Impact of Currency Fluctuation on Leather Industry in India

Impact of Currency Fluctuation on

Leather Industry in India

M99BSS – DISSERTATION

09 September 2010

Submitted by

Ronaldo J. F. Ribeiro

SID - 2917162

MBA FINANCE

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Impact of Currency Fluctuation on Leather Industry in India

M99BSS Dissertation - MBA Finance, Submit 09 Sept 2010 2

Chapter Headings

ACKNOWLEDGEMENT ................................................................................................... 4

Executive Summary .......................................................................................................... 5

1. Introduction .................................................................................................................. 7

1.0 Background ............................................................................................................. 7

1.1 Hypothesis: ............................................................................................................. 9

1.2 Research Questions ................................................................................................ 9

1.3 Aim of the research ............................................................................................... 10

1.4 Research Objectives: ............................................................................................ 10

1.5 Personal Reasons ................................................................................................. 11

2. Literature review ......................................................................................................... 12

2.0 History of Currency ................................................................................................ 12

2.0.0 The Fixed Exchange Rate System .................................................................. 12

2.0.1 The Flexible Exchange Rate System .............................................................. 13

2.0.2 Evolution of flexible exchange rate system in India ......................................... 13

2.1 Currency fluctuation .............................................................................................. 14

2.1.0 Factors effecting Exchange Rate .................................................................... 15

2.2 Impact of Currency Fluctuation on Macro Economy .............................................. 15

2.3 Impact of currency Fluctuation on Micro Economy ................................................ 16

2.3.0 Impact of currency fluctuation on Organization ............................................... 16

2.4 Studies on Impact of exchange Rate Variation ...................................................... 17

2.5 Impact of currency fluctuation on Leather Industry ................................................ 20

3. Research Methodology .............................................................................................. 23

3.0 Research Perspective ........................................................................................... 23

3.1 Research Design ................................................................................................... 23

3.2 Data Collection Methods ....................................................................................... 24

3.2.0 Sampling Techniques ..................................................................................... 24

3.2.1 Secondary Data .............................................................................................. 24

3.3 Analyzing Secondary Data .................................................................................... 25

3.4 Research Limitations ............................................................................................. 26



3.5 Ethical Considerations ........................................................................................... 27

3.5.0 Plagiarism ....................................................................................................... 27

4. Data collection, Analysis, Presentation and Findings .................................................. 28

4.0 Data Collection ...................................................................................................... 28

4.1.0 The Exchange Rate Analysis .......................................................................... 29

.4.1.1 Purchasing Power Parity Analysis .................................................................. 32

4.1.2 Leather Import & Export .................................................................................. 38

4.2 Summary on Findings ........................................................................................... 39

5. Conclusions and Recommendations .......................................................................... 41

5.0 Conclusions ........................................................................................................... 41

5.1 Recommendations ................................................................................................ 43

6. References ................................................................................................................. 47

7. Appendix ..................................................................................................................... 54

7.0 US Dollar Deviation in PPP ................................................................................... 54

7.1 Euro Deviation in Exchange rate ........................................................................... 56

7.2 GBP Deviation in PPP ........................................................................................... 58

List of Figures

Sr. No. Description Page No. 1 Total leather products exported country wise 9 2 Export Scenario for the last 5 years 21 3 Exchange Rate in INR for USD, Euro and GBP 29 4 U. S. Dollar PPP Deviation 32 5 Euro PPP Deviation 34 6 British Pound PPP Deviation 36 7 Leather Export Import 38

List of Tables

Sr. No. Description Page No. 1 Export Scenario for the last 5 years 22 2 Yearly Exchange Variation in USD 30 3 Yearly Exchange Variation in Euro 30 4 Yearly Exchange Variation in GBP 31 5 Actual PPP Deviation in U.S. Dollar 32 6 Actual PPP Deviation in Euro 34 7 Actual PPP Deviation in GBP 36



ACKNOWLEDGEMENT

I owe my gratitude and sincere thanks to my supervisor Dr. Steward Hughes for his

supervision, support and guidance from the preliminary stage till the concluding stage

of my dissertation. He has enabled me to develop an understanding, which helped in

completing my research.

My deepest gratitude and appreciation goes to my mother, employer and other family

members for providing their support financially and morally throughout my MBA

Finance Degree.

Lastly, I am grateful and thankful to all colleagues who have helped me succeed in

my dissertation research work and also in other modules of my Masters.



Executive Summary

The research analyzes the exchange rate variation and the sensitivity of purchasing

power, industry competitiveness and import and export. The study is carried out to

test that nominal exchange rate affects the purchasing power of the foreign countries

and real exchange rate affects the competitiveness of the industries against other

countries. The testing of the nominal and real exchange rate deviation will illustrate

affects on import and export of the leather industries. Hence the imports and exports

will affect the profit margin of the leather industry and the trade, which will

simultaneously affect the Indian economy.

The research has been done as per the current scenario of currency fluctuation that

occurred due to Euro crises. The crises created fear for the leather producing and

exporting firms and later it had affected the exports of the Leather industry. The

affects on the exports were due to the appreciation of the Rupee against the Euro

which reduced the purchasing power of the European nations. The effect on the

Leather industry is due to the dependence on the European Union nations for the

sale and exports of its finished products. The effects were delay in orders from

European Nations, some companies were asked to hold orders and some other firms

refused to accept immediate delivery.

The research is carried out with the evaluating the nominal exchange rate by

computing the change and justifying the affects of exchange rate fluctuation on the

purchasing power of foreign countries. Another method is the evaluation of the real

exchange rate and justifying the effects of deviation on Purchasing Power Parity

Theory. The Purchasing Power Parity Theory provides the information of how much

the competitiveness of the Indian Industries is affected and the purchasing power has

appreciated and depreciated from other countries. Hence this will illustrate that the

fluctuation in nominal and real exchange rate affects imports and exports of leather

industry.

The results of the research have been that in recent past the currency fluctuation has

affected not only the leather industry but also other industries that are involved in



manufacturing and exports of good to other countries. The currency fluctuation has

affected the leather industry due to the reduction in the purchasing power of the

foreign countries, but the affect is higher from European Union nations. The other

effect is the competitiveness of the Industries that has been deteriorated due to

higher deviation in the real exchange rate from the purchasing power parity. The

exchange rate variation has affected import and export of the Leather industry due to

appreciation of rupee and depreciation in competitiveness.

