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EXECUTIVE SUMMARY

Techniques of Controlling Foreign Exchange Exposure Used by

Banks - with reference to Canara Bank

In a floating exchange rate regime, the value of a currency changesfrequently. Such changes influence the value of those firms that are involved ininternational transactions. Foreign exchange exposure is into 2 classes. One isknown as accounting or translation exposure, while the othe r is known aseconomic exposure.The economic exposure is further divided into transactionexposure and real operating exposure.If such exposure results in loss to a firm, it needs to manage these exposures.For this purpose they use some techniques like:

j Forward Market Hedges

j Hedging through currency futuresj Hedging through currency options.

j Money Market Hedge.

j Leads and Lags

j Cross Hedging

j Currency diversification

j Risk Sharing

j Pricing of transaction

j Speculation

If such exposure arises, then firms use some documents for reducing theseexposures through banks like:

j Letter ofCredit

j Draft

j Bill of Exchange

j Pre-Shipment Credit

j Post-Shipment Credit

j Medium-term Credit

j Credit under duty draw-back schemej Factoring

j Forfeiting

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Objective of the study:

In this project we are going to find out the different risks that banks face and themethods that banks use to control foreign exchange risk. In this project, CanaraBank will be used as a reference point.

Hypothesis:

INTRODUCTION:

The foreign exchange (also known as "forex" or "FX") market is the place

where currencies are traded. The overall forex market is the largest, most liquidmarket in the world with an average traded value that exceeds $1.9 trillion perday and includes all of the currencies in the world.

There is no central marketplace for currency exchange, rather, trade isconducted over-the-counter. The forex market is open 24 hours a day, five daysa week, with currencies being traded worldwide among the major financialcenters of London, New York, Tokyo, Zrich, Frankfurt, Hong Kong,Singapore, Paris and Sydney - spanning most time zones.

The forex is the largest market in the world in terms of the total cashvalue traded, and any person, firm, or country may participate in this market.

Meaning of Foreign Exchange Market (Forex Market):

The foreign exchange market is the "place" where currencies are traded.Currencies are important to most people around the world, whether they realizeit or not, because currencies need to be exchanged in order to conduct foreigntrade and business

Foreign Exchange as a Financial MarketCurrency exchange is very attractive for both the corporate and individualtraders who make money on the Forex - a special financial market assigned forthe foreign exchange. The following features make this market different incompare to all other sectors of the world financial system:Heightened sensibility to a large and continuously changing number of factors;

y Accessibility to all traders in the major currencies;

y Guaranteed quantity and liquidity of the major currencies;

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y Increased consideration for several currencies, round-the clock businesshours which enable traders to deal after normal hours or during nationalholidays in their country finding markets abroad open and

y Extremely high efficiency relative to other financial markets.

y

Foreign exchange risk'In considering the viewpoint of so-called real businesses (those that make cars,mine, produce electronics, etc.), the 'foreign exchange risk' has by far becomethe largest risk in international business today, often larger than political ormarket risk. For example, if a German chemical company invests in a plant inIndia, it makes the investment in deutsch-marks. The chemical products soldlocally from that plant are paid in rupees, India's currency. If the value of therupee then drops in terms of the deutschmark, the return on the originalinvestment will drop as well. In short, the biggest risk of such investments is notwhether Indians will buy the chemicals (market risk) or whether the Indian

government will nationalize the plant (political risk), but the changes in thevalues of the currencies involved (foreign exchange risk).

FUNDAMENTALS OF THE FOREIGN EXCHANGE MARKET

QUOTES:

When a currency is quoted, it is done in relation to another currency, sothat the value of one is reflected through the value of another. Therefore, if

you are trying to determine the exchange rate between the U.S. dollar

(USD) and the Japanese yen (JPY), the quote would look like this:

USD/JPY = 119.50

This is referred to as a currency pair. The currency to the left of the slash is

the base currency, while the currency on the right is called the quote or

counter currency. The base currency (in this c ase, the U.S. dollar) is alwaysequal to one unit (in this case, US$1), and the quoted currency (in this case,

the Japanese yen) is what that one base unit is equivalent to in the other

currency. The quote means that US$1 = 119.50 Japanese yen. In other

words, US$1 can buy 119.50 Japanese yen.

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Direct Quote vs. Indirect Quote

There are two ways to quote a currency pair, either directly or indirectly.

A direct quote is simply a currency pair in which the domestic currency is

the base currency; while an indirect quote, is a currency pair where the

domestic currency is the quoted currency. So if you were looking at theCanadian dollar as the domestic currency and U.S. dollar as the foreign

currency, a direct quote would be CAD/USD, while an indirect quote would

be USD/CAD. The direct quote varies the foreign currency, and the quoted,

or domestic currency, remains fixed at one unit. In the indirect quote, on

the other hand, the domestic currency is variable and the foreign currency

is fixed at one unit.

For example, if Canada is the domestic currency, a direct quote would be

0.85 CAD/USD, which means with C$1, you can purchase US$0.85. The

indirect quote for this would be the inverse (1/0.85), which is 1.18USD/CAD and means that USD$1 will purchase C$1.18.

In the forex spot market, most currencies are traded against the U.S.

dollar, and the U.S. dollar is frequently the base currency in the currency

pair. In these cases, it is called a direct quote. This would apply to the

above USD/JPY currency pair, which indicates that US$1 is equal to 119.50

Japanese yen.

However, not all currencies have the U.S. dollar as the base. The Queen's

currencies - those currencies that historically have had a tie with Britain,such as the British pound, Australian Dollar and New Zealand dollar - are

all quoted as the base currency against the U.S. dollar. The euro, which is

relatively new, is quoted the same way as well. In these cases, the U.S.

dollar is the counter currency, and the exchange rate is referred to as an

indirect quote. This is why the EUR/USD quote is given as 1.25, for

example, because it means that one euro is the equivalent of 1.25 U.S.

dollars.

Most currency exchange rates are quoted out to four digits after the

decimal place, with the exception of the Japanese yen (JPY), which isquoted out to two decimal places.

Cross Currency

When a currency quote is given without the U.S. dollar as one of its

components, this is called a cross currency. The most common cross

currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These

currency pairs expand the trading possibilities in the forex market, but it is

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important to note that they do not have as much of a following (for

example, not as actively traded) as pairs that include the U.S. dollar, which

also are called the majors.

Bid and Ask

As with most trading in the financial markets, when you are trading acurrency pair there is a bid price (buy) and an ask price (sell). Again, these

are in relation to the base currency. When buying a currency pair (going

long), the ask price refers to the amount of quoted currency that has to be

paid in order to buy one unit of the base currency, or how much the market

will sell one unit of the base currency for in relation to the quoted currency.

The bid price is used when selling a currency pair (going short) and reflects

how much of the quoted currency will be obtained when selling one unit of

the base currency, or how much the market will pay for the quoted

currency in relation to the base currency.

The quote before the slash is the bid price, and the two digits after the slash

represent the ask price (only the last two digits of the full price are typically

quoted). Note that the bid price is always smaller than the ask price. Let's

look at an example:

USD/CAD = 1.2000/05

Bid = 1.2000

Ask = 1.2005

If you want to buy this currency pair, this means that you intend to buy the

base currency and are therefore looking at the ask price to see how much

(in Canadian dollars) the market will charge for U.S. dollars. According to

the ask price, you can buy one U.S. dollar with 1.2005 Canadian dollars.

However, in order to sell this currency pair, or sell the base currency in

exchange for the quoted currency, you would look at the bid price. It tells

you that the market will buy US$1 base currency (you will be selling the

market the base currency) for a price equivalent to 1.2000 Canadian

dollars, which is the quoted currency.

Whichever currency is quoted first (the base currency) is always the one in

which the transaction is being conducted. You either buy or sell the base

currency. Depending on what currency you want to use to buy or sell the

base with, you refer to the corresponding currency pair spot exchange rate

to determine the price.

Spreads and Pips

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The difference between the bid price and the ask pr ice is called a spread. If

we were to look at the following quote: EUR/USD = 1.2500/03, the spread

would be 0.0003 or 3 pips, also known as points. Although these movements

may seem insignificant, even the smallest point change can result in

thousands of dollars being made or lost due to leverage. Again, this is one

of the reasons that speculators are so attracted to the forex market; eventhe tiniest price movement can result in huge profit.

The pip is the smallest amount a price can move in any currency quote. In

the case of the U.S. dollar, euro, British pound or Swiss franc, one pip

would be 0.0001. With the Japanese yen, one pip would be 0.01, because

this currency is quoted to two decimal places. So, in a forex quote of

USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade

within a range of 100 to 150 pips a day.

Spot Market and the Forwards and Futures MarketsThere are actually three ways that institutions, corporations and

individuals trade forex: the spot market, the forwards mar ket and the

futures market. The spot market always has been the largest market

because it is the "underlying" real asset that the forwards and futures

markets are based on. In the past, the futures market was the most popular

venue for traders because it was available to individual investors for a

longer period of time. However, with the advent of electronic trading, the

spot market has witnessed a huge surge in activity and now surpasses the

futures market as the preferred trading market for individual inv estors

and speculators. When people refer to the forex market, they usually arereferring to

Currency Quote Overview

USD/CAD = 1.2232/37

Base Currency Currency to the left (USD)

Quote/Counter Currency to the right (CAD)

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Currency

Bid Price 1.2232

Price for which the marketmaker will buy the basecurrency. Bid is alwayssmaller than ask.

