MANAGEMENT OF ECONOMIC EXPOSURE BY MNCS IN INDIA

Transcription

1 51 MANAGEMENT OF ECONOMIC EXPOSURE BY MNCS IN INDIA ABSTRACT DR. MANISHA GOEL* *Associate Professor, YMCA University of Science & Technology, Faridabad, Haryana, India. Volatility of exchange rates has increased the complexity of cross border investment activities. Economic exposure is the extent to which the value of the company will change when the present value of expected cash flows fluctuates with exchange rate movements. Unmanaged economic exposure can significantly affect not only the financial position but also the competitive position of firm in international market and its market value. The present study portrays economic exposure management as practiced by various multinational companies in India. This article is based on a questionnaire study undertaken in using a sample of 200 MNCs. The purpose of this study is to make a comparative analysis of management of economic exposure by banking and non banking as well as foreign and Indian MNCs. This study deals with various other questions such as whether or not companies develop separate management system for management of their economic exposure. The effect of various factors on their management policy has also been investigated. The results of the study evidence that majority of firms do not measure their economic exposure. The companies which operate at high level are more serious about management of their economic exposure as compared to companies operating at low level. There is significant difference between attitude of banking and non banking companies towards measurement and management of their economic exposure. But there is not so significant difference between attitude of foreign and Indian MNCs towards measurement and management of their economic exposure. Most of the companies which estimate their economic exposure manage their exposure actively or regularly. Increasing usage of financial derivatives as compared to real techniques has also been evidenced. The results of this study motivate important implications for corporate risk management. KEYWORDS: Exchange Rate Movements, Economic Exposure, Exposure Management, Financial Derivatives, Real Techniques. 1. INTRODUCTION The fast pace of ever accelerating developments in technology, wide spread of channels of communication as well as the removal of trade barriers have induced the investors to invest their huge funds in the country of their choice to generate the desired returns. But the investments made in foreign countries are exposed to the exchange rate fluctuations. Economic exposure reflects the extent to which the present value of future cash flows is affected by these exchange rate movements. It is the most pernicious and harmful exposure confronting business in a world of volatile exchange rates. It has no time limit, nor a defined direction of movement. It can be measured with the help of various techniques. The simplest way to measure economic exposure

2 52 is to spot the influence of the expected change in exchange rates on forecasted sales volumes. Financial theory suggests that economic exposure can be measured with the help of expected value of firm which is reflected in net present value of future cash flows. Sensitivity of firm s share price to exchange rates represents economic exposure of the company. Sensitivity analysis can also be used for estimating the impact of unexpected exchange rate variations on present value of cash flows of the company. Almost all corporate treasurers have found economic exposure management to be the most difficult and onerous, indeed a terrifying challenge, but perhaps also the most exciting, and occasionally as a rewarding activity. The appropriate response to an anticipated or actual real exchange rate change depends crucially on the length of time that real change is expected to persist. A longer lasting change in the real exchange rate will definitely induce firm to take major long term decisions for their permanent management. MNCs with their concentrated networks in a few countries are not capable of effectively reducing their economic exposure. As different exchange rates are not perfectly correlated, a firm can also reduce economic exposure impact by diversifying cash flows over different currencies. So, only those MNCs that have greater breadth of operations are better equipped to effectively manage their economic exposure. Various strategies can be applied to manage economic exposure such as financial derivatives and real strategies. Financial derivatives include currency forward, future, option and swap contracts. Currency forward is an agreement to exchange a specific quantity of a specific currency for another currency on a specified future date at an agreed forward rate. Currency future contracts are exchange regulated forward contracts. These agreements are obligation for both of the parties. Whereas currency option is an agreement which provides option to option holder to buy (or sell) one currency in exchange of another currency at an agreed price, on or before the agreed date but has no corresponding obligation. Currency swap includes simultaneous purchase and sale of one currency for another, where the two contracts have different dates. Usage of these financial derivatives is helpful in reducing economic exposure up to some extent but these do not provide permanent solution to mitigate economic exposure. Permanent solution to this problem is usage of real strategies which include diversification, reconstruction and reallocation of resources. These strategies require operational flexibility which enables the firm to selectively exploit favorable currency movements to maximize profit potential and minimize the impact of adverse currency movements and downside their economic exposure. Competitive advantage of an MNC is based on expertise in the areas like production, marketing, the organization of people, or technical resources. MNCs with diversified business operations may adjust their production process or marketing mix to accommodate the new set of relative prices. By making necessary marketing and production revisions, the company can either counter act the harmful effects of or capitalize on the opportunities presented by, a currency appreciation or depreciation. These are long term decisions. It is obvious that such measures will be very costly, especially if undertaken over a short span of time. Therefore, operating policies designed to reduce or eliminate exposure are undertaken only as a last resort, when less expensive options have been exhausted. It is suited only for managing economic exposure. So, before going for any of the economic exposure management activity, it is imperative to judge its financial feasibility with the help of cost and benefit analysis.

