Corporate Hedging for Foreign Exchange Risk in India

This paper attempts to evaluate the various alternatives available to the Indian corporates for hedging financial risks. By studying the use of hedging instruments by major Indian firms from different sectors, the paper concludes that forwards and options are preferred as short term hedging instruments while swaps are preferred as long term hedging instruments. The high usage of forward contracts by Indian firms as compared to firms in other markets underscores the need for rupee futures in India. In addition, the paper also looks at the necessity of managing foreign currency risks, and looks at ways by which it is accomplished. A review of available literature results in the development of a framework for the risk management process design, and a compilation of the determinants of hedging decisions of firms. The paper concludes by pointing out that the onus is on Reserve Bank of India, the apex bank of the country, and its Working Group on Rupee Futures to realise the need for rupee futures in India and the convertibility of the rupee