The limitation of this research is that there are many other factors that affect import

and export, as in this research the exchange rate fluctuation has been analyzed and

hence further scope of rigorous analysis can be done along these lines of research.

This can be done by using a more comprehensive framework, and by including other

sources of risk. The comprehensive framework would be appropriate for better

understanding of the impact of currency variation. The other limitation is the import

and export details for a short period and with the limited time period for the research.



1. Introduction

1.0 Background The floating exchange regime has noticed an increased variation in the exchange

rate due to financial reforms and liberalization of trade. In the past several years

fluctuations in exchange rate has been a major concern of macroeconomic ambiguity

affecting firms in international trade. The exchange rate variation has been of rising

significance to individuals, business organization and policy makers says (Rashid:

2009) & (Levich, Wihlborg: 1980). As per Aliber (1972, 1976) and Ahmad (1984)

reveal that the commercial traders in the flexible regime may face the exchange risk

and the price risk. The study of (Davis, Coates, Collier and Longden 1991: vii) and

Prindl (1976:1) divulge that from 1970s there has been tremendous escalation with

the integration of international trade and financial markets. As Prindl (1976:3) reveals

the monetary system is always extremely unstable and is complicated to forecast the

currency in the short run.

It has been put into words by Bradley and Moles (1998) that the exchange rate

difference is unpredictable to all nations and this effect can be positive or negative to

the nations. The variation in exchange rate occurs every day which affects different

countries purchasing power continuously and will also affect the profitability of the

firms. The exchange rate change will be an appreciation or devaluation of currency

and this will affect different sectors that are involved in foreign trade. The devaluation

of a domestic currency will increase the purchasing power of foreign countries which

will give rise to export and decline in imports due to increase cost of foreign goods.

On the other side the affect will be just the opposite when the domestic currency

appreciates and be stronger against other currencies it will decline export and

increase in import which will affect the trade balance of the country.

The multinational companies have penetrated into different market with the

development of technology, which create employment opportunities for personnel of

different nationalities. The investor’s portfolio values and organization profitability are

frequently affected due to variation in the exchange rate. Internationaltrade (2009)

make public that currency fluctuation are of major concern for Small & Medium



Enterprises as 56 percent confirm for not managing the risk while other 44 percent

are using some measures to protect their business from exchange risk. Mitra (2006)

conveys that the knowledge of currency movement has become of utmost importance

for the corporate executive. Hence Vij (2009) unveil that the fluctuation in exchange

rate has become an essential concern for the investors and managers. The

companies that are involved in large transactions of import and export are affected

even with a slight appreciation or devaluation of exchange rate. The sudden change

in the exchange will generate the companies either a potential loss or gain in foreign

currency transactions.

It has been put across by Harker J. (2009) that UK cycle industry was affected by the

wide fluctuation and weakening of the British Pound. Reuters (2010) reveals that the

Mastek Ltd a software firm has made a loss of 54.19% during the 1st

As we have seen in recent past that fear of Euro appreciation has been a concern of

the major growing leather industry in India. The leather industry caters to a wide array

of product demands both at domestically and internationally. The indianleatherportal

(2010) made known that the Indian Leather Industry is important for the Indian

Economy, as it is the top 8

quarter of 2010

when compared to previous year and also suffered a loss in the previous year due to

currency fluctuation. Economic Times (2010) convey that a senior company official of

Levi Strauss & Calvin Klein conveys that the company’s global business is affected

due to consumer spending and currency fluctuation. Resource center-RCIP (2010)

divulges that the Euro zone debt crises of the will reduce the profit margin of SME

leather exporters due to the escalation of the rupee against Euro. Another issue RTT

News (2010) informs that the currency fluctuation will affect export due to the

appreciation of Euro and U.S. Dollar against Rupee and the exporters due to the

increase in the cost of raw materials have planned to increase price of products. Ojo

(2008) reveals that the fiscal results are been affected and the competitiveness has

also been skewing due to limited control of the organization.

th export industry earning foreign currency. The council for

leather (2010) reveals that the leather industry is employing about 2.5 million people

form weak society and the women contribute 30% employment which is largest in the



leather sector. The production of 60 to 65 % is carried out by the small cottage

industries and the total export value has reached to 3.40 billion US Dollar with a

5.43% annual growth rate for 5 years. The Leather Industry sector has a massive

future growth which can create employment and give a rise to the GDP of the

country. The IICCI (2010) reveal that from 1991 government banned exporting leather

raw materials and allowed only finished goods for export. There was also foreign

direct investment inflow of 51.84 million in the leather sector from 1991 to 2005. The

largest leather export is to the European countries and the total leather products

exported country wise for the year 2009-2010 is given below:

Figure 1: Total leather products exported country wise (Council for Leather Export

2010)

1.1 Hypothesis: The Indian Leather industry involved in import and export is affected due currency

fluctuation and the industry could benefit from hedging which can offset the currency

fluctuation in future.

1.2 Research Questions

• What have been the recent effects of currency fluctuations?



• What has been the history of currency in the Fixed and Flexible exchange

regime?

• What is currency fluctuation and what are the factors affecting currency

fluctuation?

• What can be the impact on the Macro and Micro Economy?

• What are the studies carried out by researchers on currency fluctuation?

• What are the problems in recent times that have affected the leather industry

by currency fluctuation?

• In the current scenario what should the individual firms do to ensure that they

are not affected by the fluctuation?

1.3 Aim of the research The aim of this research is to identify the recent issue of Leather Industry, which is

been facing the consequences of currency fluctuation, as it may be affected due to

the ongoing Euro debt crises. In this context the proposal is to explore how the

currency fluctuation affects the leather goods industry but especially the firms dealing

with import and export. Also suggest hedging measures to overcome the currency

fluctuation and maintain profitability.

1.4 Research Objectives:

• To identify the present problems of the leather goods industry in India,

especially the firms dealing with export and import of material and how far the

currency fluctuations have affected them.

• To evaluate and justify that fluctuation in Nominal exchange rate affects the

purchasing power of foreign nations.

• To evaluate and justify that Real exchange rate deviation in the Purchasing

Power Parity affects the competitiveness of Leather Industry.



• To analyze the current scenario in the matter of currency fluctuation and

propose methods of hedging that would help the industry in Currency

Fluctuation.