3 53 2. LITERATURE REVIEW Management of economic exposure is very crucial now a days as cross border investments are increasing day by day at a very fast pace. But it is also regarded as very complex. One possible reason for the absence of empirical evidence in the literature may be related to the difficulty in devising the appropriate measures of a firm s ability to measure its economic exposure and construct the appropriate hedging strategies for its management. Let s check out what the recent financial literature has to say about the role of economic exposure management in business. Bradford Cornell and Alan C. Shapiro, in their article, Managing Foreign Exchange Risks, provide step by step guidance for the formulation of an effective strategy for managing currency risk. The results of their study evidenced effect of changes in cash flows on security prices of firms. They suggested that proper way to measure exchange risk is to forecast the relation between changes in the expected level and variability of real cash flow to the firm. They pointed out significance of Purchasing Power Parity and the International Fisher Effect to measure economic exposure correctly. Real economic exposure to exchange risk occurs only when some cash flows are fixed in foreign currency or exchange rate changes cause relative price changes. The projected effect of the devaluation or revaluation on relative prices and hence on the company s sales, costs and capital requirements is required to be estimated, thus enabling management to derive an estimate of cash flow. Unless a devaluation or revaluation lead to changes in the relative prices of either the firm s inputs or the products bought or sold in various countries, it does not significantly affect the firm s value. Then, if a currency change actually occurs, firm is able to quickly adjust its marketing and production strategies in line with the plan. The article concluded that most of the companies earn their keep because of their superior marketing, production, organization and technological skills. Currency risk affects all the facets of a company operations and therefore, should not be the concern of financial managers alone. Operating managers should develop marketing and production initiatives that help to ensure profitability over the long run. It also pointed out the alarming need for the creation of a committee in order to adopt an integrated approach for managing foreign currency exposure. Martin Glaum ( ) in his paper Foreign Exchange Risk Management in German Non- Financial Corporations: An Empirical Analysis a study of 154 German firms, shed light on the strategy of German firms for managing their transaction, translation and economic exposure. This study explores that only a small minority of firms do not hedge their foreign exchange risk at all. Most of the firms adopt a selective hedging strategy based on their own exchange rate forecasts. Majority of German firms are concerned about managing their transaction exposure. Most of the firms do not attempt to manage their economic exposure. Numerous firms are concerned about their accounting exposure and some firms are actively managing it. Sohnke Bartram, in his paper Linear and Nonlinear Foreign Exchange Rate Exposures of German Nonfinancial Corporations presents the results of his comprehensive study of the foreign exchange rate exposure of 447 German non-financial corporations during the period of Indeed, many German firms exhibit a significant exposure for different foreign exchange rate indices as well as for the bilateral foreign exchange rates of Germany's most important trading partners. In addition to linear foreign exchange rate exposures, a significant nonlinear exposure component can be identified for all different foreign exchange rates and

