Volatility analysis of Correlation between foreign currencies in reference to Indian rupee

Multinational firms have their revenue linked in number of currencies and their upside and downside movements can affect overall efficiency of firms. Purpose of the research are to ascertain the correlation between exchange rate movements, to ascertain relative change in value of currency over period of time, to suggest measures to cope up volatility of exchange rate movements and for effective management of forex exchange market. Methods. The analysis of each data set of exchange rate in detail to have insight of their mean, median, mode, skewness, kurtosis. An attempt has been made to drive out trend of movements and plot that in line diagram and correlation and other descriptive statistics have been calculated using SPSS software. Results. The Pearson’s correlation value is close to 1 in almost all cases, it indicates that there is a strong relationship between two variables. CAD with INR are positively skewed whereas USD, GBP, JPY are negatively skewed with INR. INR movements in CAD, JPY, USD and GBP have correlation indicating that all companies having transactions globally can predict that upward movement in one currency affects the movement of another currency. Discussion. Based on above analysis, some suggestion have been drawn for improving functioning of forex exchange market in India.Since there is great volatility in exchange rate movements, risk is associated with every upside and downside of exchange rate and there is need for incorporation of effective and sound hedging mechanism so as to cope up with this risk and safeguard multinationals and big business houses against forex risk .Rupee movements in Canadian dollar, Japanese yen, US dollar and British Pound have correlation indicating that all companies having transactions globally can predict that upward movement in one currency affects the movement of another currency. Based on above analysis, some suggestion have been drawn out so as to come out with some concrete parameters for improving functioning of forex exchange market in India. 1) More and more hedging instruments are required to cope up extreme volatility of Indian rupee against all major currencies of the world. 2) Steady liberalization of financial markets is need of the hour by fetching more attention on corporate and business houses who invest back in India. 3) Promotion of invoicing of trade in domestic currency will be extremely helpful and beneficial for all sectors of economy so as to cope up with extreme volatility. 4) There has been wide progress and enhancement of rupee market across globe especially in Dubai, Singapore, London and New York , so it is need of the hour to try and relocate offshore activities onshore. RBI has taken a number of steps in the recent past to liberalize currency futures market to obviate/reduce the need for the NDF market. 5) There is need for effective coalition between OTC and exchange traded markets for currency futures 6) More Use of Options should be advocated and more focus should be on conducting seminars and workshops to teach and advocate the importance and practicability of risk management techniques. 7) Open ended foreign exchange positions are more prone to risk and there is need to develop strict monitoring mechanism by liberalizing open position limits of banks