1.5 Personal Reasons Experience: I had been working for a major trading company in the Middle East

which gave me considerable exposure to the international trading market. One of the

main factors that always had intrigued me was the functioning of Exchange rate and

the impact of the exchange rate variation in modern trading business. The

multinational company was involved in importing commodities from foreign

companies and this would generate difference in price due to exchange rate volatility.

It was been noted when carrying out the inventory costing of the product, that the

price of the commodity used to differ for the same commodity. Hence the customers

were also affected even though they were not involved in trading business as the

firms raised the cost of product. The company was affected by a decrease the profit

due to currency fluctuation. The research will help me understand the fluctuation

behavior of exchange rate and the measures used to mitigate risk, as it is my deep

ambition to get actively involved with a trading company.

Academic: I would like to explore more in the module that I have studied during my

degree in MBA. Hence to carry out study on Impact of Currency Fluctuation on

Industry, I could gain much deeper knowledge of the Purchasing Power Parity, to find

the deviation in the competitiveness of the Industry with the theory of Purchasing

Power Parity by computing the real exchange rate. Also check for the measures to

mitigate the risk of currency fluctuation.

Business: As most of the organization now days, are involved in international trade

and currency fluctuation affects organization either by transaction, translation and

economic exposure. Hence with this research knowledge l will be able to find out

which currency has high risk and suggest measure to mitigate the risk.



2. Literature review

The review of literature comprises of:

• History of Currency

• Currency fluctuations

• Impact of currency fluctuation on Macro Economy

• Impact of currency fluctuation on Micro Economy

• Studies on the Impact of Currency Fluctuation

• Impact of currency fluctuation on Leather Industry.

2.0 History of Currency

2.0.0 The Fixed Exchange Rate System

The fixed exchange rate system as divulged by Schifferes (2008) that the regime

came into existence with the decision of the delegates of 44 countries which met for

reshaping the world’s international financial system in summer of 1944. The meeting

was a part of the process that led to fixed exchange rate system. The regime created

gold based value for American dollar and the British Pound and the other main

currencies were associated to the dollar. It was Grauwe (1996:21) who brought to

light that the monetary authorities applied only convertibility rule to buy and sell

currencies from 1945 to 1958 and the real operation of Bretton Wood started after

1958.

Shamah (2008) notified that the British Pound was devalued due to high inflation, low

productivity in 1967 which increased deficit in balance of payment. The Dollar which

was linked to the Gold was devalued, due the devaluation of the British pound and

Vietnam War. The gold price remained the same even after the devaluation of dollar

and could not find the equilibrium value. The imbalance in the Gold price led to the

collapse of the Bretton Woods’s agreement and end to the system of convertible

currencies, fixed rates and free trade. The ‘Smithsonian Agreement’ was formed to

repair the Bretton Woods agreement but did not succeed and was terminated in

1973. In April 1972 the first European monetary system was promoted by Germany

known as ‘snake’ and this system had a narrow fluctuation which did not last for long.



2.0.1 The Flexible Exchange Rate System

The collapse of the Smithsonian Agreement led to generation of floating exchange

regime which determined value for main currencies through the trading market

Grauwe (1996:86) elucidate that the problem of credibility of the fixed exchange

regime was answered by the flexible exchange regime. Grauwe (1996:22-23)

revealed that the European countries were affected by currency fluctuation and that

led to a creation of European Monetary System 1979 which was also initially a flexible

system. Grauwe (1996:39) uncover that the EMS became inflexible in the mid 1980s

as major countries wanted to maintain the fixed central rates or balanced system. The

development of the EMS countries in production and output was unbalanced which

led to reliability problem. The reliability problem led to the collapse of EMS system in

1993 because of high speculation and later established as European Union in 1999.

Schifferes (2008) conveys that the floating exchange regime had high rate of

currency fluctuation and the central banks faced a major challenge in the

accomplishing of exchange rate policies. The currency fluctuations led to great

opportunities for market players to take advantage of the currency volatilities.

2.0.2 Evolution of flexible exchange rate system in India

The collapse of Smithsonian Agreement in 1973, initiated active participation for

foreign exchange market players. RBI (1999) reveals that the Indian Market was

unaffected due to the severe exchange regulation, as the banks undertook the minor

operations to maintain a stable position of the exchange rate. Udeshi (2004) conveys

that RBI in 1978 allowed bank to accept intra-day trade in foreign exchange. The

bank managed the trading during the daytime and set a limit for trading dealers to

carry out trade. Therefore the banks had to compile the position at the end of each

business day. Udeshi(2004) says that RBI in 1975 – 1992 officially decided the India

exchange rate by weighted basket against other major trading currencies. The Library

of Congress (1995) divulges that Indian Authorities were firmly able to manage &

control the foreign exchange transaction. The Library congress also reveal that the

rupee in 1975 to 1992 was fixed to a basket of weighted trade and during that time

US $ was worth Rs.7.86 in 1980, Rs 12.37 in 1985 and Rs 17.50 in 1990.



In March 1992, India followed a dual exchange rate system known as “Liberalized

exchange rate management system” which is conveyed by Udeshi (2004) and Mitra

(2006). Later March1993, the dual exchange rate changed and created a market

determined exchange rate regime as conveyed by Udeshi (2004) and Rajan (2008).

Udeshi (2004) put across that in 1994 IMF Article VIII Agreement accepted the

current account convertibility. In Nov 1994 an expert group was appointed to design

foreign exchange market. The group study recommendation of which a few are

mentioned as follows allowing banks to borrow and invest in foreign markets, use of

derivative and for the corporate the use of forward contracts, currency swaps for

hedging long term exposure.

2.1 Currency fluctuation The currency fluctuation as expressed by Riechel (1978:1) is a variation in the

exchange rate price of a domestic currency when compared to foreign currencies. As

per Weisweiller (1983:3) fluctuation in currency differs even in the shortest period due

to the market demand and supply of national currencies. The movement in the

exchange rate is due to change in currency value of one country or another. The

currency that is bought becomes firmer and the currency sold loses its value in the

international market i.e. if there is a demand for domestic currency by the other

countries the domestic currency will be stronger and the vice versa effect when the

demand to domestic currency falls. Hence Ahmad (1984: 57) made public that in the

flexible rate regime there is an existence of perfect arbitrage, even if the money

supply is more it won’t affect the traded goods. The exchange rate will soon come to

equilibrium through depreciation or appreciation due to the exchange rate volatility.