Ask Price 1.2237Price for which the marketmaker will sell the basecurrency.

Pip

One point move, inUSD/CAD it is .0001 and 1 point change would be from1.2231 to 1.2232

The pip/point is the smallestmovement a price can make.

Spread

Spread in this case is 5pips/ points; difference

between bid and ask price(1.2237-1.2232).

the spot market. The forwards and futures markets tend to be more

popular with companies that need to hedge their foreign exchange risks out

to a specific date in the future.

Spot Market

More specifically, the spot market is where currencies are bought and sold

according to the current price. That price, determined by supply and

demand, is a reflection of many things, including current interest rates,

economic performance, sentiment towards ongoing political situations(both locally and internationally), as well as the perception of the future

performance of one currency against another. When a deal is finalized, this

is known as a "spot deal". It is a bilateral transaction by which one party

delivers an agreed-upon currency amount to the counter party and receives

a specified amount of another currency at the agreed -upon exchange rate

value. After a position is closed, the settlement is in cash. Although the spot

market is commonly known as one that deals with transactions in the

present (rather than the future), these trades actually take two days for

settlement.

Forwards and Futures Markets

Unlike the spot market, the forwards and futures markets do not trade

actual currencies. Instead they deal in contracts that represent claims to a

certain currency type, a specific price per unit and a future date for

settlement.

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In the forwards market, contracts are bought and sold OTC between two

parties, who determine the terms of the agreement between themselves.

In the futures market, futures contracts are bought and sold based upon a

standard size and settlement date on public commodities markets, such as

the Chicago Mercantile Exchange. In the U.S., the National FuturesAssociation regulates the futures market. Futures contracts have specific

details, including the number of units being traded, delivery and settlement

dates, and minimum price increments that cannot be customized. The

exchange acts as a counterpart to the trader, providing clearance and

settlement.

Both types of contracts are binding and are typically settled for cash for the

exchange in question upon expiry, although contracts can also be bought

and sold before they expire. The forwards and futures markets can offer

protection against risk when trading currencies. Usually, big internationalcorporations use these markets in order to hedge against future exchange

rate fluctuations, but speculators take part in these markets as well.

Two types of analysis are used for the market movements forecasting:

fundamental, and technical (the chart study of past behavior of commodity

prices). The fundamental one focuses on the theoretical models of exchange

rate determination and on the major economic factors and their likelihood

of affecting the foreign exchange rates.

The main economic theories found in the foreign exchange deal with parityconditions. A parity condition is an economic explanation of the price at

which two currencies should be exchanged, based on factors such as

inflation and interest rates. The economic theories suggest that when the

parity condition does not hold, an arbitrage opportunity exists for market

participants. However, arbitrage opportunities, as in many other markets,

are quickly discovered and eliminated before even giving the individual

investor an opportunity to capitalize on them. Other theories are based on

economic factors such as trade, capital flows and the way a country runs its

operations. We review each of them briefly below.

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RISKS INVOLVED IN THE FOREIGN EXCHANGE MARKET

Risks associated with foreign exchange may be broadly classified as:

1. Transaction risk.

2. Position risk.

3. Settlement or credit risk.

4. Mismatch or liquidity risk.

5. Operational risk.

6. Sovereign risk.

7. Cross- country risk.

A.Transaction risk:

Any transaction leading to future receipts in any form or

creation of long term asset. This consists of a number of:

1. Trading items (foreign currency, invoiced trade

receivables and payables) and

2. Capital items (foreign currency dividend and loan

payments)

3. Exposure associated with the ownership of foreign

currency denominated assets and liabilities.

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4.

B.Position risk:

Bank dealings with customers continuously, both on spot

and forward basis, results in positions (buy i.e. long position

or sell i.e. short position) being created in currencies in

which these transactions are denominated. A position risk

occurs when a dealer in bank has an overbought (long) or an

oversold (short) position. Dealers enter into these positions

in anticipation of a favorable movement.

The risk arising out of open positions is easy to understand.

If one currency is overbought and it weakens, one would beable to square the overbought position only by selling the

currency at a loss. The same would be the position if one is

oversold and the currency hardens.

C.Settlement or credit risk:

Also known as time zone risk, this is a form of credit risk

that arises from transactions where the currencies settle in

different time zones. A transaction is not complete until

settlement has taken place in the latest applicable time

zone. This is also referred to as Herstatt Risk. Arising

from the failure or default of a counterparty. Technically,

this is a credit risk where only one side of the transaction

has settled. If a counterparty fails before any settlement of

a contract occurs, the risk is limited to the difference

between the contract price and the current marke t price (i.e.

an exchange rate risk).

Settlement risk is the risk of a counterparty failing to meet

its obligations in a financial transaction after the bank has

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fulfilled its obligations on the date of settlement of the

contract. Settlement risk exposure potentially exists in

foreign exchange or local currency money market business.

D.Mismatch or liquidity risk:

In the foreign exchange business it is not always possible to

be in an ideal position where sales and purchases are

matched or according to maturity and there are no

mismatched situations. Some mismatching of maturities is in

general unavoidable. Liquidity risk' arises from situations in

which a party interested in trading an asset cannot do it

because nobody in the market wants to trade that asset.

Liquidity risk becomes particularly important to parties who

are about to hold or currently hold an asset, since it affects

their ability to trade.

Manifestation of liquidity risk is very different from a drop

of price to zero. In case of a drop of an asset's price to zero,

the market is saying that the asset is worthless. However, if

one party cannot find another party interested in trading the

asset, this can potentially be only a problem of

the market participants with finding each other. This is why

liquidity risk is usually found higher in emerging markets or

low-volume markets.

Liquidity risk is financial risk due to uncertain liquidity. An

institution might lose liquidity if its credit rating falls, it

experiences sudden unexpected cash outflows, or some other

event causes counterparties to avoid trading with or lending

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to the institution. A firm is also exposed to liquidity risk if

markets on which it depends are subject to loss of liquidity.

Liquidity risk tends to compound other risks. If a trading

organization has a position in an illiquid ass et, its limitedability to liquidate that position at short notice will

compound its market risk. Suppose a firm has offsetting cash

flows with two different counterparties on a given day. If

the counterparty that owes it a payment defaults, the firm

will have to raise cash from other sources to make

its payment. Should it be unable to do so, it too will default.

Here, liquidity risk is compounding credit risk.

E.Operational risk:

Operational risk are related to the manner in which

transactions are settled or handled operationally. Some of the

risks are discussed below:

a) Dealing and settlement: This functions must be

properly separated, as otherwise there would be

inadequate segregation of duties.

b) Confirmation: Dealing is usually done by

telephone/telex/Reuters or some other electronic

system. It is essential that these deals are confirmed by

written confirmations. There is a risk of mistakes

being made related to amount, rate, valu e, date and the

likes.

c) Pipeline transactions: There are, at times, faults in

communication and often cover is not available for

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pipeline transactions entered into by branches. There

can be delays in conveying details of transactions to

the dealer for a cover resulting in the actual position of

the bank being different from what is shown by the

dealers position statement.

d) Overdue bills and forward contracts: The trade finance

departments of banks normally monitor the maturity

of export bills and forward contracts. A risk exists in

that the monitoring may not be done properly.

F. Sovereign risk: Another risk which banks and other agencies

that deal in foreign exchange have to be aware of is

sovereign risk- the risk on the government of a country.

G.Cross-country risk: It is often not prudent to have large

exposures on any one country may go through troubled

times. I such a situation, the bank/entity that has an exposure

could suffer large losses. To control and limit risks arising

out of cross country exposures, management normally lay

down cross country exposure limits. Risk management in

foreign exchange is imperative as the lack of these could

even result in the bankruptcy and closure of the organization.

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TYPES OF EXPOSURE

Exchange rates cannot be forecasted with perfect accuracy, but the

firms can at least measure its exposure to exchange rate fluctuations. If

the firm is highly exposed to exchange rate fluctuations, it can consider

techniques to reduce its exposure in the following chapter. Beforechoosing these techniques, the firm should first measure its degree of

exposure.

y Transaction exposure

y Economic exposure

y Translation exposure.

Transaction Exposure

The value of banks cash inflows received in various currencies will be

affected by respective exchange rates of these currencies when

converted into the currency desired. Similarly, the value of a banks cash

outflows in various currencies will be dependent on the respective

exchange rates of these currencies. The degree to which the value of

future cash transitions can be affected by exchange rate fluctuations inreferred to as transactions can be affected by exchange rate fluctuations

is referred to as transaction exposure.

Two steps are involved in measuring transaction exposure: (1)

determining the projected net amount of inflows or outflows in each

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foreign currency, and (2) determining the overall risk of exposure to

those currencies.

Economic Exposure

The degree to which a banks present value of future cash flows can be

influenced by exchange rate fluctuations is referred to as economic

exposure to exchange rates. Transaction exposure is a subset of

economic exposure. However, the influence of exchange rate

fluctuations on banks cash flows is not always due to transaction of

currencies.

