique has been adopted in this dissertation. A simple random sampling selects the samples by methods that allow each possible sample to have an equal probability of being picked up and each item in the entire population to have an equal chance of being included in the sample. [...]
[...] Translation exposure: The effect of an exchange rate changes on published financial statement of a firm is known a translation exposure. Economic exposure: The degree to which firm's value of future cash flows can be influenced by exchange rate fluctuation is known as economic exposure. Of these, the first and the third together are sometimes called “cash flow exposure” while the second is referred to as “accounting exposure” or “balance sheet exposure”. The reasons for this will become clear below. [...]
[...] The grading of risk have also been done to help the corporate world to benefit while they go for the currency exchange rates and its variability so that they can use them as hedging tool INSRUMENTATION TECHINQUE The lists of exchange rates that have been posted in Economics times are in the reference of Indian Rupees. An attempt has been made to analyze the effect on cross-currency measures also. The base currency has been changed to another one and simultaneously the correlation coefficients have been calculated. [...]
[...] These changes in the exchange rate regime have been accompanied by a series of measures relaxing exchange control as well as significant liberalization of foreign trade International Foreign Exchange Market The important features of the international foreign exchange market, which has grown very rapidly in recent years, are as follows: The key participants are: Importers who need foreign currencies to pay for their imports Exporters who want to convert their foreign currency receipts into domestic currency Traders who make a market in foreign currencies Foreign exchange broker who bring together buyer and sellers Speculators who try to profit from exchange rate movements Portfolio managers who buy and sell foreign securities The foreign exchange market is essentially an ‘over the counter' market. [...]
[...] However, MNCs can benefit significantly from such information even though the MNC may not be able to predict a currency's future volatility with perfect accuracy OBJECTIVE OF THE RESEARCH The objective of this dissertation is to perform the analytical study of currency correlation and variability as hedging tool. Year wise cross-currency correlation coefficient on the different currency base has been calculated and their relation has been analyzed. Since MNCs will be operating with different cash inflows and outflows irrespective of the home currency depending upon its location and type of operation. [...]
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