The recent past recession the currency fluctuation which is made known by the

economywatch (2010) that rupee appreciated to 10 year high in 2008 as the

appreciation also caused increase in interest rates and strengthen the stability of the

Indian economy. The Indian rupee was again depreciated to US$ 52.06 on 5 March

2009 to a record low.



2.1.0 Factors effecting Exchange Rate

The sensitivity to exchange rate fluctuations varies across trading sectors and the

foreign exchange market. The Reuters (1999) states three main factors that affect

currency exchange rates in the short and long run as follows:

• Economic factor - effects are for the long term (Economic growth, Trade Balance,

Rate of inflation, Money supply, Unemployment and Taxation).

• Capital Market factor - effects in the short term (market demand and supply, the

interbank rates which affects exchange rates).

• Political factor - effects in long and short term (economic policies, uncertainty in

politics, central bank regulatory policies and intervention in foreign exchange

markets).

2.2 Impact of Currency Fluctuation on Macro Economy Subramaniam (2008) divulge that currency fluctuation is the after effect of the

economic activity of the nation. The nation economy is affected due to the balance of

payment. The currency will hold strong if the exports are more than the imports and

the borrowings have been paid. The currency of the developed nations will hold

strong but not the developing and underdeveloped nations. It is also conveyed by

Riechel (1978: 6) that devaluation of national currency can improve the trade

balance.

It is declared by Kandil, M. (2008) that there is possibility to decide the economic

performance of a country with the exchange rate fluctuation. Subramaniam (2008)

conveys that the currency of each nation represents growth can be just an illusion. If

the domestic currency is devaluated then it will stimulate demand for domestic goods

with an increase in production and export. The competitiveness of the domestic

industries will increase and give a rise in exports. The export of goods will generate

income, employment and increase in economic growth and GDP of the country.

Subramaniam (2008) says that the currency fluctuation has become very important

for the policy makers and do not want the market forces to determine the price. The

difference in the exchange rate will affect the income and wealth of the individuals of



that country. Hence the exchange rate price is important for the economy, as this will

generate an adjustment in the price of the commodity.

The management of currency fluctuations Aliber, R. (2002:19) conveys that each

country has to decide and manage the foreign exchange value for its country. If the

country does not manage the currency then the currency of that country will not be

stable with other countries currency. This can affect the economy of the country by

low growth, less investments and unemployment. Hence the current issue of the

leather industry can hamper the growth of the economy by reduction in export that will

in turn affect the GDP and the economy.

2.3 Impact of currency Fluctuation on Micro Economy The change in the exchange rate generates instability in the markets for importers

and exporters of commodities and services, as well as the international markets. As

per the theory of (Kandil, M.: 2007) the instability of the exchange rate affects the

demand and supply transactions, hence combination of demand and supply, will

provide the real output (GDP). The real output depends on the movement of the

currency rate, supply and expenditure from government. The fluctuations in exchange

rate will effect real output growth, price inflation, consumption, income, investment,

export, import and trade balance.

2.3.0 Impact of currency fluctuation on Organization

The consequences of variation in the exchange rate will depend on the

characteristics of the organization and that might affect the future income,

expenditure and investment. The reading of (Davis, Coates, Collier and Longden

1991:24-25) and (International Federation of Accountants: 1987) divulges that

organization faces the accounting exposures and the economic exposure.

1) The accounting exposures relate to changes in financial statements that includes: Transaction exposure also known as conversion exposure, Donaldson (1980:8)

& (1987:8-9) says that this effects the cash flow in the financial transaction during

the settlement in foreign currency. Translation exposure also known as

accounting exposure, Donaldson (1980:9) & (1987:10-11) says that this effects



the book value of assets and liabilities in balance sheet, when expressed in other

currencies. As Prindl (1976:2) narrates that the organizations due to exchange

rate volatility are unfavorably affected by translation loss which is a cause for

diminishing the market value.

2) The Economic exposures relate to economic changes and Lipson (2009) conveys

that exchange rate variation can be an economic factor that affects the value of

the organization as per Lipson (2009). The economic exposure includes:

Transaction exposure which occurs when organizations have business contracts

and earning in foreign currency. Operational exposures which occurs when the

cash flow earnings are in foreign currency that may be known in advance and can

use different methods to mitigate risk.

Prindl A. (1976:21) reveals that the effects of economic exposure are seen on the

company’s liquidity, entire operations, financial structure and profits. The economic

exposure is concern for the value of organization and the future cash flow which may

arise due to change in exchange rate. Hence the economic exposure is most

essential for the long term future of an organization. The organization involved in

import and export generally face the risk of economic exposure, when the purchasing

power of the domestic currency is devalued against the foreign currency.

2.4 Studies on Impact of exchange Rate Variation It has been known that many studies have been carried out on the exchange rate

exposure on organization with respect to the market value, present value and the

effect of changes in exchange rate. The results of the study shows that change in

exchange rate have considerable effect on the trading organization. As Jorion (1990)

disclose that the effect of exchange rate variation is much higher than interest rate or

inflation.

The exchange exposure is estimated by Aliber (1976:175) for eight industrial

countries where he conducted study on the fixed and flexible regime. He calculated

the difference of real future spot rate from corresponding forward rate by weighting

against mean forecast errors. He carried out a practical study on weekly basis from



1967 – 1969 for the fixed exchange regime and from 1973 – 1974 for the flexible

exchange regime, where it showed five to ten times higher deviation in the flexible

exchange regime. The higher deviation has increased the importance of price risk in

the purchasing power parity. However he finds that the Purchasing power parity

prices of commodities are set by the market conditions and arbitrage system.

The previous research of (Aliber & Stickney 1975, Grauer, Litzenberger and stehle:

1976 and Giddy 1977) said that exchange rate and inflation depend on each other,

but has identified very slight relationship between exchange rate and inflation.

Whereas the investigation of Hooper and Kohlhagen (1978) were not able to uncover

considerable effect of international trade due to variation in exchange rate. Hence

(Levich and Wihlborg: 1980) says that more findings are still required to know effects

of exchange rate changes on MNC.