Economic Exposure to Exchange Rate Fluctuations

Variables ThatInfluence the Firms

Local Currency Inflows

Impact of LocalCurrency

Appreciation on

Variables

Impact of LocalCurrency

Depreciation on

Variables

Local sales (relative to

foreign competition in

local markets)

Decrease Increase

Banks exports

denominated in local

currency

Decrease Increase

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Banks exports

denominated in foreign

currency

Decrease Increase

Interest received from

foreign investments

Decrease Increase

Variables That Influence the Banks Local Currency

Outflows

Banks imported supplies

denominated in localcurrency

No Change No Change

Banks imported supplies

denominated in foreign

currency

Decrease Increase

Interest owed on foreign

funds borrowed

Decrease Increase

The economic exposure refers to the change in expected cash flows as

a result of an unexpected change in exchange rates. For example, an

American exporter who operates in French market can increase his

market share merely by reducing the French Company which is a

potential competitor to the American firm can profit indirectly from

currency losses of the American company. Thus it can be se en that

though the French company is not directly exporting but business

competition can be generated on account of the strength of the currency

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of competitors, which can be termed as economic exposure. Economic

risks cannot be managed as they are not reported in accounts, are

difficult to quantify and perhaps unhedgable.

Translation Exposure

The exposure of the MNCs consolidated financial statements to

exchange rate fluctuations is known as translation exposure. For

example, if the assets or liabilities of the MNCs subsidiaries are

translated at something other than historical exchange rates, the

balance sheet will be affected by fluctuations in currency values over

time. In addition, subsidiary earnings translated into the reporting

currency on the consolidated income statement are subject to changing

exchange rates.

Transaction exposure: exists when the future cash transactions of a

firm are affected by exchange rate fluctuations. For example, a US firm

that purchases German goods may need marks to buy the goods. While

it may know exactly how many marks it will need, it doesnt know how

many dollars will be needed to be exchanged for those marks. This

uncertainly occurs because the exchange rate between marks and

dollars fluctuates over time. Also consider a US - based MNC that will be

receiving a foreign currency. Its future receivables are exposed since it

is uncertain of the dollars it will obtain when exchanging the foreign

currency received.

If transaction exposure does exist, the firm faces three major tasks. First

it must identify the degree of transaction exposure. Second, it must

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decide whether to hedge this exposure. Finally, if it decides to hedge

part or all of the exposure it must choose among the various hedging

techniques available.

FOREIGN EXCHANGE RISK MANAGEMENT POLICY

The foreign exchange risk management policy should clearly define

instruments in which the bank is authorized to trade, risk limits commensurate

with the banks activities, regularity of reports to management, and who isresponsible for producing such reports. The policy should be reviewed on a

regular basis, normally at least annually, to ensure that it remains appropriate.

The main points that need to be considered when drawing up a policy are given

below:

a) Open position limits commensurate with custo mer driven turnover, and

the banks appetite for market risk.

b) Separate limits should be allocated for each currency, together with an

overall cap limit. Banks that assume risk on a proprietary trading basis

should also introduce measures to limit int raday risk (normally a

maximum of five times the overnight cap limit).

c) Where a bank trades with counterparties other than members of their

own group located in Zone A countries, settlement and country limits

should be addressed and clearly defined.

d) Forward foreign exchange mismatch limits.

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e) List of approved instruments.

f) Use of foreign exchange derivatives.

g) The expertise and experience of authorized personnel.

h) Authority to trade with counterparties other than group companies.

i) Monitoring and reporting systems.

j) Recording and follow up of limit excesses.

k) Impact on P&L of an adverse 10% movement in exchange rates on

maximum permitted exposure.

l) Imposition of a stop loss limit to restrict or prevent any further trading

other than client deals and hedging.

m) Segregation of duties.

n) Trading mandates for authorized personnel.

o) Limitation on out of hours trading.

p) List of authorized brokers (if applicable).

q) Code ofConduct for authorized personnel.

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PROCEDURES AND SYSTEMS

The Commission requires banks to monitor their foreign exchange risk on

a frequent and timely basis. The Commission would expect banks that assume

any foreign exchange risk to be in a position to measure their positions on an

ongoing basis and to report to management daily. It follows from this that a

bank must have adequate procedures and systems for monitoring foreignexchange risk. This requires:

a) A clear allocation of the responsibility for measuring and reporting

foreign exchange risk.

b) The maintenance of reliable systems that can produce accurate

reports promptly.

c) Active senior management involvement in, and clearly allocated

responsibility for, foreign exchange risk reporting.

d) Regular reporting to group or parent companies.

The system that produces the foreign exchange risk reports should be linked

to the banks core systems, and be capable of being reconciled to core data.

Reports should follow the principles of good management information, for

example:

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a) Clarity

b) Highlight key information, in particular breaches or exceptions

c) Highlight unutilized limit capacity

d) Use of an exception based commentary

TOOLS AND TECHNIQUES USEDBY BANKS TO MITIGATE RISK

1. HEDGING.

2. SPECULATION.

Hedging:Many derivatives transactions take place on the bourses. Derivativeproducts like options were designed to act as hedging instruments. Many peoplemisunderstand the concept of hedging and some regard derivatives as

speculative products.

Hedging means entering into two complimentary contracts so that profits fromone offset losses from the other. This reduces the risk of loss due to pricefluctuations. In simple terms it can be defined as a method of reducing the riskof loss caused by price fluctuations.

Hedging with Forwards

Hedging refers to managing risk to an extent that makes it bearable. Ininternationaltrade and dealings foreign exchange play an important role. Fluctuations in theforeign exchange rate can have significant impact on business decisions andoutcomes. Many international trade and business dealings are shelved orbecomeunworthy due to significant exchange rate risk embedded in them. Historically,theforemost instrument used for exchange rate risk management is the forwardcontract.

Forward contracts are customized agreements between two parties to fix theexchange

rate for a future transaction. This simple arrangement would easily eliminateexchange rate risk, but it has some shortcomings, particularly getting a counterpartywho would agree to fix the future rate for the amount and time period inquestion maynot be easy.

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.Hedging with FuturesNoting the shortcomings of the forward market, particularly the need and thedifficulty in finding a counter party, the futures market came i nto existence. Thefutures market basically solves some of the shortcomings of the forward market.

A currency futures contract is an agreement between two parties a buyer and a

seller to buy or sell a particular currency at a future date, at a particu larexchange rate that is fixed or agreed upon today. This sounds a lot like theforward contract. In fact thefutures contract is similar to the forward contractbut is much more liquid. It is liquidbecause it is traded in an organizedexchange the futures market (just like the stockmarket). Futures contracts arestandardized contracts and thus are bought and sold just like shares in the stockmarket. The futures contract is also a legal contractjustlike the forward, but theobligation can be removed before the expiry of the contract by making an

opposite transaction. As for hedging with futures, if the risk is anappreciation of value one needs to buy futures and if the risk is depreciationthen oneneeds to sell futures.

Hedging with Currency FuturesTo hedge it should take a futures position such that future s generate a positivecash flow whenever the asset declines in value.The bank is long in the underlying asset, it should go short in futuresWhen the bank is short in the underlying asset it should go long in futures.

Hedging using OptionsA currency option may be defined as a contract between two parties a buyerand a seller - whereby the buyer of the option has the right but not the

obligation, to buy or sell a specified currency at a specified exchange rate, at orbefore a specified date, from the seller of the option. While the buyer of optionenjoys a right but not obligation, the seller of the option nevertheless has anobligation in the event thebuyer exercises the given right. There are two types ofoptions:

Call options gives the buyer the right to buy a specified currency at aspecifiedexchange rate, at or before a specified date.

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Put options gives the buyer the right to sell a specified currency at aspecified exchange rate, at or before a specified date.

The compensation is called the price or the premium of the option. Since thesellerof the option is being compensated with the premium for giving the righ t, thesellerthus has an obligation in the event the right is exercised by the buyer.

Money Market Hedge

A money market hedge involves taking a money market position to cover

a future payables or receivable position.

Currency Option Hedge

Banks recognize that hedging techniques such as the forward hedge

and money market hedge can backfire when a payables currency

depreciates or a receivable currency appreciates over the hedged

period. In these situations, an unhedged strategy would likely outperform

the forward hedge or money market hedge. The ideal type of hedge

would insulate the bank against adverse exchange rate movements but

allow the firm to benefit from favourable exchange rate movement.

Currency options exhibit these attributes. However, a bank must assess

whether the advantages of a currency option hedge are worth the price

(premium) paid for it.

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Is Hedging Worthwhile?

If a bank decides to hedge its periodic future payables denominated in a

foreign currency. The forward contract is a common heeding device

against this foreign currency position. If the spot rate in the future

exceeds todays forward rate, then the company will save money by

hedging its net payables (as opposed to no hedge). If the spot rate in the

future is less than todays forward rate, then the company will lose

money by hedgings its net payables. A forward rate that serves as an

unbiased forecast of the future spot rate will underestimate and

overestimate the future sport rate with equal frequency. In this case

periodic hedging with the forward rate will be more costly in some

periods and less costly in other periods. On the average, it will not

reduce the company cost. Thus it could be argued that hedging is not

worth while.