4 54 periods. Nonlinearities in the exposure may originate from corporate cash flows that are a nonlinear function of the exchange rate. Consequently, the assumption of a uniform, symmetric and linear exposure that is implicit in the classical approach for exposure estimation appears to be unrealistic and simplifying. The empirical evidence does not indicate that the economic foreign exchange rate exposure is primarily driven by the currency of determination. In line with previous studies, the ratio of foreign sales to total sales is identified as important explanatory variable for foreign exchange rate exposures. Thus, firms with more international sales exhibit systematically larger and more significant foreign exchange rate exposures. In addition, firm liquidity variables, especially cash flow/total assets, are significantly negatively related to the exposure. Moreover, industry sectors are important determinants of the foreign exchange rate exposure. Given that a simple linear relationship between financial risks and firm value cannot be assumed in general, the structure of the economic exposure has to be taken into account for exposure estimation. Only when considering potential nonlinear exposure components, corporate financial exposures can be estimated and hedged properly. As the choice of hedging tools is determined by the exposure profile, nonlinear foreign exchange rate exposures suggest the use of hedging instruments with nonlinear payoff profiles such as financial and/or real options. Sriprasanna Ramesh, in his report, A project on Trade Finance, Foreign exchange and Exposure management, has discussed the various sources of trade finance, foreign exchange market, foreign exchange exposures and techniques to manage them. Exchange rate movements destabilize the cash flows of a business significantly and affect the profitability of the business. Foreign exchange exposure can take any form i.e. transaction exposure, translation exposure and economic exposure. Economic exposure is the risk that a change in exchange rate affects a company s competitive position in the market and thus affecting overall profitability in long term. A good foreign exchange policy is critical to the sound risk management of any company. The most desirable method of risk management is the pre-planning of responses to exchange rate movements. This approach helps eliminate the panic factor as all outcomes have been considered including worse case scenarios. Derivatives have come into existence because of the prevalence of risk in every business. Derivatives provide a means of managing such risks. The common derivative products are forwards, future, options and swap. Forward contracts are suitable to hedge transaction exposure. Currency options are useful tools to limit losses and for unlimited access to unlimited profit potential in volatile market. Wayne Y. Lee, Sam M. Walton and Michael E. Solt, in their study, Economic Exposure and Hysteresis: Evidence from German, Japanese, and US Stock Returns, September, 2000, stress the role of internal cost and productivity adjustment in economic exposure management. Real exchange rate changes reflect terms of trade changes and macroeconomic shocks in productivity, aggregate demand, and interest rates. The study demonstrates that German, Japanese, and U.S. excess stock returns vary directly with changes in the real terms of trade as well as with exchange rate changes that are induced by macroeconomic factors. Evidence from German, Japanese, and the US Stock Returns, firms engaged in international business must contend with exchange rate changes that affect their cash flow streams. Transaction exposure reflects the risk that exchange rates change between the time a transaction is booked and settled. As this risk is short-term and can be hedged with forward or futures contracts, its impact on real stock returns is likely to be muted. These results imply that long-term future cash flows are exposed to exchange rate risk and that economic exposure is a global phenomenon. This paper accentuate that

5 55 economic exposure is a long-term systematic effect that is important to equity investors in all three countries and has two broad components. The long-term nature of these effects makes forecasting difficult, and hedging is unlikely to be effective in managing economic exposure. In the absence of transactions costs or barriers to trade, the Law of One Price implies that the expected rate of change in nominal exchange rates across countries should be proportional to the difference between the expected rates of change in domestic and foreign inflation. Managing economic exposure is a balancing act between profit margin and market share that involve marketing initiatives (for products and markets, pricing, and promotion) and/or production initiatives (for sourcing inputs, plant location, and productivity) which affect competitive position, long-term cash flows, and, ultimately, stock returns. Real excess stock returns reflect changes in the real terms of trade and an orthogonal real exchange rate factor that captures the macroeconomic effects of productivity, aggregate demand, and interest rates. Further, although German, Japanese, and U.S. firms appear to adjust costs and productivity in response to economic exposure there are indications that firms in all three countries suffer from the effects of hysteresis. Long-horizon real excess returns on German, Japanese, and U.S. stocks vary directly with improving and deteriorating real terms of trade. German and U.S., and to some extent Japanese, real excess stock returns vary directly with the macroeconomic exchange rate factors and suggests that currency depreciation (appreciation) leads to higher (lower) stock returns. They infer that MNEs actively manage economic exposure. 3. SIGNIFICANCE OF STUDY Economic exposures relate directly to the value of a firm in the market. It is the most subtle and insidious of all the types of foreign exchange exposures and has the potential to ruin the company. It is also possible that a favorable investment project may convert in to an unfavorable project just because of unfavorable changes in exchange rates, resulting in bankruptcy of the firm. The value of foreign assets will rise and fall with exchange rates, which can be a relevant consideration even if the assets are held for short-term investment purposes. Economic exposure affects the company's competitive position in the market and hence indirectly affects the profitability over a longer time span. MNCs have to take lively interest to take appropriate and timely action in terms of restructuring their operations to respond to changes in exchange rates so that they are able to maintain their competitive advantage despite the dark clouds. 4. OBJECTIVES OF STUDY Economic exposures relate directly to the market value of a firm within the ever more global trading community. Very high economic exposure can bring dramatic changes in the competitive position of MNCs in international market which may even cause some companies to be driven out of the market. Failure of many MNCs in past few years, have resulted in too many questions; whether or not companies in India are seriously managing their economic exposure? If yes, how do they manage? If not, what is the reason? All of these questions are required to be answered which initiate this research work. The present study examines the available evidence on management policy of MNCs in India towards measurement and management of their economic exposure. The focal point of the study is to investigate the factors that affect management policy of MNCs towards their economic exposure. It is usually stated that Indian companies are not so serious about measurement and management of their economic exposure as compared to their

