How To Deal With Forex Rate Fluctuations

During the last few weeks, management of every business entity, having even smallest international transactions, was taken aback by sudden rise in exchange rate of US$ and other currencies. Although Rupee was stable, with minor adjustments, for a few months and enterprises did not pay attention to this fact. Such a sharp increase was never expected and that is the reason of enterprises are shocked. It has its impact on business set up India possibilities by foreign companies.

While for the purpose of Business Plans, management teams can visualize things to some extent and make provisions accordingly and take the impact in the figures, it is very difficult to predict how exchange rate of a particular currency will move However, if we study the currency fluctuations of major currencies during the last five years, it will be observed Rupee has depreciated against almost all the major international currencies. Exchange rate volatility does not affect different stakeholders. When the rupee appreciates, importers are benefitted since the import cost of goods comes down but exporters are at loss. It depends on the sectors also. Like large IT companies are in a position to absorb the jerks where small exporters cannot withstand. General impact on all the enterprises is amount outstanding against import payments. If exchange rate goes up, outstanding amount also goes up and there is loss.

Measures to deal with foreign exchange fluctuations

Hedging – Enterprises has to see the share of international business and compare it with total volume. If international business is in-significant then there is not need for hedging and foreign exchange loss and gain can be absorbed. Foreign investors while company formation in India look for the possibilities to minimize foreign exchange loss.

Forward Contracts – Through forward contract, bank guarantees conversion of fixed amount of currency into another currency at a pre-determined exchange rate at a particular date. This is the most popular document used for hedging. However, if exchange rate becomes favorable, then the enterprise is deprived of the benefit as well.

Swap – Swap involves adjustment of receivable and payables (after following due procedures and approvals) in the same foreign currency.

Foreign Currency Account – Banks are giving option to have a foreign currency account. If the enterprise has foreign exchange earnings, they can open this account and use the foreign currency balance for payments. In this case, they will remain un-affected by foreign exchange fluctuations. You can also set the percentage of foreign exchange earning going to Foreign Currency Account.

Call and Put Option – Call is the option in which an enterprise can benefit also when foreign exchange goes favorable. In this case, entity has to pay some premium. They may reserve foreign currency at a pre-determined price but are not bound to purchase it. Similarly, in the Put option, entity can reserve price to sell foreign currency but is not bound to do so.

Besides the above, there are some products devised by the banks to minimize the impact of foreign currency fluctuations. Some of them are POS (Principal only Swap), in this scheme banks exchange the loan from high interest rate bearing currency to lower interest rate currency.

Author Bio:- Varun Bhatia is currently working with Corporateleaps, he is the author & publisher of this article about ” HOW TO DEAL WITH FOREX RATE FLUCTUATIONS”. He is professional content writer and having vast experience in writing articles on various topics like business, banking, accounting, finance, human resources and marketing. He has written many articles about Company Setup India and these articles are very popular in Business industry.