In respect to effects on currency fluctuation Kandil & Mirzaie (2003) has conducted

study on Output and Prices level with a sample of 33 developing countries, where he

reveals the unexpected currency fluctuation are having higher effect on output growth

and price inflation. Kandil (2004) provided evidence on economic activity on

developing countries and confirms that the depreciation of currency provides negative

effect on the economic performance. Kandil, Berument and Dincer (2006) had done

study on economic activity in Turkey and discover that unexpected depreciation

shrinks the output growth and also the growth of consumption and investment. Kandil

(2008) conducted studies on macro-economic interaction channel on developed and

developing countries. He finds progress in the trade balance due to currency

depreciation and also improvement in the competitiveness of exports in developing

countries. In another study Kandil (2008) investigates the asymmetric effects in

developing countries on output and prices and finds that the supply channel with

unexpected currency depreciation leads to reduction in output and price inflation. All

the studies of Kandil had proved the currency fluctuation is the major issue that

affects the economy and output of the country.

The reading of Bordo, Meissner and Weidenmier (2007) authenticate that the

depreciation in exchange rate can considerably raise the superiority risk if the country



has foreign currency debt. Lizardo and Mollick (2009) also endorse that the oil prices

increase directly proportional to major devaluation of USD and other oil exporter

currencies. While Tille (2006) show from his work that exchange rate movement

affect different sectors and the depreciation will increase the welfare and competition

in foreign market but the depreciation will also affect domestic competition.

Dekle and Ryoob (2007) study the firms that are looming in financing constraints as

well as hedging and exports. He proves financial constraints affects more than the

currency fluctuation. Here Li, Lui and song (2006) shows how currency fluctuation

affect exports and indicates that depreciation of currency have positive effect. Ihrig

and Prior (2005) have conducted examination on the effect of exchange rate

exposure on U. S. Manufacturing firms and found that some firms are significantly

affected during the period of crises where as some are affected during the normal

exchange rate variation.

Choi & Prasad (1995) has investigated the exchange rate sensitivity on US

multinational firms and found sixty percent have gained during the depreciation of

dollar. Even the research of Rashid (2009) on 22 Industries in developing countries

found that some industrial sectors were highly vulnerable to variation in exchange

rate. A recent study on IT Industry by Dash & Madhava (2008) has disclosed that the

whole IT industry revenue was decreased by six percent in 2005 with the study

carried out, where small-cap firms were largely affected, mid-cap and large-cap were

not much affected as they had hedge the risk. Bradley and Moles (2001) verify

exchange rate exposure on non-financial U.K firms, where they confirm stability in the

economic exposure. Their earlier research confirms considerable effect on industry of

economic exposure. Bradley and Moles (2001) also found that 75% of the company’s

involved in export had to manage their volumes or margin due the exchange rate

variation. Vij (2009) identified from his survey of CFOs that most of the companies

CFOs are aware about translation, transaction and economic exposure, where he

also mentions that very few companies don’t hedge. Vij (2009) also recommends

some measures which can be used by companies for hedging the risk. Sanyal,

Banerjee and Majumder (2010) conducted a study on the Leather Industry in India by



using the Constant Market Share (CMS) Analysis, to find the change in export from

(1991-2006) and conveys that the leather export has been seen decreasing due the

change in demand in the world, change and market competiveness.

2.5 Impact of currency fluctuation on Leather Industry In recent past there are many industries in India that are been affected by the

fluctuation in currency. The fluctuation in currency does not affect directly on a daily

basis for the Indian industries. The leather industry is largely dependent on the

exports to the United States, United Kingdom and European countries. The import

and export transactions are affected at the point of receipt and payment, when banks

equate the currencies at the time of exchange. However, it is said that the leather

industry was largely affected due to the currency fluctuation during the past recession

and now due to the European debt crises, which has reduced the purchasing power

of European nations. The exports will be affected which in turn will decrease the GDP

of India and will also affect the Balance of Payment.

It is put in writing by IANS (2010) tells that exporters of leather are worried cause of

currency fluctuation as 75 % of the exports are generated by the European countries.

Venkatraman (2010) divulges that currency fluctuation has affected the leather

industry which would reduce the export and profit margin due to the appreciation of

Rupee against Euro. The export survey conducted by FICCI (2010) found high

variation in exchange rate, risk of exports slowdown and due to the increasing price

of oil and raw materials. They also noticed signs of delaying orders from the EU

region and also some companies in India were asked to hold back the dispatch of

consignment. There have been some other cases where buyers refused to accept

immediate delivery and the exporting firms had to take temporary place for storing the

goods.

The fiber2fashion (2010) reveal that leather industry in Kanpur has been severely

affected due to rupee appreciation to 57 from the range of 68-70 exchange rate which

has reduced the exports to European Countries. Sourcejuice (2010) reveal that in

June the leather exports fell by 3% due to euro debt crises and the rupee

appreciation by 9 % against Euro. The reduction in leather exports will affect the jobs



and enforce the leather firms to reduce their product price. It has also been known to

exports agents that the European countries are now sourcing from other exporting

countries like Africa and Latin America. Resource center – RCIP (2010) conveys that

the euro crises can affect the profit margins and hence will difficult to remain in the

market. The players in the leather industry are small & cottage leather manufacturers

and do not have the financial potential to use hedging techniques.

The major affect that the industry faced is the export of goods to the European Union

nations. The effect has reduced the competitiveness against other countries and also

the purchasing power of the foreign nations has impacted the exports of the leather

industry. The impact can be seen in the exports of the industry in this current year as

per the export scenario for the past 5 years.

Figure 2: Export Scenario for the last 5 years (Council for Leather Export 2010)



Export Scenario for the last 5 years 2005-06 2006-07 2007-08 2008-09 2009-10

US $ m US $ m US $ m US $ m US $ m

Finished Leather 636.27 724 807.19 673.37 625.54

Footwear 1045.24 1236.91 1489.35 1534.32 1507.51

Leather Garments 333.3 309.91 345.34 426.17 428.52

Leather Goods 660.17 706.28 800.46 873.44 756.02

Saddlery & Harness 77.52 82.33 106.18 92.15 83.39

Total 2752.5 3059.43 3548.51 3599.46 3400.97

% Growth 10.30% 11.15% 15.99% 1.44% -5.51%

Source: DGCI&S

Table 1: Export Scenario for the last 5 years (Council for Leather Export 2010)



3. Research Methodology

3.0 Research Perspective The research is to identify the impact of currency fluctuations that affects the

purchasing power of foreign countries and industry competitiveness. The currency

variations will simultaneously affect imports and exports of Leather Industry in India.

