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About DicnoFX

Overview

Currency derivatives are an effective method of dealing with the risks associated with foreign exchange fluctuations. Small and medium enterprises and other companies engaged in export and import businesses play a significant role in the development of any country. But these units have to worry about the impact of currency fluctuations in their businesses.

SMEs currently contribute nearly 35% of India’s gross output of the manufacturing segment. This segment also accounts for 40% of the country’s total exports. The growth of this segment, has, however, been constrained by the risks associated with the fluctuations in the currency rates.

All SMEs or other corporate units exporting their products have to worry about the impact of currency fluctuations and take actions to prevent the negative impact of such fluctuations. The units highly exposed to currency fluctuations are the ones engaged in export and import of a variety of products and services related to the food processing segment, agricultural inputs, pharmaceuticals, engineering, electrical and electronics, textiles and garments, leather goods, meat products, bio engineering, IT services etc.

  • A change in the currency rate leads to change in the valuation of outstanding financial obligations of any business. In many cases exporters work out their cost estimates in rupee terms but get their revenues in foreign currencies.
  • Translation of financial statements of foreign subsidiaries for the purpose of consolidation into worldwide financial statements of a corporate.
  • Change in the value of the operating cash flows of a business due to change in exchange rates.
  • Risks related to change in the cost of foreign currency loans due to fluctuations in the value of the currency.

One of the best options to deal with currency fluctuations and related risks is hedging. This means taking an opposite position in the futures market. This helps to minimize the risks associated with the unpredictable changes in the USD/INR rate. Derivative instruments can easily be bought and sold in India and thus are an attractive option for hedging against the currency fluctuation risks.

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