Project Report on Foreign Exchange Risk Management


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Mahindra Intertrade is part of the Mahindra Group, a global manufacturing conglomerate with annual revenues in excess of US $1 billion. The Mahindra Group has a significant presence in key sectors of the Indian economy. A consistently high performer, M&M has been ranked among the top ten private-sector companies in the country for several years.
A corporate history spanning from 1945, the group expanded its operations from automobiles and tractors to secure a significant presence in many more important sectors - hospitality, trade and financial services, automotive components, information technology, telecom and infrastructure development. The group employs more than 12,600 people and has six state-of-the-art manufacturing facilities spread over 500,000 square meters. It has 33 sales offices that are supported by a network of over 500 dealers across the country. This network is connected to the company's plants by an extensive IT infrastructure. The M&M philosophy of growth is centered on a belief in people. As a result, the company has put in place initiatives that seek to reward and retain the best talent in the industry.

Mission Statement

"Build a Global trading Organization based on the Mahindra brand promises of reliability and credibility towards delivering a distinct value proposition to our business affiliates, customers, employees and shareholders. We seek to achieve this through continuously enhancing and leveraging our human and knowledge capital across products and services".

Foreign Exchange Exposure

Definition
Adler and Dumas defines foreign exchange exposure as ‘the sensitivity of changes in the real domestic currency value of assets and liabilities or operating income to unanticipated changes in exchange rate’.
To understand the concept of exposure, we need to analyze this definition in detail. The first important point is that both foreign and domestic assets and liabilities could be exposed to exchange rate movements. E.g. if an Indian resident holds a dollar deposit and dollar’s value vis-à-vis the rupee changes, the value of deposit in terms of rupees changes automatically. On the other hand, if a person is holding a debenture in an Indian company, the value of the debenture may change due to an increase in general rates, which in turn may be the effect of depreciating rupee. Thus, even though no conversion from one currency to another in involved, a domestic asset can be exposed to movements in the exchange rates, albeit indirectly.

Exposure When Assets and Liabilities Have Fixed Foreign Currency Values

The measurement of exposure for the first category is category is comparatively simpler than for the remaining three. Let us see an example to understand the process of measurement. Assume that an Indian resident is holding a $1 million deposit. As the dollar appreciates by Rs.0.10, the value of the deposit also increases by Rs.0.1 million. Similarly, an unexpected depreciation of the dollar by Rs.0.10 will reduce the value of the deposit by Rs.0.1 million. This gives an upward sloping exposure line. On the other hand, if there were foreign liability which had its value fixed in terms of the foreign currency, it would give a downward sloping exposure line.