If the company choose to hedge only in those situations in which they

expect the currency to move in a direction that will make hedging

feasible. That is they may hedge future payables that they foresee

appreciation in the currency denominating the payables. In addition they

my hedge future receivables if they forsee depreciation in the currency

denominating the receivables.

In general, decisions on whether to hedge, how much to hedge, and how

to hedge will vary with the company managements degree of risk

aversion, and its forecasts of exchange rates. companies that are more

conservative tend to hedge more of their exposure.

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Most company do not perceive their foreign exchange management as a

profit center. The main responsibility is to (1) measure the potential

exposure to exchange rate movements, which is necessary to assess

the risk (2) determine whether the exposure should be hedged, and (3)

determine how the exposure should be hedged, if at all. Thus is normally

inappropriate for the foreign exchange management group to set a profit

goal, as it may even use some hedges that will likely result in slightly

worse outcomes than no hedges at all, just to avoid the possibility of a

major adverse movement in exchange rates.

Speculation: Speculation is defined as buying and selling the instruments without takingtheir delivery. It is also called as non-delivery based transaction.

Speculators are those who have no exposure to underlying asset.

The speculators are trading for very short duration of time and their main motive is to earn

profits as there are changes in the prices within a short duration of time.

The speculators are exposed to risk as they are employing their assets without much study

and in the process provide liquidity in the market.

Deliberate creation of a position for the express purpose of generating a profit from

exchange rate fluctuations accepting the added risk.

With Motive of speculative profit, lots of money floats in the universal market. This money

is highly volatile and runs after profits

It changes hands from options to futures to forwards to commodities and also to banks. Such

volatile funds moving for profits are termed as HOT MONEY. Quantum of Hot Money

depends upon market conditions, worldwide recessionary /growth trends, natural and political

uncertainties. Regional uncertainties and comforts decide the direction of movements of

funds.

Speculators are of two kinds :Optimistic and pessimistic. Former is called as Bulls and later

as bears. Bulls expect price appreciation/strengthening of currencies (or of any such

instrument).Hence Bulls buy and hold (long position) with a hope to sell at a higher price.

Bears expect fall of price/weakening of currencies (or of any such instrument).Hence Bears

sell(short sell) with a hope to recover(buy) at a lower price.

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FOREX RISK MANAGEMENT WITH REFERENCE TO CANARA

BANK

Vision

To emerge as a Best Practices Bank by pursuing global benchmarks in

profitability, operational efficiency, asset quality, risk management and

expanding the global reach.

Mission

To provide quality-banking services with enhanced customer orientation, highervalue creation for stakeholders and to continue as a responsive co rporate socialcitizen by effectively blending commercial pursuits with social banking.

The new brand identity forCanara Bank is based on the idea of a bond and is arepresentation of the close ties between the Bank and its many stakeholders

from customers and employees to investors, institutions and society at large.With its rich heritage of banking expertise, dedicated customer service andcorporate social responsibility, Canara Bank is a powerful enabler who helps itsstakeholders achieves their goals. The two seamlessly connected links capturethe essence of this partnership.

Canara Bank has more than 45,800 employees and serves over 31 million

customers through a network of over 2600 branches spread across the

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country. The simple, memorable sy mbol can be easily recalled and decoded

by all of the Banks diverse audiences.

The colour palette and typography have been carefully chosen. The rich bluerepresents stability, scale and depth. This contrasts with accents of bright

yellow that evoke optimism, warmth and energy. The Canara Bank logotype hasbeen hand-crafted. Its classic, serif letterforms communicate heritage andstature.

Foreign Exchange Operations of Branch of Canara Bank:

First we will see the Hierarchy of Foreign Exchange Operations in

Canara Bank. First it starts with International Foreign Exchange. Under this

International Foreign Exchange, Forex Department (FD) has existing. FD is

having its own Account in their name. So they do not dependent on any other.

In India around 13 departments are situated. In Maharashtra there are

only 2 FDs one is situated in Mumbai and another one is in Mangalore.

Under this FD, Foreign Exchange Cell comes. There are 22 Foreign

Exchange Cells situated in India. These Foreign Exchange Cells should report

the daily report of foreign exchange operations to Foreign Department.

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Under this FD another branch also existed called it as Designated Branch

(D-Branch). This D-Branch is not like a Foreign Exchange Cell. This branch is

not dependent on any other Foreign Exchange Cells, but they have their own

Account. For instance, for foreign exchange transaction purpose a customer

approaches Avenue Branch of Mumbai. Avenue Branch is a D -Branch, so will

not send this transaction to any other Foreign Exchange Cells but it operates in

their own account under the name of Foreign Department.

In Maharashtra especially in Mumbai these D -Branches are situated viz., inNaigaon Branch etc.,

A part from all these, still another branch is there, it is called Overseas

Branch. These Overseas Branches are Operate as branches or subsidiaries ofthe parent Bank. These branches are to seek deposits and grant loans incurrencies other than the currency of the host government.

Diagrammatic way of Hierarchy of Foreign Exchange Operations inCanara Bank

INTERNATIONAL FOREIGN EXCHANGE

Designated Branch Foreign Department

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SERVICES

now Let us see particularly of Mumbai Branch:

There is only one Foreign Exchange Transaction Cell, is situated in Mumbai.Mumbai Foreign Exchange Transaction is a Foreign Exchange Cell. This iscomes under Foreign Department from previous diagram we can clarify it.

This Mumbai Foreign Exchange Cell has been operating since from 1991.Till 2005 Mumbai Foreign Exchange Cell was under Mangalore Foreign

Department. But now it is shifted to Mumbai Foreign Department.

This Mumbai Foreign Exchange Cell reports daily foreign exchangeoperations to Mumbai Foreign Department. So for this reporting purpose it ishaving a new computer technology, by this they only press a key to submit or tosend the report at the end of the day. So for this technology they have separatecomputer.

Foreign Exchange Cell

IMPORT EXPORT

REMITTANCE

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Mumbai Forex Cell gives service to Exporter in the name of Export

Service. Here they have made 3 types of categories, as in the above figure.

Collection of Bills: Every document should be send through banks only. It is

compulsion made by RBI and also FEMA. Here exporter must submit some

documents are as follows:

Invoice, Packing List, Bill ofLading (in case of Sea) /Airway Bill (in

case ofAir), Certificate of Origin, Test Certificate etc., Statutory Declaration

Form (SDF) and Shipping Bill are very important documents where bank will

check these documents very thoroughly. And combining these important

documents, and they call it as GRForm.

EXPORT

Collection of

Bills

FinancePre &Post

Shipment

Cash in

Advance

Purchase

Discount

Negotiation

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Exporter or consignor prepares SDF. It is a document where exporter

declares the Type of goods he is exporting, Quantity (Kg & No.s), Name of

Importer, Name of Shipping Agency etc., This is made in 3 copies. One is sent

to RBI, another one is to any commercial Forex traded Bank and remaining is

for them. Superidentant of Exercise Custom certifies all these copies.

Finance: (Pre &Post Shipment loan): At Sight they purchase the document

and make the payment within 15 to 20 days. Bank may discount it as per the

instruction by party like Bill of Exchange. This may maturated at 90 days after

or 90 or 120 days as per agreement between both parties. Negotiation also

made by bank to get profits.

Who takes the pre shipment loan they should compulsorily take post

shipment loan also. Because, if any one have taken pre shipment, when goods

are ready to shipment, then bank convert this pre shipment into post shipment.

For this purpose Bank should require Purchase Order (PO), if New Importer/

High value goods then opening ofL/c and Bank should take Inventory as a

Hypothesis, Guarantee from Director/partner, some times Mortgage and some

times pledge the finished goods. These loan sanctions stage by stage.

IMP RTLetter of

Credit

Advise,

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here Bank gives service to importers also as an Import Service. Here importer

can open Letter of credit, for this purpose Bank acts as a mediator between

exporter and importer. So bank will take some risks relating to export and

import of goods.

Bank also acts as advisor to importer. Incase new exporter or incase of

high value materials or incase first time importing the materials, in all these

cases banks will give advise to the importer that whether to go or not. If any

RBIs prior permission is required or not if so require then what are the

procedure all things may advise to importer.

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Some times for importer also it gives a loan called Foreign Letter of

Credit (FLC). According to this if exporter fails to supply goods then Bank will

take the responsibility. But some major responsibility will be on importer only.

Remittance is nothing but receiving and paying of foreign currency in

India. Outward is nothing but paying abroad. Inward means incoming payment

from abroad. Money change means if a person wants to convert the one foreign

currency into domestic currency.

Here TT, DD, Bills, Travelers Cheques, Notes, Now recently Yatri Card

etc., are the major modes of transactions held in this type of service. For this

REMITTANCE

Outward

Inward

Money

Change

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purpose of service, any receiving / paying person should be a customer i.e., he

should be an Account holder in that particularBank. But this condition is not

applicable to Tourist. For Tourist Bank only looks out the Passport and Visa

(According to FEMA).