As per Saunders M., Lewis P. and Thornhill A. (2009) the investigation can be based

on the deductive approach by analyzing the change in nominal and real exchange

rate and thus testing industries competitiveness by the purchasing power parity

theory. The Purchasing Power Theory was initiated by the economists David Ricardo

and later was made known by a Swedish economist ‘Gustav Cassel’. The study will

be based on the quantitative data analyzes with the evaluation of variation in the

nominal and real exchange rate deviation in purchasing power parity. This will help in

proving the hypothesis, that currency variation affects the purchasing power of foreign

countries and concurrently effecting import and export of leather industry in India.

3.1 Research Design The research will be carried out to analyze the current problem faced by the Leather

Industry in India and mainly focusing on the impact of import and export due to

currency fluctuation.

The purpose this research is to explore in details, the variation in exchange rate

fluctuation and the deviation in purchasing power parity. The exchange rate variation

and deviation in Purchasing power parity affects the competitiveness of the industry

as per study of Eun C. and Resnick B. (2009). The exploration will help to explain

how the competitiveness of the Leather industry in import and export is been affected

due to the impact of variation in exchange rate and PPP deviation.

The strategy of the research is based on an experiment, to find out the variation in the

nominal and real exchange rate that affects the purchasing power of foreign nations.

This experiments outcome will facilitate in proving that the variation in exchange rate

affects the import and export of the leather Industry.



The technique that is used in the data collection will be quantitative, as my research

analysis includes historical statistical data. The graphs will be generated through the

use of this statistical numerical data. As an investigator, I do not exercise any control

over the fluctuations in the exchange rate, as multiple set of case study will thus be

helpful. A study of different cases will give a broad understanding of the impact of the

fluctuations in currency on the Industry.

In view of the time horizon the study will be conducted on longitudinal basis, where

the data will be collected for the past 10 years, to verify the effect of currency

fluctuation with the purchasing power parity. As the export monthly data for the

industries is difficult to obtain monthly data for the past ten years and therefore the

data will be collected for the available months.

The research findings will not provide the reliability that all other researchers might

find with the similar observation, as it may differ from the thoughts of one person to

another. The transparency will be maintained by providing the reference in

bibliography. The data that will be collected form reliable source and hence the

analysis will be true, according to the Purchasing Power Parity Theory.

3.2 Data Collection Methods

3.2.0 Sampling Techniques

The research will be based on the probability sampling technique where the

evaluation of deviation in the nominal and real exchange rate, affects the purchasing

power parity. The result will be generated with the evaluation and proved whether

fluctuation in exchange effect import and export of the Leather Industry.

3.2.1 Secondary Data

The secondary data will be collected for the analysis on the impact of fluctuation in

exchange rate and the Purchasing Power Parity. The historical statistical data will be

checked for the availability of exchange rate in INR for U.S. Dollar, Euro and British

Pound. The available statistical data will be collected from a multiple sources for a

time period of 10 years, as per the requirement and availability of the data. The data

for the exchange rate evaluation will be collected on the daily average basis from



Oanda (2010). This website will provide me the data on average daily and yearly

basis which will be used for generating the graph and evaluating how much

percentage of fluctuation has taken place every year over the past 10 years.

The data collection for computing the deviation in purchasing power parity will require

inflation rate for India, United States, European Area and United Kingdom. The data

will be collected from different websites like CIA – TheWorldFactbook,

Tradingeconomics and Reserve Bank of India. The data will facilitate me to achieve

the Real Exchange rate to find the deviation in the purchasing power parity of the

foreign nation, which affects the competitiveness of the Indian leather Industry.

3.3 Analyzing Secondary Data A qualitative analysis will be carried out on the data collected to find the deviation in

exchange rate and Purchasing Power Parity on the leather goods importing countries,

which effects import and export of Leather Industry. The countries like United States,

European Nations and United Kingdom are the major importers of leather goods.

1. In the exchange rate evaluation the data is collected on daily basis for past 10

years from the online resource database “OANDA” The statistical graph will be

generated with the data collected with INR rates for the currencies of major

importers of leather products. Also the yearly average data for exchange rate will

be collected to find the deviation percentage in exchange rate by using the

horizontal analysis. The method used to find the percentage deviation in nominal

exchange rate is as follows:

e = (P-P1/ P1)* 100

2. In carrying out the analysis with the Purchasing power Parity Theory, which is

based on the theory testing of the economists David Ricardo and Gustav Cassel.

The Purchasing Power Parity theory suggests applying “Law of One Price” for a

standard basket internationally. In Eun and Resnick (2009) theory says that “the

exchange rate of two countries should be equal to the ratio of the countries price

level.



To calculate the real exchange for purchasing power parity we first need to find the

deviation in the nominal exchange rate which is given above.

Further the task involves collecting the inflation rate from tradingeconomics.com

(2010) for India, United States, European Area and United Kingdom. Then

calculate the q, which is the real exchange rate. The q, measure the real exchange

deviation from purchasing power parity with the method as follows:

q= (1+π dom)/ ((1+e)*(1+ π for))*100

In the above equation q, is the real exchange rate, π dom is the domestic inflation

rate, e, is the deviation in the nominal exchange rate and π for

3. The statistical data for import and export will be collected from Reserve Bank of

India (2010). The import export data will be analyzed to find the deviation in the

import and export of the collected data. The data will be compared with the

exchange rate and the purchasing power parity and the hypothesis will be proved

whether the fluctuation in the exchange rate affects import and exports.

is the foreign nation

inflation rate. The results will be generated into a graph to find the competitiveness

of the domestic industry as follows:

Q = 1 the competitiveness of the domestic is at unity

Q < 1 the competitiveness of the domestic country has appreciated

Q > 1 the competitiveness of the domestic country has depreciated

If the purchasing power parity holds then real exchange rate will be at unity.

However, most often the purchasing power parity does not hold than real

exchange rate will deviate by greater than one or less than one. The change in the

real exchange occurs due to the change in the nominal exchange rate, which is

due to the adjusted inflation in the nominal exchange rate.

