The Economy of every Country depends how strong its currency is and amount of Foreign Exchange Reserves held by the Country. Initially, use of Forex was limited only to export and import but in recent era of Globalization Forex has a wider scope. Various arbitrage possibilities are available for arbitragers to earn good amount of money from Forex trading.

 

Every Country has its own Forex market. A Forex quotation can either be direct or indirect. A Forex quotation is said to be direct when it is quoted in a manner that reflects the exchange of a specified number of domestic currency vis-à-vis 1 unit of foreign currency. For example US $ 1 = Rs. 45 is a direct quotation for US $ in India. In contrast, the Forex quotation is said to be indirect when it is quoted in a manner that reflects the exchange of a specified number of foreign currency vis-à-vis 1 unit of local currency. For example Rs. 1 = US $ 0.02222 is an indirect quotation in India. Every Country except United Kingdom use direct quotation.

In modern era due to liberalization and globalization amount of export and import has an upward trend for business organization hence giving rise to a new risk for business enterprises named as Forex risk. There are many techniques for managing Forex risk exposure such as Netting, Leading and Lagging, Forward Market Hedge, Financial Swaps, Money Market Hedge etc.

 

Forward Market Hedging is one of the best methods of managing Forex risk exposure. A forward transaction is a transaction requiring delivery at a future date of specified amount of one currency for specified amount of another currency. The exchange rate is determined at the time of entering into the contract but the payment and delivery takes place on maturity.

 

Corporate Houses use forwards to hedge themselves against fluctuations in currency price that would have a significant impact on their financial position. Banks use forwards to offset the forward contracts entered into with non-bank customers. The basic rule in forward market hedge is that foreign currency payable should be hedged by a matching buying in the same currency in the forward market and the receivable position should be matched with selling in the same currency in the forward market.

 

Apart from forward market hedge, Option Market Hedge and Future Market Hedge are also commonly used methods of managing Forex risk exposure. Selection of appropriate method of hedging is very important aspect for every business house which is vulnerable to Forex risk for long term survival of business.