Main Article Content
Abstract
For reducing a firm’s vulnerabilities from major exchange rate movements, measuring and managing exchange rate risk exposure is important. It could adversely affect profit margins and the value of assets. This paper reviews the conventional types of currency rate risk faced by firms, namely transaction, translation and economic risks; it also presents the VaR (Value at Risk) approach as the currently leading method of quantifying a firm’s exchange rate risk exposure, and examines the main advantages and disadvantages of various currency rate risk management policies, including tactical versus strategic and passive versus active risk management. In addition, it covers a set of widely accepted best practices in managing currency risk and presents some of the main hedging tools in the OTC (Over the Counter) and exchange-traded markets. This paper also provides some data on the use of financial derivatives instruments, and widely used hedging practices by Indian firms.