3.4 Research Limitations The nominal exchange rates limitation is that, the inflation is adjusted in exchange

rate, which is calculated in each country with CPI “basket of goods” which is not



identical. Also the exchange rate is taken on the daily and yearly average which might

not be accurate.

The Purchasing power limitation is that the basket of goods is not identical to all

countries, as the choice and preference of the people differ in different countries.

Hence the nominal exchange rate and the real exchange rate might generate and

error in the deviation of the purchasing power parity. The calculation of purchasing

power will be difficult as there are many other factors affecting the purchasing power

parity. The Purchasing Power Parity theory is a long term theory as this theory

requires time to react to the exchange differences and return to equilibrium. Hence

the theory does not work well to find the Purchasing Power Parity deviation for the

shorter term as it shows a continuous fluctuation in the real exchange rates. The

other limitation of the Purchasing Power Parity theory is that it does not take in to

account the taxes, quotas and tariff while calculating the purchasing power.

3.5 Ethical Considerations Every research is bound closely by the integrity of ethical values. They are deeply

associated not only with the disciples but also with the individuals involved. I will

strictly adhere to BES ethical guidelines and initiate all necessary procedure required

for the successful completion of this research.

I will deal politely with others who share different opinions about my research and

treat them and their opinions with respect.

The information collected will be strictly used for my research and academic purpose.

My research supervisor will be notified about my progress on a constant basis.

The data obtained will be confidential and stored securely. I will also ensure that my

research will not be of any physical, cultural and psychological effect to the research

participants or any other parties involved.

3.5.0 Plagiarism

I will definitely acknowledge and give total credit to the intellectual capital of the

rightful owners thereby ensuring the integrity of others works.



4. Data collection, Analysis, Presentation and Findings

4.0 Data Collection In carrying out the data analysis on the impact of currency fluctuation on leather

industry in India and involves using two methods. The method is evaluating nominal

and real exchange rate and find the deviation Purchasing Power Parity.

The investigation with exchange rate the collection involves collecting the historical

exchange rate data of past ten years for major currencies like United States - Dollar,

European Union - Euro and Great Britain - Pound. The exchange rates for the

currencies are collected with the Indian rupee (INR) value. The exchange rate

collection of data has been center of attention that the data should be for the

countries that are mostly involved in trade with the Indian leather industry and facing

the effects of currency fluctuations. The leading countries for import of leather

finished products are the European nations followed by the United States, Great

Britain and other Asian countries. The information will provide the basic

understanding of the foreign countries deviation in purchasing power, whether it has

increased or decreased against the Indian Rupee in the past several years. In this

analysis the foreign currencies will be compared against the value of the Indian rupee

for 10 years and also an explanation will be provided how the industry is affected due

to currency fluctuation.

The second investigation is with the real exchange rate deviation in the Purchasing

Power Parity Theory that involves collection of inflation rate data for India, Europe,

United Kingdom and United States. Also making use of the exchange rate of the

foreign nations mentioned above in the previous exchange rate analysis. The inflation

is basically the rise in prices of goods and services over a period of time in an

economy. The information collected will be used in finding the expected and actual

real exchange rate deviation in purchasing power parity for the past 10 years. The

deviation in the purchasing power parity will show how much the industry

competitiveness and the purchasing power of foreign countries have been affected.

The affects may be caused due the appreciation or depreciation of the exchange rate



and economical forces, which affects the price of the product and the purchasing

power.

The above data analysis of the nominal and real exchange rate will be used in

proving that in the current scenario the purchasing power of the foreign country has

been diminished against the rupee, which affects the industry in the short run. The

exchange rate cannot be predicted accurately due to unexpected factors that affect

the country’s exchange rate. Hence the purchasing power of foreign country is

affected due to the exchange rate, which in turn will affect import and export of the

leather industry.

4.1 Data Analysis and Presentation

4.1.0 The Exchange Rate Analysis

The below graph is for the data that has been collected for daily average exchange

rate in INR for U. S. Dollar, Euro and British Pound to carry out the analysis on the

impact of currency fluctuation,

Figure 3: Exchange Rate in INR for USD, Euro and GBP (OANDA: 2010)



Yearly Exchange Variation in USD Year Average High Low

Rate % change Rate % change Rate % change 2000 44.957

46.910

43.420

2001 47.227 5.049 48.336 3.040 46.250 6.518 2002 48.679 3.075 49.179 1.744 47.661 3.051 2003 46.660 -4.148 48.037 -2.322 45.135 -5.300 2004 45.340 -2.830 46.418 -3.370 43.250 -4.176 2005 44.115 -2.700 46.317 -0.218 43.015 -0.543 2006 45.319 2.728 46.935 1.334 43.840 1.918 2007 41.357 -8.742 44.685 -4.794 39.225 -10.527 2008 43.814 5.942 53.965 20.768 24.165 -38.394 2009 48.850 11.493 53.425 -1.001 45.535 88.434 2010 46.108 -5.613 47.735 -10.650 43.835 -3.733

Table 2: Yearly Exchange Variation in USD (OANDA:2010)

In view of the retrospect, the dollar against rupee from 2000 to 2002 depreciated and

was hovering in between 43.42 to 49.18 with the average escalated by 8.28% (44.95

- 48.68). The rupee appreciated from 2003 until 2005 and floating around 43.02 to

48.04 with an average increase by 9.37% (48.68 to 44.12) against dollar. In 2006,

rupee depreciated by floating around 43.84 to 46.94 with average decrease of 2.73%

(44.12 - 45.32). The rupee in 2007 again appreciated by floating around 39.23 –

44.69 with average increase by 8.74% (45.32 – 41.36) against the dollar. In 2008 to

2009, rupee depreciated by floating around 24.17 – 53.97 with average decrease by

18.12 (41.35 – 48.85) and in 2010 rupee appreciated with floating around 43.84 –

47.74 with average increase by 5.61% (48.85 – 46.11) against the dollar till date. The

Dollar depreciation was high in 2007 with the high appreciation in 2009 and is

currently prevailing at Rs 46/USD.