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Forex Facilities to Canara bank residents(individuals)

Introduction

The legal framework for administration of foreign exchange transactions inIndia is provided by the Foreign Exchange Management Act, 1999. Under theAct, freedom has been granted for buying and selling of foreign exchange forundertaking current account transactions. The Government has issued ForeignExchange Management (Current Account T ransactions) Rules, 2000 whichhave been notified vide Notifications GSR. 381(E) dated May 3, 2000, S.O.301(E) dated March 30, 2001 and GSR 608(E) dated September 13, 2004 asamended from time to time. The last amendment to the G.S.R is viding Notification No. G.S.R. No.412 (E) dated July 10, 2006 notifying certainrelaxations on current account transactions in public interest.

Under the Foreign Exchange Management Act, 1999 (FEMA) [in lieu ofFERA], which has come into force with effect from June 1, 2000, alltransactions involving foreign exchange have been classified either as Capital orCurrent Account transactions. All transactions undertaken by a resident that donot alter his assets or liabilities outside India are current account transactions. Interms of Section 5 of the FEMA, persons are free to buy or sell foreignexchange for any current account transaction except for those transactions onwhich Central Government has imposed restrictions, vide its Notification

referred to above A copy of the Not ification is available in the Official Gazette

I. Guidelines on Travel Related Matters

A 'person resident in India' is defined in Section 2(v) of FEMA, 1999 as:

A person residing in India for more than one hundred and eighty -two days

during the course of the preceding financial year but does not include

(A) a person who has gone out of India or who stays outside India, in either case

- for or on taking up employment outside India, or for carrying on outside Indiaa business or vocation outside India, or for any other purpose, in suchcircumstances as would indicate his intention to stay outside India for anuncertain period;

(B) a person who has come to or stays in India, in either case, otherwise than for or on taking up employment in India, or for carrying on in India a businessor vocation in India, or for any other purpose, in such circumstances as would

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indicate his intention to stay in India for an uncertain period; any person or bodycorporate registered or incorporated in India, an office, branc h or agency inIndia owned or controlled by a person resident outside India, an office, branchor agency outside India owned or controlled by a person resident in India; Thatis to qualify as a resident the person concerned will have to fulfill the criteri on

regarding (a) the duration of stay and (b) the purpose of stay.

The term Person Resident Outside India is defined in the Act as a person who isnot a person resident in India.

Buying foreign exchange

Foreign exchange can be purchased from any authorised dealer. Besidesauthorised dealers, full-fledged moneychangers are also permitted to releaseexchange for business and private visits.

Authorised Dealer

An Authorised Dealer is normally a bank specifically authorised by the ReserveBank under Section 10(1) of FEMA,1999, to deal in foreign exchange orforeign securities (List available on www.fedai.org.in ).

Exchange is available for a business trip

Authorised Dealers can release foreign exchange up to USD 25,000 for abusiness trip to any country other than Nepal and Bhutan. Release of foreign

exchange exceeding USD 25,000 for a travel abroad (other than Nepal andBhutan) for business purposes, irrespective of period of stay, requires prior permission from Reserve Bank. Visits in connection with attending of aninternational conference, seminar, specialised training, study tour, apprenticetraining, etc., are treated as business visits. Maintenance expense of a patientgoing abroad for medical treatment and/or check up or for accompanying asassistant to the patient going abroad for medical treatment / check -up also fallswithin this category. Incidentally, no release of foreign exchange is admissiblefor any kind of travel to Nepal and Bhutan or for any transaction wi th personsresident in Nepal and Bhutan.

Obtaining of foreign exchange for medical treatment outside India

Authorised Dealers may release foreign exchange upto USD 100,000 or itsequivalent to resident Indians for medical treatment abroad on self declarat ion basis of essential details, without insisting on any estimate from ahospital/doctor in India/abroad. A person visiting abroad for medical treatmentcan obtain foreign exchange exceeding the above limit, provided the request is

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supported by an estimate from a hospital/doctor in India/abroad. This exchangeis to meet the expenses involved in treatment.

Exchange is available for studies outside India

ADs may release an amount of USD 100,000 per academic year or the estimatereceived from the institution abroad, whichever is higher.

Students going abroad for studies are treated as Non-Resident Indians (NRIs)and are eligible for all the facilities available to NRIs under FEMA. In addition,they can receive remittances up to USD 100,000 from close relatives (as definedin Section 6 of the Companies Act, 1956) from India on self -declaration,towards maintenance, which could include remittances towards their studiesalso. Educational and other loans availed of by students as resident in India canbe allowed to continue. There is no dilution in the existing remittance facilitiesto students in regard to their academic pursuits.

Foreign exchange one can buy when traveling abroad on private visits to a

country outside India

In connection with private visits abroad, viz., for tourism purposes, etc., foreignexchange up to USD10,000, in any financial year may be obtained from anauthorised dealer on a self-declaration basis. The ceiling of USD10,000 isapplicable in aggregate and foreign exchange may be obtained for one or more

than one visit provided the aggregate foreign exchange availed of in onefinancial year does not exceed the prescribed ceiling of USD10,000 {Thefacility was earlier called B.T.Q or F.T.S.}. This limit of USD10,000 perfinancial year can be availed of by a person along with foreign exchange fortravel abroad for any purpose, including for employment or immigration orstudies. However, no foreign exchange is available for visit to Nepal and/orBhutan for any purpose.

Foreign exchange is available to a person going abroad on employment

Person going abroad for employment can draw foreign exchange up-toUSD100,000 from any authorised dealer in India on the basis of self -declaration.

Foreign exchange is available to a person going abroad on emigrat ion

Person going abroad on emigration can draw foreign exchange uptoUSD100,000 on self- declaration basis from an authorised dealer in India or the

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amount prescribed by the country of emigration. This amount is only to meetthe incidental expenses in the country of emigration. No amount of foreignexchange can be remitted outside India to become eligible or for earning pointsor credits for immigration. All such remittances require prior permission of theReserve Bank.

Category of visit, which requires prior approval from the Reserve Bank or

Govt. of India

Dance troupes, artistes, etc., who wish to undertake cultural tours abroad, arerequired to obtain prior approval from the Ministry of Human ResourcesDevelopment, Government of India, New Delhi.

Foreign exchange can be purchased in foreign currency notes while buying

exchange for travel abroad

Travellers are allowed to purchase foreign currency notes/coins only up to USD2000. Balance amount can be taken in the form of travellers cheque or bankersdraft. Exceptions to this are (a) travellers proceeding to Iraq and Libya can drawforeign exchange in the form of foreign currency notes and coins not exceeding

USD 5000 or its equivalent; (b) travellers proceeding to the Islamic Republic ofIran, Russian Federation and otherRepublics ofCommonwealth of IndependentStates can draw entire foreign exchange released in the form of foreign currencynotes or coins.

Minimization of Forex Exposure techniques uses in Mumbai Forex Cell

Exporters Credit Guarantee Corporation (ECGC)

This is the Government owned corporation. This company givesinsurance not only to banks but also to the exporters and importers. Andit also gives the guarantee towards the opposite party i.e., customer ofdomestic party.

If exporter or importer cheats in their business, then Banks will take theresponsible all those losses. For this purpose only Government hasestablished this ECGC to minimize the risk or losses to banks. So ifsomething happens then banks straightly approach this ECGC to refundor reimburse its losses.

Banned /Caution List by Government

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Every yearGovernment makes 2 type of list. One is related to companyand another one is about country. In that it makes 2 categories, one isbanning category and another one is cau tion category.

If any exporter or importer wants to trade with any country / company,

which is banned by Government at that time banks will not act as amediator between these two parties.

Suppose any company / country in the list of caution. Then bank ma yadvice to its customers to take the permission from government or RBI.Then only banks are ready to act as a mediator between both parties.

Don &BreakAgency

This is international Agency situated in Russia. This is nothing butCredit Rating Agency. If any customer comes to trade with any countrywhich is not banned / cautioned by Government but bank is having somefear of cheat. Then for safety purpose banks approaches this Agencycalled D&BAgency.

This agency studies the pros and cons in details about all aspects of thatcountry / company. And submit the report to particular bank. For thispurpose Agency takes some commissions, paid by banks only.Prevention Better than Cure theory they are adopting to minimize theexposure.

Square of the position

Banks not kept themselves any amount or transaction at the end of theday. Every day they square of their positions. So by this they do nothave any exchange rate exposure. For only working capital requirementthey have some foreign currency with them, this is very minor not muchaffective with exchange rate exposure.

Other Activities in Mumbai Forex Cell

Report

They prepare 2 types of reports. One is to RBI and another one is toFDs. Submission of Report to RBI: RBI made a Form called R-Return Form.This form is concern with outflows and inflows of Rupee and Net. If anydeposits made by particular cell in any banks and minimum deposit maintainedby this particular cell with RBI. All such informations are involved in this R-Return Form.

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This report includes only in value terms not the Number of Transactions.As per RBI guidelines Mumbai forex cell makes this report with differentcurrencies whatever they have transacted in a particular period. In the sensethey make report of dollar, pound, yen, euro and any currency they havetransacted in terms of value. And they make it as one and convert it in rupee

terms and submit it to RBI.

