Forex Risk Management Strategies for Indian IT Companies

This study deals with the impact of currency fluctuations on cash flows of IT service providers (who would be receiving foreign currencies), and explores various strategies for managing transaction exposure from this viewpoint. The study evaluates three foreign exchange risk management strategies, viz. forward currency contacts, currency options, and cross-currency hedging, to find out which of the strategies is appropriate in particular situations. The results of the study suggest that the forward currency hedging strategy yielded the highest mean cash flows and the highest mean percentage gain amongst the forex risk management strategies considered. Further, in terms of project type, the forex risk management strategies investigated in the study seem to be more suitable for fixed price projects (FPP) than for time and materials (T&M) projects, and in terms of project category, the forex risk management strategies investigated in the study seem to be more suitable for application support (AS) projects than application development (AD) projects.

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