Financial markets are generally impulsive. Influenced by global events, forex markets have become highly volatile and unpredictable. Adverse movement of exchange rates is resulting in significant losses for the derivative traders. The Indian corporate treasuries have to evolve sound risk management policies and practices. The Indian companies need to build the ability to manage the new financial risks that may arise in the process of global integration.

Indian companies have grown at a fast pace in the past few years. Overseas acquisitions have resulted in growing exports and foreign currency exposure. These acquisitions have driven the companies to go for excessive foreign finance to fund their growth. This increased exposure demands ability to manage the new financial risks that arise in the process of global integration.

Forex derivatives are the financial instruments whose value is derived from the underlying assets. Generally, companies use derivatives to hedge their risk in the financial markets. In the foreign exchange markets, traders use the derivatives to lock in their future exchange rate. Many Indian companies which bought these contracts to minimize currency risk, are facing huge losses now. The companies got into exotic derivatives without proper risk assessment.When the markets were favorable, the companies enjoyed the benefit of these transactions and took the credit for smart treasury operations. Now the volatile global markets are affecting the profit margins of both the Indian companies and banks. The estimated national loss on foreign exchange exposure of corporate India is Rs. 12,000 cr to Rs. 20,000 cr, according to forex consultants.

One of the major reasons for losses is that the companies started using these products for speculative purpose. Ernst and Young studied around 34 companies. It is found that among the companies surveyed, 44% used exotic derivative products and 35% have resorted to opportunistic hedging. Only 32% of the companies studied resort to risk management techniques/practices that are approved by the board or top-management.

Treasury Management Magazine, Forex Derivative in India, Financial Markets, Risk Management, Corporate Acquisitions, Management Policies, Foreign Exchange Markets, Indian Stock Exchanges, Income Tax, Small and Medium Enterprises, SMEs, Global Interest Rates, Institute of Chartered Analysts of India, ICAI.