Forex speculation drives corporate losses

http://www.thehindubusinessline.com/2009/02/14/stories/2009021450600600.htm
Forex speculation drives corporate losses
S. Balakrishnan
Apart from the poor operating results of manufacturing companies in Q3 of 2008-9, there was a nasty surprise. Practically all, be they giants or SMEs, have incurred large foreign exchange losses.
What is peculiar is that even companies with predominantly rupee income and expense streams have not been spared.
There is much more here than meets the eye. The only plausible explanation is that they have been trading in forex markets much beyond what was necessary just to hedge their business exposures (because of imports, forex liabilities and exports).
One must be clear about the difference between a trading loss and an opportunity loss. An Infosys selling its dollar income forward when the dollar was Rs 40 on the view that the rupee would appreciate could have earned more had it not done that as the rupee is now nearly Rs 49. This is a case of a view or forecast going wrong, which happens often to the best of market players.
On the other hand, a company which sells non-existent dollar revenues loses real money if the dollar rises and it is forced to square its position at a higher exchange rate. One suspects most of the forex losses of corporates belong to the latter category.
Not new
Of course, all this is not new news. Much has been reported and written about the derivative losses of small, medium and large companies and businesses. Again, these involved complex products and structures in foreign currencies. So you had a small hosier-exporting proprietary firm in Tirupur dabbling in binary, touch, knock-in and knock-out (this has a nice touch to it!) currency options in yen, Swiss franc and euro without in the least realising what it was in for. Expectedly, huge losses were the result. (Not that corporates with supposedly savvy Treasuries fared any better).
It is not as if the Reserve Bank of India allows businesses without underlying currency risk to operate in the forex markets. The central bank’s guidelines and regulations in this matter leave no room for doubt. Still, it cannot escape responsibility and blame, because, besides the mandatory reporting on derivative trades and contracts from banks, the market was abuzz for quite some time about the volumes in exotic derivatives and the major players.
The boards and top managements of companies have an important responsibility to rein in financial transactions and activities which violate the RBI’s regulations (quite apart from their potential destruction of shareholder value). Otherwise, they run the risk of being culpable.
Audit panels’ role
Obviously, we need to revisit the role and functioning of audit committees. Is more hidden from them than disclosed? How well are external directors grounded in management and corporate finance and financial risks — commonplace in any large and medium company — which will enable them to ask the right questions?
As usual, basic questions still seeking satisfying answers.

via:Business line