This report should prepare for every fortnight i.e., every 15th

and 30th

/31

stas the case may be of every month. And for this submission purpose, RBI

has made relaxation period as up to 5 days after that specified dates. If banksfail to do so they have to pay penalty to RBI, each day, after that grace period.

Another report is submitted to its FD. Every quarterly they have toprepare this report. Here they reports about the transaction held in that particularquarter in terms of Number of transactions and value.

Peak Month

Peak month starts from November and grow fast in Decemb er month.Matures in January to March months. Declines in A pril and ends with May

month. Why?

First reason is RBI. Yes, RBI declares credit rating twice in a year. Thispeak is nothing but comes in November month. Many foreigners are observingthis credit policy of RBI, after declaration of credit rate by RBI, accordinglythey will ready to trade. So these months are says to be peak months.

As we know, from June to September is a rain season. Because of thisclimatic condition: transportation may delay, storage is main problem, high protection is require for materials, so many exporters and importers are notready to trade in these seasons. They are trade in other than these months. Thisalso one reason, to say November to May is the peak season for Mumbai ForexCell.

Profitable Customers

As already we know that for Mumbai Forex Cell, they have 3 types ofcustomers viz., exporter, importer and remitters. Who are more the beneficialcustomers to Bank?

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Importer takes the first place among all customers. Because here bankwill get more exchange rate spread. That is differences between buying andselling rates of particular currency. Here bank and also government are not bothering about the importer. Means they are not giving any privileges toimporter for importing of materials. So here banks may charge high exchange

rates to importers. Whereas for exporters government is providing someprivileges, because of enjoying some privileges and encouraging the exporters

bank will minimize its profit in way of minimizing the spread rates. So by thisway importers are takes the first place to increase the profits of the banks.

Next place occupied by Remitters. Because these customers are visit thebanks only at once or twice not more than that. For this purpose banks are notviewing these customers as lifetime customers. So banks will make much profitfrom exchange rate spreads.

But exporters are not in the least place. But really these customers are beneficial customers rather than profitable customers. Of course thesecustomers are long-term profitable customers.

So every customer is important for bank. Only for giving more privilegesto exporters they seems to be as least profitable customers otherwise they arealso profitable as well as beneficial customers.

SWIFT

Every bank is having Bank Identification Code. By entering this code

only they can operate and open the SWIFT system. SWIFT system is nothingbut sending a message to other bank situated in foreign countries.

If Mumbai Forex Cell sends the messages then they immediately receivean acknowledgement in printed format. If Mumbai Forex Cell received anymessages from other banks then they have a set of words like RCVD, meansreceived.

This system is already programmed by giving some codes we can operateit. Like 700 code for L/c, 707 is for Opening of L/c, 707 is for

Amendment of L/c, 103 for Receiving / Paying of Amount, 100series forRemittance operated by Single to Single Person, 400 Series for Exportingtransaction.

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If bank specify the specific code, then related blank boxes come on thescreen. These boxes are filled by operator, who is a banker and these boxes arechanges according to codes given by banks for specific purposes.

Sometimes SWIFT is also uses for non-financial purpose. Like opening

of L/C and amendment of L/c etc., here we cannot find out any financialtransaction. So this is nothing but sending the message to other banks throughInternet media.

Mainly in this format we observe Code Number, Senders Name,Receivers Name, Date, Currency, Amount etc., This SWIFT mechanism issame all over the world. So by this we cannot have a Rupee V/s other currencyexchange rates. This is used for only sending the messages.

Rate Mechanism:

From Mumbai FD only they get the exchange rates of all currencies withcross currency exchange rates.

Mumbai Internal Forex Department sends exchange rates to all itsbranches and cells. This rate is driven by again market Demand & supply. Butalso some persons of Canara Bank International Department decide the finalexchange rates for their bank. By this only all branches and cells will get theinformation about the rates. So it is online connection from InternationalDepartment to all its branches and cells.

Here we can see two rates, one is Buying Rate and another one is SellingRate. If any customer wants to convert his Dollar into Rupee, then bank goes tothe buy option and buy the dollar and sell the rupee.

Here banks should give the type of transaction. Means whether thistransaction is for remittance purpose or is it for TT orCheque, orL/c etc., Afterdoing all these things Mumbai Forex cell submit report to their InternationalBranch.

Sometimes this Mumbai Forex cell chats with its International Division.

If customer is a lifetime customer, then Mumbai cell chats with its InternationalDivision to reduce or to increase the exchange rate in the benefit of customer.In other words, this cell requests to International Division for changing theexchange rates in the beneficial of customers. So for this purpose only they usethis Chatting option.

Doing all these transaction is nothing but indirectly sending the report toits International Forex Department. So for this purpose now Mumbai Forex

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Cell is having special computer. Recently, in October it was started itsoperation through this special computer. By this they can send and receive themessage very fast and easily.

RECOMMENDATIONS AND INFERENCES FROM THE CANARA

BANK CASE STUDY

y Canara Bank is one of the good banks in Mumbai city, which providesalmost all facilities to its customers. They had opened a stall in MumbaiExpo, held in Indira Glasshouse.

y Mumbai is not a major city in forex market like Mumbai. But there aresome players in Mumbai, they trade very cautiously. But some need

training programs, seminars, some knowledge to trade in forex market.

y As per some samples we found it out that, almost all exporters orimporters trades in only currency, i.e., USD. Because of Dollardepreciation they are in some currency loss. So to avoid this risk or

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exposure they can go for currency diversification. For that they requiresome guidelines. Anyhow now banks are ready for that.

y Canara Bank, Forex Cell is very cautious regarding the risk arises inforex market. And they are having some techniques and tools tominimize those risks. They are in the theory of Prevention better thancure. Means, before causing something now only they are takes somesteps to avoid the adverse effect.

y But Trading Firms are not in the position to recognize the risk. Thenminimizing is secondary. Any how they need some training programs.

y Government is not making any restrictions on forex market. Rather it ismaking some help to exporters and also importers (especially those whoare importing of materials for exporting purpose).

Recommendation

1. To Bank:

y Now they have a time to conduct some seminars, trainingprograms of forex market.

y By this they can get some customers or traders.

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y And others (i.e, especially companies) will feel, you aredoing social welfare. And they are very happy to close withyou.

y Existing customers will feel proud for their bank and theyare also give some good word of mouth.

y By this you can get more information about: Whats reallycustomer wants? What we suppose to do for our customers?What are the troubles for customers? By understanding thiswhat can we provide the service so customer will come to usvery easily?

y So it is recommend to Canara Bank that: CONDUCT ASEMINAR OR 15 DAYS TRAINING PROGRAM INFOREX MARKET.

y By this Mumbai also recognize itself in forex market. Andmore and more traders will create, because some are hesitate

to export or import the goods, if you made easy then manytraders may ready to come in forex market. All these creditwill goes to Canara Bank.

As a general:

Nevertheless, given this economic verity, it is important that exporters, in particular, and Indian businesses, in general, recalibrate their position. These

include:

y Consequent to Rupee appreciation, the net earnings of our exporters inrupee terms would necessarily dip. Exporters need to guard themselvesagainst anti-dumping investigations that would necessarily follow in thisnew paradigm. Accordingly, an exporter has to perhaps conduct acomprehensive risk analysis of his exports to various countries, takinginto account the probability of facing anti -dumping measures in thosecountries, and has to strategies his operations.

y Our businesses need to rework their position in the value chain. As theRupee appreciates, exporters must realize that 'brand India' has arrived.This means we cannot continue to export or produce products at the lowend of the value chain. India, perhaps, needs to import such goods fromother developing countries and concentrate on value -added products. Thisis possible as, with the appreciation of the Rupee, newer technologiesbecome economical and accessible to Indian manufacturers.

y Further, the changing paradigm calls for a re -look at domestic markets byexporters. To aid domestic consumption, the government too has to play

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its part. One factor that inhibits domestic consumption is the highincidence of indirect taxes -- we end up paying 16% to the centralgovernment and another 12.5% as VAT to state governments,aggregating to approximately 30% or one-fourth of retail prices. This isone of the highest in the world. Obviously, indirect tax reforms are

crucial to boost domestic consumption.y Exports of services would apparently be hit due to appreciation ofRupee

and salary levels in this sector may see a dip. But the rise in the intrinsicvalue of the Rupee compensates for the same. For instance, an Rs 50 tipto the waiter may do when Rs 100 would do today. An alternative thatcould be explored would be to bill in other currencies, perhaps in Euro,Yuan orRupee.

y Another area that requires deep contemplation by the businesscommunity is to re-compute their entire strategy on Special EconomicZones (SEZs) given these developments. It has to be noted that the

success of the Chinese SEZs was aided and abetted almost close to adecade by a tightly pegged Yuan to US dollar. The entire economics ofSEZs could undergo a tectonic shift in light of a sustained Rupeeappreciation.

y An appreciating Rupee makes foreign direct investment (FDI) into Indiaattractive as it hedges such investments from exchange rate depreciation.On the contrary, it provides a further incentive through capitalappreciation. This once again calls for a comprehensive strategicpositioning to leverage the opportunity -- not only by exporters but even by others. Obviously, as an investment destination, India and perhaps

China, with their booming stock exchanges and rising currency, could bethe best bet for investments. Of course, one cannot forget investments ingold and real estate.

