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RISK MANAGEMENT

IN

FOREIGN EXCHANGE

By

NAGARJUN B R

(Reg. No 03VWCM6063)

This dissertation report is submitted in partial fulfillment of the

requirements

of the MBA program of Bangalore University

Under the guidance of

PROF. MIHIR DASH

Alliance Business Academy

Alliance Business Academy

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19th cross, 7th main,

N.S.Palya, BTM 2nd Stage,

Bangalore 560076

2003 2005

DECLARATION

I Nagarjun B. R, of MBA IV SEMESTER studying in Alliance Business

Academy, Bangalore do hereby declare that this Project titled Risk

Management in Foreign Exchange has been prepared by me in the partial

fulfillment of the award of MASTER OF BUSINESS ADMINISTRATION

under Bangalore University during session 2003-05. My guide for the

training has been Prof. Mihir Dash.

I further declare that this project report has not been submitted earlier to any other

University or Institute for the award of any Degree or Diploma.

Date:

Place: Bangalore

Nagarjun B. R

(03VWCM6063)

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CERTIFICATE

I, Prof. Mihir Dash hereby certify that this dissertation report

titled Risk Management in Foreign Exchange has been successfullycarried out by Nagarjun.B.R with Registration number 03VMCM6063

under my supervision and guidance during the months of April June

2005.

Prof. Mihir Dash

Faculty

Alliance Business Academy

BangaloreDATE:

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ACKNOWLEDGEMENT

The satiation and pleasure that accompany the successful completion of task

would be incomplete without the mention of the people who have made it

possible and whose consent, guidance and encouragement served as a

guiding light for the completion of the study.

I consider my privilege to place on record my sincere gratitude to the

persons who have helped in bringing out this report. I would like to express

my sincere thanks to our honorable President, Mr. Sudhir Angur and Director

Dr. B.V. Krishnamurthy for having giving me the opportunity to do this

dissertation.

I would also like to express my gratitude to my project guide Prof. Mihir Dash

for guiding and explaining to me the procedures to be followed in carrying

out this report without whom the task would not have been completed.

I would also like to thank our Program manager, Prof. Narasimhan for givingme the support and encouragement needed for undertaking this work.

Last but not the least, I would like to thank my parents and friends for their

constant support and encouragement.

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TABLE OF CONTENTS

SL NO. CONTENTS PAGE NO.

EXECUTIVE SUMMARY

CHAPTER 1 THEORITICAL BACKGROUND TO THE STUDY 1 - 24

CHAPTER 2 DESIGN OF THE STUDY

STATEMENT OF PROBLEM

OBJECTIVES OF THE STUDY

SCOPE OF THE STUDY

RESEARCH METHODOLOGY

RESEARCH INSTRUMENTS LIMITATIONS OF THE STUDY

25 - 26

CHAPTER 3 MARKET PROFILE 27 - 34

CHAPTER 4 ANALYSIS AND INTERPRETATION

TESTING OF HYPOTHESIS

34 - 67

CHAPTER 5 FINDINGS AND SUGGESTIONS 68 - 69

CHAPTER 6 CONCLUSION 70

BIBILIOGRAPHY

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LIST OF TABLES

TABLE

NO. TITLE OF THE TABLE

PAGE

NO.

1 Receiving dollars and not hedging the position 37

2 Receiving dollars and hedging the position with a forward contract. 38

3Receiving dollars and hedging the position with an option contract.

39

4 Receiving dollars and hedging the position by shifting the risk 39

5 Receiving dollars and hedging the position by exposure netting 40

6 Receiving dollars and hedging the position by exposure netting 40

7 Receiving dollars and hedging the position by swap contract 41

8 Receiving dollars and hedging the position with the help of risk sharing 41

9 Paying dollars and not hedging the position. 42

10 Paying dollars and hedging the position with a forward contract. 42

11 Paying dollars and hedging the position with an option contract. 43

12 Paying dollars and hedging the position by shifting the risk. 43

13Paying dollars and hedging the position by exposure netting.

44

14 Paying dollars and hedging the position by exposure netting. 44

15 Paying dollars and hedging the position by a swap contract. 45

16 Paying dollars and hedging the position with the contract of risk sharing. 45

17 Receiving dollars and not hedging the position 47

18 Receiving dollars and hedging the position with a forward contract. 49

19 Receiving dollars and hedging the position with an option contract. 50

20 Receiving dollars and hedging the position by shifting the risk 51

21 Receiving dollars and hedging the position by exposure netting 52

22 Receiving dollars and hedging the position by exposure netting 53

23 Receiving dollars and hedging the position by swap contract 5424 Receiving dollars and hedging the position with the help of risk sharing 55

25 Paying dollars and not hedging the position. 56

26 Paying dollars and hedging the position with a forward contract. 57

27 Paying dollars and hedging the position with an option contract. 58

28 Paying dollars and hedging the position by shifting the risk. 59

29 Paying dollars and hedging the position by exposure netting. 60

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30 Paying dollars and hedging the position by exposure netting. 61

31 Paying dollars and hedging the position by a swap contract. 62

32 Paying dollars and hedging the position with the contract of risk sharing. 63

33 Various mean when there are outflows of currencies 65

34 Various mean when there are inflows of currencies 65

35 t-test results for outflows of foreign currencies 66

36 t-test results for outflows of foreign currencies 67

37 Ranking of the various tools 68