Prof. D Mukhopadhyay
Globalization of financial markets achieved by dynamic technological advancements business transactions between two or more countries has been much easier. Departure of capital controls regime has generated lot of benefits for effecting hassle free movement of goods and services including workforce and capital. But all these are not free from currency exposure. It is there an essential to create scientific mechanism for an efficient and effective exchange risk management. Further, given the way that business organizations are continuously signing commercial and business contracts and memorandum of understandings titled in foreign currencies, precise estimation and supervision of exposure and economic risks management have become the part and parcel of financial strategic management. This writes up throws certain light on exchange rate risks faced by the international traders and MNCs on account of the surge of global quest for the cross-border trades and financial transactions. It further attempts to have a magnified understanding of the importance of currency risk management strategies with reference to hedging and outline hedging strategies for the importers and exporters including multinational firms. Market driven economic system promoted integration of global economies making them emerge as profitably sustainable at an unprecedented rate growth with the assistance of workforce and capital mobility along with benefits of lower factors cost and suitable market conditions for their product and services through competitiveness These enabling economic benefits are subject to risk associated with the floating exchange rate system when the value of a currency is significantly dependent of volatility in foreign exchange market. The presence of this risk makes import and export vulnerable to potential losses or gains arising out of foreign exchange exposure. The potential gains or losses that importers and exporters are exposed to is foreign currency translation risk which adversely affect profitability, cash flows and liquidity.
Of late, the INR is being observed to be persistently getting depreciated against US Dollar and to be more specific, it has depreciated by around 11.28 % and the currency has declined in value by about 4% in between September 1, 2021 and October 21, 2022. INR crossed 83 marks being all time high per US Dollar on October 19, 2022. The Central of the country has issued advisory to the commercial banks for ascertain foreign currency exposure and adopting measures for arresting the currency exposure risks. But a substantially large number of exporters and importers expressed reluctance to adopt forex exposure risk management measures due to involvement of higher cost in risk management process. Outstanding external commercial borrowings of $180 billion, as per the Financial Stability Report, the Reserve Bank of India, $79 billion representing 44% is forex exposure and remained unhedged. This may be mentioned that out unhedged amount of $79 billion, $40 billion is the liabilities of the public sector organizations such as railways, power and oil segments of the economy. The recent worldwide inflation is a serious concern for the world leaders and individual importers and exporters and in most of the cases, countries are exposed to forex translation risk on account of impot and export of foodies and cereals which is expected to continue with uncertainly in military conflict between Russia and Ukraine. Currency volatility takes place due to unpredictability of the movement of macroeconomic variables having effect on the global economic fluctuations. The counters and the importers and exporters who do not take keen interest in managing the forex exposure become victim economic unsustainability. The author of this write up is reasoned to believe that currency exposure is quite unlikely to be a short run economic phenomenon under the existing geopolitical turmoil like situation shaking the world across and consequence, currency volatility would persistently continue for indefinite period of time unless any miracle happens to the global economy and normally function of global economy is induced on cause-effect theory of normative science.
Indian importers and exporters’ international transactions are substantially US Dollar based and magnitude of currency risk is associated with fluctuations on US Dollar. When, INR depreciates means appreciation in the value US Dollar. Forex is an international market and exchange value of one ratio between two currencies depends on demand-supply law of economics. Under the given circumstances, currency hedging acts as an insurance against the loss suffered due to volatility-mainly adverse movement in exchange rate between the importing countries and exporting countries. Normally, more export and less import accrue favourable balance payments but import reduction of a country depends on the degree of self-reliance in one hand and magnitude in increase export and may be India will be able to achieve these economic goals on account of efficient implementation of ‘Self-Reliance i.e. Aatmanirbhar Bharat’ through ‘Make in India’, ‘Start Up India’ etc in near future. As of now, India needs to have a robust risk management methodology for the currency exposure for which hedging is recommended for although all kinds currency exposure may be possible to the extent of cent percent but may be possible to a greater extent for the importers and exporters Out of empirical observation, it may be feasible to opine that the value currency change relative to the US Dollar while trading in progress on the assumption that trading takes place between India and the US meaning thereby the Indian traders is exposed currency risk in terms of adverse movement in INR against US Dollar.
Therefore, currency hedging is a must in order to sustain currency risk. India trades with many countries worldwide and she needs to substantially hedge movement in INR against Euro, Pound-sterling, UD $, Yen, Saudi Reals and UAE Dirham and she also trades against INR with some of countries. Currency hedging is a mechanism of entering into a financial contract for protecting domestic currency’s purchasing power against anticipated or even unexpected movement in currency exchange rates using financial instruments such as Forward Contract which involves the designation of one or more financial instruments as a buffer for potential loss. Hedging assists the traders to minimise the potential loss in the event of currency volatility due to macroeconomic adversary prevalent in the global economy mainly in wake of pandemic, war, natural calamity such as earthquake, drought, tsunami and any other causes which provokes more import and less export of goods and services. Any trader dealing in international market is exposed to currency risk or forex exposure. Exposure may be of different variants sicu as commodity risk, interest rate risk, wage inflation, staple food supply risk. Un-hedged exposure of forex affects profitability and liquidity as well owing to adverse cash flow and operational viability and hedging reduces exposure to unwanted risk such as sustaining liquidity and profitability. The foreign traders face different variants of risks such as revenue exposure, expense exposure, Fob (Free on Board in value of export and imports), capital expenditure exposure, working capital exposure and son.
Hedging is an insurance to protect international trade from financial casuality taking place out of fluctuation in currency exchange rate due to uncertain volatility in the international market. Financial markets are uncontrollable and uncertain due to macroeconomic flections and it is advisable to hedge business to narrow down losses arising out unforeseen incidents. It is important for traders to keep in view that all currencies are not freely and quickly US $ but the US $ is widely accepted as an international trading currency and US companies can often secure payment in Dollar. If the importer is asked to make payment in a foreign currency, the importer should consult an international banker or Exchange before finalizing the deal. as the professionals and experts can Banks can offer advice on any foreign exchange risks exposure with a particular currency. The comfortable hedging mechanism is a forward contract that enables the exporter to sell a predetermined amount of foreign currency at a pre-agreed exchange rate?with a delivery date varying from 3 days to 1 year in the future under normal situation. To do business in US $ is itself a kind of risk minimization of because of its universal acceptability. Therefore, hedging expenses and commissions should be treated just like as one of the operational expenses as it enables an international and cross border trader to eliminate and minimise loss arising out volatility in the forex market.
(The author is an Educationist and Former Interim Vice Chancellor, SMVD University)
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