Management of Foreign Exchange Exposure in Tata Consultancy Services Limited
Keywords:
Foreign exchange exposure, derivatives, forwards, futures, options, SwapsAbstract
The economic liberalisation in early nineties and deregulation of exchange rates in 1993 facilitated the introduction of interest rate and foreign exchange derivatives in India. Uncertainty about exchange rates causes foreign exchange exposures having significant effect on the earnings of the firms. Foreign exchange derivatives are used by firms to mitigate foreign exchange exposures. The use of derivatives is still a highly regulated in India due to partial convertibility of rupee. Currently, futures, forwards, swaps and options are available in India.
The motivation for this study came from first, the Asian financial crisis of 1997 and the global financial crisis of 2008 and, which caused huge losses to companies owning to volatility in exchange rates of currencies and second, comparatively low and narrow use of foreign exchange derivatives by corporate firms in India. In January 2014, the RBI put rules in place asking banks to make provision against unhedged forex exposures of their clients.
This paper deliberates on the various alternatives available to Indian corporates for hedging foreign exchange risks. The paper aims to study the strategic uses of foreign exchange derivatives by Tata Consultancy Services Limited to manage its foreign exchange exposures.
There are evidences in literature showing the reduction of foreign exchange exposure with the use of tools for managing the exposures. The paper concludes that since, in addition to proper mix of foreign exchange derivative instruments in foreign exchange risk management strategy, the precise prediction of foreign exchange rate plays a very significant role in successfully managing the foreign exchange exposure of a firm, more emphasis should be given on the accurate prediction of relevant exchange rates.
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