Mar 07 2018

Foreign Exchange Risk Management Process Improvement


A U.P. based steel manufacturer having an exposure of around 300cr. The finance team monitors exchange rates on a regular basis and follows the risk management policy as decided by the board of directors. In the past few months management has come across an issue of mismanagement of the forward contract utilisation and instances of forex losses on account of delayed realisation against a forward contract booked.

Myforexeye Value Addition

To get in depth understanding of the issue, Myforexeye team had a detailed meeting with the management and finance team to discuss the ongoing forex risk management practices.

We did a why-why analysis of the risk management practices and found the following issues.

  • They forgot to cancel a forward contract of Euro 54540 that expired on 5th March, as the inward got delayed by one day. Since the forward cancellation was done by the bank after the maturity date, the bank applied the card rate of EURINR 81.
  • They were hedging order to order for a fixed date maturity.
  • Not taking any time buffer in case the export receivable gets delayed by a few days.
  • Loose Monitoring of the exposure.

Myforexeye Solutions:

  • If we would have cancelled the forward contract on the due date, the live market rate of around 80.20 would have applied instead of card rate thereby saving 80 paisa in this transaction.
  • Instead of hedging on an order to order basis, we recommended to gather exposures of each month and book forwards for the respective months.
  • As they were not taking any buffer period for booking the forward contracts against export orders, we advised them to take 10-15 day grace period from the expected date of receivables to book forward contracts.

Advised the client to subscribe to our Forex Portfolio Management services wherein we manage the foreign exchange exposures using real-time market data and technology to keep an error-free monitoring of the exposures. We keep a check on the client’s exposure on a regular basis, ensuring best market rates for forex payables and receivables with end-to-end support from gathering the exposures to managing and advising various hedging strategies.