In India, exchange rates were deregulated in 1993 and were allowed to be determined by the market forces. The economic liberalisation of the early nineties facilitated the introduction of interest rate and foreign exchange derivatives. Foreign exchange derivatives are used by firms to mitigate foreign exchange exposures. Uncertainty about exchange rates causes foreign exchange exposures having significant effects on the earnings of the firms. The use of derivatives is still a highly regulated due to partial convertibility of rupee. Currently, futures, forwards, swaps and options are available in India.

This paper attempts to evaluate the various alternatives available to Indian corporates for hedging foreign exchange risks. The paper aims to study the strategic uses of foreign exchange derivatives by Reliance Industries Limited and Tata Consultancy Services Limited to manage foreign exchange exposures.

There are evidences showing the reduction of foreign exchange exposure with the use of tools for managing the exposures. The Paper concludes that since, in addition to proper mix of foreign exchange derivative instruments in foreign exchange risk management strategy, the precise prediction of foreign exchange rate plays a very significant role in successfully managing the foreign exchange exposure of a firm, more emphasis should be given on the accurate prediction of exchange rate.

KEYWORDS: Foreign exchange exposure; derivatives; forwards; futures; options; Swaps

JEL Classification: F 30, F 31, G15