Software companies must use foreign exchange markets and enter derivative contracts exclusively for hedging purpose only.

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1 7.3 Conclusions The objective of this study is to describe the current foreign exchange risk management practices of select software companies that have registered office in Hyderabad and also to examine the association between the selected software firms characteristic variables such as type of the firm, form of ownership, firm size and degree of foreign involvement and firms foreign exchange risk management practice variables. In addition, the study aimed to examine the relationship among Indian software exports, US economic activity, and INR-USD exchange rate volatility. The Indian software industry has been growing phenomenally for the last two decades. It has been contributing significantly to the GDP of Indian economy. It is a major foreign exchange earner having global presence across more than hundred countries. Indian software industry exports more than seventy percent of exports to US. In the recent past, the INR-USD exchange rate has been fluctuating a lot, which would have negative impact on the operating margins of these software companies. In order to determine the association between the firm characteristic variables and firms foreign exchange risk management practice variables, chi-square test have been applied. The results of chi-square tests indicated that: The type of the firm and firms foreign exchange risk identification and management variables were found to be associated, as the associated p-values were found to be significant and the null hypothesis of type of the firm and foreign exchange risk identification and management variables are independent was rejected. Moreover, type of the firm variable was also significant with all the other foreign exchange risk policy variables suggesting association, except policy on transaction exposure, coverage of transaction exposure, objective of firm s foreign exchange risk management, and type of policy adoption on transaction exposure. The type of the firm was not significant with two of the foreign exchange risk management variables viz., choice of external techniques used and factors influencing the choice of external techniques usage indicating no association between these variables. However, there exists an association between the type of the firm and choice of internal techniques used and factors influencing the choice of internal techniques usage. 314

2 The form of ownership and all the firm s foreign exchange risk identification variables were found to be associated, as the associated p-values were found to be significant. The results also showed that the form of ownership was associated with firms foreign exchange risk policy variables except policy on transaction exposure, coverage of translation and transaction exposure, objectives of firm s foreign exchange risk management, type of policy adopted on transaction exposure, sources of firm s foreign exchange rate forecast. Further, form of ownership was associated with choice of internal techniques used and factors influencing choice of external techniques usage. The firm size variable was independent with all of the foreign exchange risk identification variables. However, firm size was associated with foreign exchange risk policy variables such as policy on translation exposure, policy on transaction exposure, coverage of translation exposure, objectives of firm s foreign exchange risk management and revision of firm s foreign exchange risk management policy and rest of the foreign exchange risk policy variables were found to be independent of firm size. The firm size was associated with all of the foreign exchange risk management variables except for factors influencing choice of external techniques usage. The degree of foreign involvement variable was associated with firms foreign exchange risk identification variables such as management of translation exposure and types of exposures identified only. The degree of foreign involvement variable was associated with firm s foreign exchange risk policy variables such as policy on translation exposure, type of policy adopted on translation exposure and sources of firm s foreign exchange rate forecast, while all the other foreign exchange risk policy variables were found to be independent with degree of foreign involvement. The firm s degree of foreign involvement and foreign exchange risk management variables were found to be independent of each other, except factors influencing choice of external hedging techniques usage. To sum up, all the firm s foreign exchange risk identification variables were associated with type of the firm and form of ownership. However, none of the firm s foreign exchange risk 315

3 identification variables were found to be associated with firm size and firm s foreign exchange risk identification variables such as type of exposures identified, management of translation exposure and reasons for managing translation exposures were found to be associated with degree of foreign involvement variable and firm s foreign exchange risk management variables such as choice of external techniques used and factors influencing choice of external hedging techniques usage were independent of firm s characteristic variables. It can be concluded from the Cointegration analysis that there exists a long-run stable relationship among Indian software exports, US economic activity, and INR-USD exchange rate volatility as these variables were found to be significant. There exists significant positive relationship between Indian software exports and US economic activity and significant negative relationship between Indian software exports and INR-USD exchange rate volatility. 7.4 Recommendations Software companies must actively participate in the foreign exchange market to protect themselves from the volatile foreign exchange rates. Companies should set up their own treasury department to monitor and forecast exchange rates rather than depending on foreign exchange dealers or banks. Software companies must encourage all its executives associated with the treasury related activities to hone their knowledge and skill on a regular basis, so that they can deal with foreign exchange risk more efficiently and effectively. Software companies without having a complete understanding of the risk of derivative contracts should not enter into these exotic or complex derivatives merely on banks or foreign exchange dealers advice. Software companies must self-regulate themselves and they should maintain a written foreign exchange risk management policy document, which clearly enunciates the policy 316

4 of the company in dealing with the foreign exchange risk and foreign exchange related transactions. Software companies must use foreign exchange markets and enter derivative contracts exclusively for hedging purpose only. RBI should provide technical expertise and consultancy services to all the small and medium software companies in tackling their foreign exchange risk, as these companies lacks the required skill in dealing with foreign exchange risk and lacks technical expertise in measuring the risk of complex foreign exchange derivative contracts. SEBI should give some leeway to small and medium software companies related to hedging of foreign exchange transactions, such as booking of contracts without having underlying exposure and also for cancelation of booked contracts, without much procedural requirements. Software companies that do not have required information technology to deal with foreign exchange risk must extensively use available internal hedging techniques to hedge their foreign exchange risk. Apart from spot markets and currency forwards which were used more commonly, companies must also use other available instruments such as currency options, futures and swaps. RBI in association with NASSCOM and other dominant regulatory bodies of the software industry must regularly organize workshops, seminars, and panel discussions in the domain of foreign exchange risk to create awareness about the seriousness of exchange rate volatility and its impact on the profitability of the company, consequently on the economy. 317

5 All the companies irrespective of degree of foreign involvement must appoint qualified risk professionals as full-time executives to manage their foreign exchange risk. Companies must continuously monitor US economy and US dollar, as the Cointegration results showed that there exists a significant positive relationship between Indian software exports and US economic activity. Last but not the least, software companies should not undermine the foreign exchange risk, as there exists a significant negative relationship between Indian software exports and INR-USD exchange rate volatility, companies should continuously monitor foreign exchange rates so that they can take timely action to reduce the adverse impact of exchange rate volatility on their profitability. 7.5 Future Research Direction Studies on companies from diversified industries can be taken up. Impact of INR-GBP and INR-EUR exchange rate volatility on Indian software exports. Comparison of foreign exchange risk management practices of Indian software companies with foreign exchange risk management practices of emerging countries software companies. 318