6 56 foreign counterparts. This research is a comparative analysis of management policy of Indian and foreign companies. The difference between attitudes of banking and non- banking companies towards their economic exposure has also been studied in detail. 5. HYPOTHESIS In this research the following hypothesis have been tested; 1. There is no significant effect of level of operation on measurement of economic exposure. Volume of net sales has been considered for the purpose of level of operation of company. 2. There is no significant effect of level of operation on development of separate management system for management of economic exposure. 3. There is no significant difference between Indian and foreign companies regarding their management policy for hedging their economic exposure. 4. There is no significant effect of level of operation on management policy of the companies towards the management of economic exposure. 5. There is no significant effect of development of separate management system on management policy of the companies towards the management of their economic exposure. 6. There is no significant effect of concern for the measurement of economic exposure on management policy of the companies towards the management of their economic exposure. 6. RESEARCH METHODOLOGY Using a field study and proprietary data, the present study unfolds the difference between attitude of various banking and non banking Indian and foreign MNCs engaged in international business in India towards management of their economic exposure. The results presented in this study are based on a questionnaire study undertaken in The sample is composed of 200 companies out of fortune 500 companies which were ranked on the basis of their sales during the financial year from 1 st Jan to 31 st December 2003, as published in Economic Times in May Out of 200 companies, 95 companies responded back to the questionnaire. The selected companies cover a broad specter of players of various sectors. Management policies for managing economic exposure have been divided into mainly three groups; active management, regular management and no management. Three point scales has been used for this purpose. Number 3 has been used for active management, 2 for regular management and 1 for no management of economic exposure. A scale of 1 to 5 has been used to analyze results. Volume of net sales has been considered for the purpose of level of operation of company. On the basis of the general statements, assumptions have been framed regarding the behavior of MNCs in India and tested with the help of ANOVA. Test has been conducted at 5 % level of significance. Graphs and tables have also been used to facilitate the analysis of data.

7 57 7. RESULT & DISCUSSION On the basis of the study of management of economic exposure by MNCs in India, the followings are the findings of the study; 7.1 ATTITUDE TOWARDS MEASUREMENT OF ECONOMIC EXPOSURE: Economic exposure cannot be measured so easily. It requires specialized skills. Usually it is stated that companies in India do not measure their economic exposure. The results of the study for measurement of their economic exposure are presented in table 1 and chart 1. TABLE 1 & CHART 1 ATTITUDE TOWARDS MEASUREMENT OF ECONOMIC EXPOSURE Types of Companies Measure Economic Exposure Yes No Total Non-Banking Companies Banking Companies Total % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Non-Banking Companies 12 Banking Companies No Yes

8 58 Results of the study show that only 42 % of the companies measure their economic exposure. All the banking companies make proper forecasting of their economic exposure as it is required as per RBI guidelines. But only a few of non-banking companies make any estimation of their economic exposure themselves. Since the measurement of economic exposure requires expertise, most of the non-banking companies take help of external professionals for this purpose. Some of the companies have well qualified risk professionals in their exposure management team who apply sensitivity analysis to measure the economic exposure of these companies. A majority of these companies measure only their short term economic exposure. The period of their forecasting is usually 3 months which extends up to 18 months in few cases. 7.2 RELATION BETWEEN LEVEL OF OPERATION AND MEASUREMENT OF ECONOMIC EXPOSURE: Usually it is observed that level of business operations affects the attitude of companies towards measurement of their economic exposure. On the basis of this general observation, null hypothesis has been framed and tested with the help of ANOVA where measurement of economic exposure is dependent variable and level of operation is independent variable. The results are depicted in table 2. NULL HYPOTHESIS: There is no significant effect of level of operation on measurement of economic exposure. TABLE 2 LEVEL OF OPERATION AND MEASUREMENT OF ECONOMIC EXPOSURE Source Type III Sum of Squares df Mean F Sig. Corrected Model 7.773(a) 1 Square Intercept Level of Operation Error Total Corrected Total *a R Squared =.336 (Adjusted R Squared =.329) The results of the test show that at 5 % level of significance, null hypothesis is rejected. There is significant effect of level of operations and their concern for measurement of economic exposure. It has been observed that the MNCs which operate at high level usually make serious efforts to measure their economic exposure either themselves or with the help of outside professionals.

