Usage of Derivatives for Hedging FOREX Risk: An Investigation of Indian Companies

Abstract

With the turmoil in the global economy, Indian Rupee exchange rate has seen huge volatility against USD and other major foreign currencies in recent times. Hedging with derivative instruments is a feasible solution to this situation. This paper aims to provide a perspective on managing the risk that Indian companies faces due to fluctuating exchange rates. It investigates the prudence in investing resources towards the purpose of hedging and narrates the trends in foreign exchange exposure of Indian companies in international markets. It also analyzes the usage of different derivative contracts for hedging the foreign exchange risk by Indian companies. The BSE SENSEX companies are taken as sample for secondary data analysis as it is representative of entire Indian market. It covers all major industries and these are the leading companies in India. An attempt has been made to find out the quantum of foreign exchange risk exposure and the tools used for hedging by respective companies from their published annual reports for the financial year 2007-08, 2008-09, 2009- 10