\

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FOREX MARKET INDIAN SCENARIO

The rise in the value of rupee meant that inflation was curbed. The inflation rate

in India declined from 6.73 percent in February 2008 to 4.10 percent in August2008. Now in end of March 29

th2008 inflation rate went up to 7.41%.

The average daily turnover in the foreign exchange market increased to

US $ 45.9 billion during April-November 2008 from US $ 23.8 billion in thecorresponding period of 2006. While inter -bank turnover increased to US $ 31.9 billion from US $ 17.2 billion, the merchant turnover increased to US $ 14.0billion from US $ 6.6 billion. The ratio of inter-bank to merchant turnover was

2.4 during April-November 2008 as compared with 2.6 a year ago.

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Let us now look at the pros and cons of a rising rupee.

Advantages of the rising rupee:

y Foreign debt service: A ppreciation of the rupee helps in easing the

pressure, related to foreign debt servicing (interest payments on debtraised in foreign currency), on India and Indian companies.With Indiancompanies taking advantage of the United States soft interest rate regimeand raising foreign currency loans, known as external commercial borrowings (ECBs), this is a welcome phenomenon from the point ofview of their interest commitments on the loans raised. This will helpthem avoid taking a bigger hit on their bottom-line, which is beneficialfor its shareholders.

y Outbound tourists/student bonanza: The appreciating rupee is a big positive for tourists traveling or wanting to travel abroad. Considering

that the rupee has appreciated by over 10% against the US dollar sincemid-2002, traveling to the US is now cheaper by a similar quantum inrupee terms.The same applies to students who are still in the process offinalizing their study plans abroad. For example, a student's enrollmentfor a $1,000 course abroad would now cost only Rs.44,000 instead of theearlierRs 49,000!

y Government reserves:Considering that the government has been sellingits stake aggressively in major public sector units in the recent past, andwith a substantial chunk of this being subscribed by FIIs, the latter willhave to invest more dollars to pick up a stake in the company beingdivested, thus aiding the governments build up of reserves.

Disadvantages of the rising rupee:

y Exporters' disadvantage: The exporters are at a disadvantage owing tothe currency appreciation as this renders their produce expensive in theinternational markets as compared to other competing nations whosecurrencies haven't appreciated on a similar scale. This t ends to take awaya part of the advantage from Indian companies, which they enjoy due totheir cost competitiveness. However, it must be noted that despite thesharp currency appreciation in recent times, Indian exports have

continued to grow. This is vindicated from the fact that while in themonth of February 2004, India's exports were higher by 35% over thesame month previous year, in the first 11 months of the current fiscal,Indian exports have been higher by 15% year -on-year.

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y Dollar denominated earnings hurt: The strengthening rupee has anadverse impact on various companies/sectors, which derive a substantial portion of their revenues from the US markets (or in dollardenominations). Software and BPO are typical examples of thesectors adversely impacted by the appreciation of rupee.

CONCLUSION

Now banks are moving towards their core business to other businesses like mutual fund, stock market and forex market also.Because of low IRP (Interest Rate Parity) between deposit andlending.

Mumbai also one of growing city in Maharashtra. So year on yearnew firms are establishing and some existing firms are also readyto enter into forex market.

Exposure is there everywhere; Banks are avoiding these exposuresby following some methods and techniques as already told.

But trading firms are not having that much of knowledge as for asForex Market concern. They required much training andknowledgeable persons to conduct their business of import /export.

Some firms, they do not know whether they are in exposure or not.So it is a time to all banks and especially EXIM bank to conduct

some seminars to all exporters and importers and especially to alltraders of Forex Market situated in North Maharashtra

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Therefore from our study we can conclude that banks do not use anyone technique but a combination of techniques for mitigating forexrisk. Thus, our hypothesis has been proved.

Questionnaire:

:

1. Exports / Imports by:

Your own Branch, or

Head Office / Some otherBranch

2. How many times you export / import the materials in a year?

1 to 3 times 7 to 9 times

4 to 6 times More than 10 times

3. In which currency you usually export / import the materials?

USD GBP

EURO If other Specify________

If more than one currency give the weights in % age

4. Mode ofPayment

Advance Payment After receipts ofGoods/Payment

Bills Collection Letter ofCreditIf any other please specify: _____________________

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5. What are the risks involved in forex market according to you?

1)__________________________ 2)____________________________

3)__________________________ 4)____________________________

6. What the techniques you are using to minimize these exposures / risks?

Hedging Options Market

Lead orLags

Others, Specify ________________

7.What are the techniques you are using to forecast the exchange rates?

1)__________________________ 2)____________________________

3)__________________________ 4)____________________________

8. If you have branches in other countries, how you translate the P&LA/c and

Balance Sheet, What are the risks involved in it?

1) __________________________ 2)____________________________

9. How you minimize these exposures / risks?

1)__________________________ 2)____________________________

10.What are the privileges you are enjoying, provided from Governments(S/C)?

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11. What are the restrictions in forex market by Government or otherconcerns?

12. What other Services you are expecting from Banks?

Thank You Sir,

Annexure

Date USD SMA EMA CALCULATION OF SMA & EMA2/1/2006 45.05 FORMULA OF EMA

3/1/2006 44.95

4/1/2006 44.85

5/1/2006 44.67

6/1/2006 44.66

9/1/2006 44.28

10/1/2006 44.38

12/1/2006 44.15

13/01/2006 44.26

16/01/2006 44.17

17/01/2006 44.31

18/01/2006 44.51

19/01/2006 44.3620/01/2006 44.36

23/01/2006 44.15

24/01/2006 44.21

25/01/2006 44.29

27/01/2006 44.15

30/01/2006 44.14

31/01/2006 44.07 44.3985 44.3985

1/2/2006 44.15 44.3535 44.39421 `=(((C22-D21)*0.095328095)+D21)

2/2/2006 44.31 44.3215 44.38728

3/2/2006 44.23 44.2905 44.37805

6/2/2006 44.2 44.267 44.36747

7/2/2006 44.27 44.2475 44.35603

8/2/2006 44.2 44.2435 44.345310/2/2006 44.21 44.235 44.33479

13/02/2006 44.26 44.2405 44.3258

14/02/2006 44.22 44.2385 44.31748

15/02/2006 44.27 44.2435 44.31043

16/02/2006 44.3 44.243 44.304

17/02/2006 44.46 44.2405 44.29794

20/02/2006 44.43 44.244 44.2928

21/02/2006 44.4 44.246 44.28834

22/02/2006 44.51 44.264 44.28602

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23/02/2006 44.56 44.2815 44.28559

24/02/2006 44.45 44.2895 44.28596

27/02/2006 44.42 44.303 44.28759

28/02/2006 44.44 44.318 44.29049

1/3/2006 44.35 44.332 44.29444

2/3/2006 44.34 44.3415 44.29893

3/3/2006 44.36 44.344 44.30323

6/3/2006 44.32 44.3485 44.307547/3/2006 44.33 44.355 44.31207

8/3/2006 44.42 44.3625 44.31687

9/3/2006 44.55 44.38 44.32289

10/3/2006 44.5 44.3945 44.32972

13/03/2006 44.53 44.408 44.33718

14/03/2006 44.47 44.4205 44.34512

RSI

Date USD Change Advance DeclineAvg.Gain

Avg.Loss NR DR RS RSI

2/1/2006 45.05

3/1/2006 44.95 -0.100 0.1

4/1/2006 44.85 -0.100 0.1

5/1/2006 44.67 -0.180 0.18

6/1/2006 44.66 -0.010 0.01

9/1/2006 44.28 -0.380 0.38

10/1/2006 44.38 0.100 0.100

12/1/2006 44.15 -0.230 0.23

13/01/2006 44.26 0.110 0.110

16/01/2006 44.17 -0.090 0.0917/01/2006 44.31 0.140 0.140

18/01/2006 44.51 0.200 0.200 `=100-100/(1+J17))

19/01/2006 44.36 -0.150 0.15 `=H17/I17

20/01/2006 44.36 0.000 0.000 0 `=(((F16*13)+D17)/14)