9 RELATION BETWEEN LEVEL OF OPERATION AND ESTABLISHMENT OF SEPARATE MANAGEMENT SYSTEM FOR MANAGEMENT OF ECONOMIC EXPOSURE Usually it is stated that level of operation affects the attitude of companies towards management of their economic exposure. To judge the relation between the level of operation and establishment of separate management system for management of economic exposure null hypothesis has been formulated. It has been tested with the help of ANOVA where existence of separate management system is dependent variable and level of operation is independent variable. The results of the study are presented in table 3. NULL HYPOTHESIS: There is no significant effect of level of operation on development of separate management system for management of economic exposure. TABLE 3 LEVEL OF OPERATION AND ESTABLISHMENT OF SEPARATE MANAGEMENT SYSTEM FOR EXPOSURE MANAGEMENT Source Type III Sum of Squares df Mean Square F Sig. Corrected Model 4.086(a) Intercept Level of Operation Error Total Corrected Total *a R Squared =.203 (Adjusted R Squared =.194) The results of the study show that at 5 % level of significance, null hypothesis is rejected. So, there is significant effect of level of operations on development of separate management system for the management of economic exposure. The companies which operate at high level have a separate system comprising experts and professionals for management of their economic exposure. On the other hand, companies operating at low level of operations are not so serious about the management of their economic exposure. 7.4 MANAGEMENT POLICY FOR ECONOMIC EXPOSURE MANAGEMENT Management of economic exposure requires flexibility in operational policies. The seriousness of MNCs towards management of their economic exposure can be well evidence in their attitude. The results of the study showing their attitude are presented in table 4 and chart 2.

10 60 TABLE 4 & CHART 2 MANAGEMENT POLICY FOR MANAGEMENT OF ECONOMIC EXPOSURE Management Policy Response Active 26 Regular 14 No 55 Total 95 No 58% Active 27% Regular 15% The results of the study show that 58% of total respondents are not managing their economic exposure at all. Only 42 % companies are managing their economic exposure. It also evidence that only 27 % of companies are actively managing their economic exposure. 7.5 COMPARISON BETWEEN MANAGEMENT POLICY OF BANKING AND NON BANKING COMPANIES Banking and non banking companies may have different attitude for management of their economic exposure. The results of the study for the difference between attitude of banking and non banking companies towards management of their economic exposure are depicted in table 5 and chart 3.

11 61 TABLE 5 & CHART 3 MANAGEMENT POLICY OF BANKING AND NON-BANKING COMPANIES Response Companies Active Yes Regular No Total 100% 80% Non- Banking Companies Banking Companies % 40% 20% 0% Non-banking 12 Banking Total No Regular Active s The results of the study show that banking companies are more serious about management of economic exposure as compared to non- banking companies. As in case of banking companies, there are many regulations of RBI guiding banks in India about their foreign currency activities, derivative activities and also their management policy for hedging their foreign exchange exposure. These guidelines may be one of the major reasons of forcing all the banking companies to manage their economic exposure. Non banking companies are not bound to have proper management system for hedging their exposure. They do not pay serious attention to manage their economic exposure as they consider it as a very tedious activity. Only a few of these non- banking companies are following the policy of active management for their economic exposure. 7.6 COMPARISON BETWEEN MANAGEMENT POLICY OF INDIAN AND FOREIGN COMPANIES Usually it has been stated that Indian companies are not as active as foreign companies for hedging their economic exposure. Many arguments support this statement. Since foreign companies usually have diversified scale of operations, it is easier for them to apply operational strategies to mitigate their economic exposure. Whereas in case of Indian companies, operational strategies are not so feasible option as they do not have so much flexibility in their operations. Moreover most of the Indian companies are either not aware of various strategies which can be applied to mitigate their economic risk. On the basis of these general statements hypothesis has

