International trade is today experiencing a tough time. Declining margins are making traders scurry for cover. Volatility in the exchange rates and the resultant losses have made adoption of effective risk management techniques the need of the hour. The article sheds light on transaction exposure, another foreign exchange risk, and ways to manage it.

The increasing volatility in the rupee-dollar rates (Refer Chart 1) affects the fate of several companies involved in international trade and sometimes results in monetary losses. The international trade has no more remained steady. The fluctuations between rupee and dollar affects the Indian industry both positively and negatively. In case of dollar depreciation two distinct situations result in two different circumstances, the gain for the importers turns into the loss for the exporters. This mounting fluctuation in rupee-dollar movement has mandated the need for effective currency risk management.

Prior to 1990, India followed a very conservative approach to trade and business. Indian economy was almost similar to a closed economy where the proportion of foreign exchange risk was very less. It is only after the liberalization that started in 1990 that the government started relaxing the norms related to capital account convertibility, and policies pertaining to export and imports. Under the amended policy, government opened up economy for Foreign Direct Investment (FDI) and portfolio investment in various sectors. Apart from them, several quantitative restrictions were dropped, which resulted a shift of the currency regime from a fixed-(adjustable) exchange rate to a "market determined exchange rate". This brought the country at the heart of international trade, providing attractive markets to foreign institutional investors and long term investors. Subsequently, Indian firms were also allowed to try out the investment avenues and raise money from foreign markets

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