23/01/2006 44.15 -0.210 0.21 0.039 0.104 `=(F16*13+D17)/14

24/01/2006 44.21 0.060 0.060 0.041 0.096 0.041 0.096 0.424 29.769

25/01/2006 44.29 0.080 0.080 0.044 0.089 0.044 0.089 0.488 32.789

27/01/2006 44.15 -0.140 0.14 0.040 0.093 0.040 0.093 0.435 30.331

30/01/2006 44.14 -0.010 0.01 0.038 0.087 0.038 0.087 0.432 30.157

31/01/2006 44.07 -0.070 0.07 0.035 0.086 0.035 0.086 0.407 28.908

1/2/2006 44.15 0.080 0.080 0.038 0.080 0.038 0.080 0.478 32.357

2/2/2006 44.31 0.160 0.160 0.047 0.074 0.047 0.074 0.633 38.758

3/2/2006 44.23 -0.080 0.08 0.043 0.074 0.043 0.074 0.584 36.879

6/2/2006 44.2 -0.030 0.03 0.040 0.071 0.040 0.071 0.567 36.170

7/2/2006 44.27 0.070 0.070 0.042 0.066 0.042 0.066 0.642 39.109

8/2/2006 44.2 -0.070 0.07 0.039 0.066 0.039 0.066 0.594 37.262

10/2/2006 44.21 0.010 0.010 0.037 0.062 0.037 0.062 0.605 37.714

13/02/2006 44.26 0.050 0.050 0.038 0.057 0.038 0.057 0.668 40.043

14/02/2006 44.22 -0.040 0.04 0.036 0.056 0.036 0.056 0.634 38.793

15/02/2006 44.27 0.050 0.050 0.037 0.052 0.037 0.052 0.702 41.261

16/02/2006 44.3 0.030 0.030 0.036 0.048 0.036 0.048 0.747 42.752

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17/02/2006 44.46 0.160 0.160 0.045 0.045 0.045 0.045 1.002 50.038

20/02/2006 44.43 -0.030 0.03 0.042 0.044 0.042 0.044 0.953 48.785

21/02/2006 44.4 -0.030 0.03 0.039 0.043 0.039 0.043 0.905 47.503

22/02/2006 44.51 0.110 0.110 0.044 0.040 0.044 0.040 1.102 52.437

23/02/2006 44.56 0.050 0.050 0.044 0.037 0.044 0.037 1.199 54.530

24/02/2006 44.45 -0.110 0.11 0.041 0.042 0.041 0.042 0.976 49.383

27/02/2006 44.42 -0.030 0.03 0.038 0.041 0.038 0.041 0.925 48.05128/02/2006 44.44 0.020 0.020 0.037 0.038 0.037 0.038 0.962 49.038

1/3/2006 44.35 -0.090 0.09 0.034 0.042 0.034 0.042 0.815 44.904

2/3/2006 44.34 -0.010 0.01 0.032 0.040 0.032 0.040 0.800 44.456

3/3/2006 44.36 0.020 0.020 0.031 0.037 0.031 0.037 0.839 45.625

6/3/2006 44.32 -0.040 0.04 0.029 0.037 0.029 0.037 0.774 43.646

7/3/2006 44.33 0.010 0.010 0.027 0.034 0.027 0.034 0.795 44.296

RUPEE V/s DOLLAR FROM 1ST

JAN 2007 TO 31ST

MAR 2008

Date USD DATE USD DATE USD

2/1/2006 45.05 17/03/2006 44.42 2/6/2006 46.17

3/1/2006 44.95 20/03/2006 44.44 5/6/2006 45.82

4/1/2006 44.85 21/03/2006 44.38 6/6/2006 45.92

5/1/2006 44.67 22/03/2006 44.47 7/6/2006 45.93

6/1/2006 44.66 23/03/2006 44.55 8/6/2006 46.06

9/1/2006 44.28 24/03/2006 44.66 9/6/2006 45.92

10/1/2006 44.38 27/03/2006 44.66 12/6/2006 45.88

12/1/2006 44.15 28/03/2006 44.66 13/06/2006 46.04

13/01/2006 44.26 29/03/2006 44.69 14/06/2006 45.98

16/01/2006 44.17 31/03/2006 44.61 15/06/2006 45.91

17/01/2006 44.31 3/4/2006 44.61 16/06/2006 45.92

18/01/2006 44.51 4/4/2006 44.61 19/06/2006 45.89

19/01/2006 44.36 5/4/2006 44.69 20/06/2006 45.91

20/01/2006 44.36 7/4/2006 44.63 21/06/2006 45.92

23/01/2006 44.15 10/4/2006 44.74 22/06/2006 46.01

24/01/2006 44.21 12/4/2006 44.93 23/06/2006 46.2

25/01/2006 44.29 13/04/2006 45.3 26/06/2006 46.34

27/01/2006 44.15 17/04/2006 45.15 27/06/2006 46.36

30/01/2006 44.14 18/04/2006 45.15 28/06/2006 46.4

31/01/2006 44.07 19/04/2006 45.14 29/06/2006 46.34

1/2/2006 44.15 20/04/2006 45.15 30/06/2006 46.08

2/2/2006 44.31 21/04/2006 45.09 3/7/2006 45.98

3/2/2006 44.23 24/04/2006 45.06 4/7/2006 46.01

6/2/2006 44.2 25/04/2006 44.83 5/7/2006 46.03

7/2/2006 44.27 26/04/2006 45.03 6/7/2006 46.15

8/2/2006 44.2 27/04/2006 45.06 7/7/2006 46.12

10/2/2006 44.21 28/04/2006 44.97 10/7/2006 46.06

13/02/2006 44.26 2/5/2006 44.9 11/7/2006 46.21

14/02/2006 44.22 3/5/2006 44.86 12/7/2006 46.21

15/02/2006 44.27 4/5/2006 44.97 13/07/2006 46.29

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16/02/2006 44.3 5/5/2006 44.88 14/07/2006 46.43

17/02/2006 44.46 8/5/2006 44.88 17/07/2006 46.44

20/02/2006 44.43 9/5/2006 44.96 18/07/2006 46.73

21/02/2006 44.4 10/5/2006 44.93 19/07/2006 46.95

22/02/2006 44.51 11/5/2006 45.07 20/07/2006 46.84

23/02/2006 44.56 12/5/2006 45.05 21/07/2006 46.83

24/02/2006 44.45 15/05/2006 45.39 24/07/2006 46.9327/02/2006 44.42 16/05/2006 45.61 25/07/2006 46.81

28/02/2006 44.44 17/05/2006 45.34 26/07/2006 46.85

1/3/2006 44.35 18/05/2006 45.48 27/07/2006 46.64

2/3/2006 44.34 19/05/2006 45.46 28/07/2006 46.56

3/3/2006 44.36 22/05/2006 45.68 31/07/2006 46.51

6/3/2006 44.32 23/05/2006 45.52 1/8/2006 46.65

7/3/2006 44.33 24/05/2006 45.73 2/8/2006 46.56

8/3/2006 44.42 25/05/2006 45.85 3/8/2006 46.72

9/3/2006 44.55 26/05/2006 45.85 4/8/2006 46.54

10/3/2006 44.5 29/05/2006 45.97 7/8/2006 46.49

13/03/2006 44.53 30/05/2006 46.19 8/8/2006 46.59

14/03/2006 44.47 31/05/2006 46.43 9/8/2006 46.53

16/03/2006 44.41 1/6/2006 46.22 10/8/2006 46.43

11/8/2006 46.52 27/10/2006 45.22 10/1/2008 44.53

14/08/2006 46.56 30/10/2006 45.09 11/1/2008 44.56

16/08/2006 46.55 31/10/2006 45.02 12/1/2008 44.61

17/08/2006 46.46 1/11/2006 44.93 15/01/2008 44.31

18/08/2006 46.48 2/11/2006 44.93 16/01/2008 44.32

21/08/2006 46.45 3/11/2006 44.84 17/01/2008 44.27

22/08/2006 46.52 6/11/2006 44.86 18/01/2008 44.25

23/08/2006 46.56 7/11/2006 44.83 19/01/2008 44.3424/08/2006 46.5 8/11/2006 44.68 22/01/2008 44.21

25/08/2006 46.61 9/11/2006 44.65 23/01/2008 44.21

28/08/2006 46.56 10/11/2006 44.45 24/01/2008 44.23

29/08/2006 46.52 13/11/2006 44.9 25/01/2008 44.24

30/08/2006 46.51 14/11/2006 45.16 29/01/2008 44.27

31/08/2006 46.55 15/11/2006 45.34 31/01/2008 44.17

1/9/2006 46.53 16/11/2006 45.17 2/2/2008 44.11

4/9/2006 46.44 17/11/2006 45.01 5/2/2008 44.11

5/9/2006 46.22 20/11/2006 44.86 6/2/2008 44.13

6/9/2006 46.21 21/11/2006 44.99 7/2/2008 44.09

7/9/2006 46.1 22/11/2006 44.75 8/2/2008 44.12

8/9/2006 46.2 23/11/2006 44.7 9/2/2008 44.06

11/9/2006 46.27 24/11/2006 44.87 12/2/2008 44.18

12/9/2006 46.34 27/11/2006 44.64 13/02/2008 44.17

13/09/2006 46.22 28/11/2006 44.74 14/02/2008 44.16

14/09/2006 46.15 29/11/2006 44.65 15/02/2008 44.09

15/09/2006 46.13 30/11/2006 44.76 19/02/2008 44.07

18/09/2006 46.12 1/12/2006 44.67 20/02/2008 44.2

19/09/2006 46.11 4/12/2006 44.59 21/02/2008 44.19

20/09/2006 46.05 5/12/2006 44.56 22/02/2008 44.25

21/09/2006 45.88 6/12/2006 44.51 23/02/2008 44.28

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22/09/2006 45.94 7/12/2006 44.66 26/02/2008 44.17

25/09/2006 45.86 8/12/2006 44.69 27/02/2008 44.2

26/09/2006 45.97 11/12/20