12 62 been formulated. It has been tested with the help of ANOVA technique where the management policy of companies is dependent variable and level of operation and origin of companies (India / foreign country) are independent variables. The results for difference between attitude of Indian and foreign companies towards management of their economic exposure are depicted in table 6 and chart 4. The results for the effect of origin of company on management policy of companies towards their economic exposure are presented in table 7. NULL HYPOTHESIS: There is no significant difference between Indian and foreign companies regarding their management policy for hedging their economic exposure. TABLE 6& CHART 4 MANAGEMENT POLICY OF INDIAN AND FOREIGN COMPANIES Response Total Companies Indian Companies Foreign Companies Yes Active Regular Total No Total % 80% 60% % % % Indian Foreign No Regular Active TABLE 7 EFFECT OF ORIGIN OF COMPANY ON MANAGEMENT POLICY Source Type III Sum of Squares df Mean Square F Sig. Corrected Model (a) Intercept Origin of company Error Total Corrected Total * a R Squared =.324 (Adjusted R Squared =.317)

13 63 The results of the study show that Indian and foreign companies have similar attitude towards management of their economic exposure. 41% of Indian companies are managing their economic exposure which is very close to the percentage of foreign companies (46%) managing their economic exposure. 28% of Indian companies as compared to 23% of foreign companies manage their economic exposure actively. At 5 % level of significance, results of ANOVA show that, null hypothesis is rejected. There is no significant difference between Indian and foreign companies regarding their management policy for hedging their economic exposure. 7.7 RELATION BETWEEN LEVEL OF OPERATION AND MANAGEMENT POLICY FOR ECONOMIC EXPOSURE Usually it is stated that big companies are more serious as compared to small companies towards management of their economic exposure. To judge this statement hypothesis has been formulated. It has been tested with the help of ANOVA where the management policy of companies is dependent variable and level of operation is independent variable. The results are depicted in table 8. NULL HYPOTHESIS: There is no significant effect of level of operation on management policy of the companies towards the management of economic exposure. TABLE 8 EFFECT OF LEVEL OF OPERATION ON MANAGEMENT POLICY Source Type III Sum of Squares a R Squared =.293 (Adjusted R Squared =.286) df Mean Square F Sig. Corrected Model (a) Intercept Level of Operation Error Total Corrected Total The results of study show that at 5 % level of significance, null hypothesis is rejected. There is significant effect of level of operations on management policy of the companies for the management of their economic exposure. The companies which operate at high level manage their economic exposure either regularly or actively. On the other hand, companies operating at low level of operations ignore their economic exposure and they do not manage it at all.

14 RELATION BETWEEN ESTABLISHMENT OF SEPARATE MANAGEMENT SYSTEM AND MANAGEMENT POLICY FOR ECONOMIC EXPOSURE It has been usually stated that companies which are serious about their economic exposure, establish separate management system. These companies actively manage their exposure. To judge this statement in the context of companies in India, hypothesis has been formulated. It has been tested with ANOVA where the management policy of companies is dependent variable and establishment of separate management system for economic exposure is independent variable. The results are presented in table 9. NULL HYPOTHESIS: There is no significant effect of development of separate management system on management policy of the companies towards the management of their economic exposure. TABLE 9 EFFECT OF DEVELOPMENT OF SEPARATE MANAGEMENT SYSTEM ON MANAGEMENT POLICY FOR ECONOMIC EXPOSURE MANAGEMENT Source Type III Sum of Squares df Mean Square F Sig. Corrected Model (a) Intercept Separate Management System Error Total Corrected Total *a R Squared =.836 (Adjusted R Squared =.834) The results of study show that at 5 % level of significance, null hypothesis is rejected. There is significant effect of development of separate management system for the management of economic exposure on management policy of the companies. Most of the companies which have separate system for the management of economic exposure follow either the policy of active management or regular management. They also take help of external experts from time to time for effective management of their economic exposure. Some of the companies under the study do not have separate management system but still they manage their economic exposure regularly. 7.9 RELATION BETWEEN MEASUREMENT OF ECONOMIC EXPOSURE AND MANAGEMENT POLICY Usually it has been stated that MNCs which measure their economic exposure also seriously manage their economic exposure. To judge the behavior of companies in India, hypothesis has been formulated. It has been tested with ANOVA where the management policy of companies is

15 65 dependent variable and measurement of economic exposure is independent variable. The results are depicted in table 10. NULL HYPOTHESIS: There is no significant effect of concern for the measurement of economic exposure on management policy of the companies towards the management of their economic exposure. TABLE 10 EFFECT OF MEASUREMENT OF ECONOMIC EXPOSURE ON MANAGEMENT POLICY Source Type III Sum of Squares df Mean Square F Sig. Corrected Model (a) Intercept Measurement of Exposure Error Total Corrected Total *a R Squared =.874 (Adjusted R Squared =.873) At 5 % level of significance, the results of the study show that, null hypothesis is rejected. So, there is significant effect of concern of the companies for the measurement of their economic exposure on their management policy. The companies which make serious efforts for the measurement of their economic exposure manage their economic exposure definitely either following the policy of regular management or active management. On the other hand, those companies which are not measuring their economic exposure at all they are not managing their economic exposure STRATEGIES USED FOR ECONOMIC EXPOSURE MANAGEMENT Competitive advantage is based on expertise to choose the right strategy for economic exposure management. Every strategy has its pros and cons. It is stated usually that application of real strategies is much more expensive and require expertise as compared to use of financial derivatives. The results for strategies used by companies in India are depicted in table 11 and chart 5.

16 66 TABLE 11 TECHNIQUES USED FOR HEDGING OF ECONOMIC EXPOSURE Techniques Total Banking Non Banking % age Forward Currency Swap Currency Option Cross Currency Option Operational Activities Financing Activities Diversified Market mix Cash Flow Hedge CHART 5 TECHNIQUES USED FOR HEDGING OF ECONOMIC EXPOSURE Currency Option 16 Currency Swap 16 Forward 32 Cross Currency Option 11 Operational Activities 10 Financing Activities 5 Diversified market mix 5 Cash Flow Hedge 4 The results of the study confirm that companies use more than one strategy for management of their economic exposure. It has been evidenced that most of the companies are taking help of financial derivatives to manage their economic exposure. Among various financial derivatives forward contracts are more popular as compared to other derivatives. Very few of the nonbanking companies are making use of operational strategies. 8. CONCLUSION As it is required as per RBI guidelines, all of the banking companies make proper forecasting of their economic exposure. Since the measurement of economic exposure requires expertise, only a

17 67 few of the companies under the study measure their economic exposure. For the purpose of measurement of their economic exposure these companies either take help of external professionals or establish their own exposure management team comprising of well qualified risk professionals. It has also been evidenced that big business tycoons make serious efforts to measure and manage their economic exposure due to their large scale diversified business operations. These companies have a separate system comprising experts and professionals for management of their economic exposure. They are able to manage their economic exposure either regularly or actively. On the other hand, companies operating at low level of operations are not so serious about the management of their economic exposure. They ignore their economic exposure and do not take any steps to manage it. Banking companies are more serious about management of economic exposure as compared to non- banking companies. Both Indian and foreign companies have similar attitude for the management of their economic exposure. It has been found that there is significant effect of development of separate management system and concern of the companies for the measurement of their economic exposure on management policy of the companies for the management of their economic exposure. Most of the companies which have separate system for the management of economic exposure follow either the policy of active management or regular management. Likewise, the companies which make serious efforts for the measurement of their economic exposure manage their economic exposure definitely either following the policy of regular management or active management. Last but not the least; it has also been observed that usage of financial derivative especially forward contracts is more preferable and feasible option as compared to operation strategies for the management of economic exposure as practiced by MNCs in India. 9. BIBLIOGRAPHY Aabo, Tom (2001), E-Commerce and Exchange Rate Exposure Management: A tilt towards Real Hedging, Journal of E-Business, Vol. 1, Issue-1 June. Allayannis, George and E. Ofek (1997), Exchange rate Exposure, Hedging, and the Use of Foreign Currency Derivatives, Working Paper, University of Virginia. Allen, Linda and Christos Pantzalis (1996), Valuation of the Operating Flexibility of Multinational Corporations, Journal of International Business Studies, 27 (4), Bartov, Eli and Gordon M. Bodnar (1994), Firm Valuation, Earnings Expectations, and the Exchange rate Exposure Effect, The Journal of Finance 44, Bodnar, Gordon M. and W.M. Gentry (1993), Exchange Rate Exposure and Industry Characteristics: Evidence from Canada, Japan and U.S., Journal of International Money and Finance (February), Bradford Cornell and Alan C. Shapiro (1983), Managing Foreign Exchange Risks, "Managing Foreign Exchange Risk", Midland Corporate Finance Journal, Fall. Brown, Gregory W., and Klaus Bjerre Toft (1999), How Firms Should Hedge?, University of North Carolina Working Paper.

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