Yearly Exchange Variation in EURO Year Average High Low


44.994

38.689

2001 42.340 1.945 44.810 -0.409 39.526 2.164 2002 46.039 8.737 50.365 12.396 41.574 5.180 2003 52.789 14.661 57.260 13.691 49.703 19.553 2004 56.385 6.811 59.935 4.671 52.240 5.105



2005 54.916 -2.605 58.984 -1.586 51.930 -0.594 2006 56.944 3.694 60.009 1.736 52.627 1.342 2007 56.609 -0.588 59.111 -1.496 54.381 3.333 2008 64.127 13.280 70.705 19.614 57.450 5.644 2009 68.033 6.091 72.006 1.839 62.716 9.167 2010 60.804 -10.626 67.387 -6.414 56.076 -10.588

Table 3: Yearly Exchange Variation in Euro (OANDA:2010)

The Rupee in 2000 to 2001 was floating between Rs 38.68 – 44.99 with average

increase by 1.95% against Euro. However, the Indian rupee continued depreciating

against the Euro from 2002 until 2004 floating around 41.57 – 59.94 and with an

average decrease of 33.18% (42.34 – 56.39) in 3 years. The rupee appreciated in

2005 by floating around 51.93 - 58.98 with average increase of 2.60% (56.39 –

54.92). The rupee from 2006 to 2009 floated around 52.63 – 72.01 with an average

decrease by 23.88 against Euro. The rupee showed a slight appreciation in 2007 by

an average increase of 0.59% against Euro. In 2010 rupee floated around (56.08 –

67.38) and appreciated by average 10.63% (68.04 – 60.80) against Euro. The Euro

Nation debt crises can be suspected as the primary fueling factor for loss of currency

competitiveness. The euro appreciation was high in 2003 & 2008 but this year the

depreciation of euro is at a high rate.

Yearly Exchange Variation in GBP Year Average High Low


72.133

64.029

2001 68.069 -0.073 71.359 -1.073 64.584 0.867 2002 73.193 7.527 77.364 8.414 68.195 5.591 2003 76.286 4.226 81.100 4.829 72.052 5.656 2004 83.084 8.911 86.617 6.803 78.282 8.646 2005 80.289 -3.364 84.241 -2.743 75.612 -3.411 2006 83.543 4.053 88.961 5.602 76.650 1.373 2007 82.730 -0.972 87.660 -1.463 78.026 1.795 2008 80.633 -2.535 87.109 -0.628 71.724 -8.077 2009 76.380 -5.275 81.945 -5.928 68.365 -4.683 2010 70.622 -7.538 75.643 -7.690 65.779 -3.782

Table 4: Yearly Exchange Variation in GBP (OANDA:2010)



In 2000 to 2004 the rupee depreciated continuously for consecutive 4 years and

floated around 64.03 – 86.62 with an average decrease by 21.97% (68.12 – 83.09)

against GBP. However in 2001 the rupee appreciated by the average of 0.07%

against the GBP. In 2005 rupee appreciated with an average increase of 3.36%

(83.08 – 80.29) and floated around 75.62 – 84.24 against GBP. The rupee in 2006

depreciated with an average decrease of 4.05% (80.29 – 83.54) and floated around

76.65 – 88.96 against GBP. The rupee continued appreciating for consecutive 4

years from 2007 until 2010 by floating around 65.78 – 87.66 and with an average

increase of 15.47% (83.54 – 70.62) against GBP. The rupee has more appreciation

has been high in 2009 & increased again in 2010 against the Great Britain Pound.

.4.1.1 Purchasing Power Parity Analysis

The graphs below provide the details of expected real exchange rate and the actual

real exchange rate which measures the deviation in the Purchasing Power Parity:

4.1.1.0 U.S. Dollar PPP Deviation

Figure 4: U. S. Dollar PPP Deviation

U.S. Dollar Act PPP Deviation

Year Act. Div

Change % Year

Act. Div

Change % Year

Act. Div

Change %

Jan-00 0.9927 Jul-03 1.0277 0.21% Jan-07 1.0524 0.59% Feb-00 0.9998 0.71% Aug-03 1.0130 -1.43% Feb-07 1.0545 0.20%

Mar-00 1.0182 1.84% Sep-03 1.0074 -0.55% Mar-07 1.0413 -1.26%



Apr-00 1.0226 0.44% Oct-03 1.0281 2.05% Apr-07 1.0860 4.30% May-00 1.0149 -0.76% Nov-03 1.0071 -2.04% May-07 1.0729 -1.21% Jun-00 0.9909 -2.36% Dec-03 1.0080 0.08% Jun-07 1.0293 -4.06% Jul-00 1.0042 1.34% Jan-04 1.0305 2.24% Jul-07 1.0488 1.89%

Aug-00 0.9893 -1.48% Feb-04 1.0249 -0.54% Aug-07 1.0411 -0.74% Sep-00 0.9929 0.36% Mar-04 1.0265 0.15% Sep-07 1.0474 0.60% Oct-00 0.9881 -0.48% Apr-04 1.0300 0.35% Oct-07 1.0408 -0.63%

Nov-00 0.9784 -0.99% May-04 0.9680 -6.02% Nov-07 1.0135 -2.62% Dec-00 0.9990 2.11% Jun-04 0.9986 3.16% Dec-07 1.0135 -0.01% Jan-01 0.9999 0.09% Jul-04 0.9961 -0.25% Jan-08 1.0133 -0.02% Feb-01 0.9980 -0.19% Aug-04 1.0122 1.62% Feb-08 1.0050 -0.82%

Mar-01 0.9903 -0.77% Sep-04 1.0262 1.38% Mar-08 1.0212 1.61% Apr-01 0.9850 -0.53% Oct-04 1.0204 -0.57% Apr-08 1.0463 2.46%

May-01 0.9827 -0.23% Nov-04 1.0162 -0.41% May-08 0.9825 -6.10% Jun-01 1.0080 2.57% Dec-04 1.0393 2.27% Jun-08 1.0090 2.70% Jul-01 1.0114 0.34% Jan-05 1.0207 -1.79% Jul-08 1.0254 1.63%

Aug-01 1.0247 1.32% Feb-05 1.0082 -1.22% Aug-08 1.0320 0.64% Sep-01 1.0043 -1.99% Mar-05 1.0053 -0.29% Sep-08 0.9861 -4.44% Oct-01 1.0118 0.74% Apr-05 1.0094 0.41% Oct-08 0.9974 1.15%

Nov-01 1.0324 2.04% May-05 1.0140 0.46% Nov-08 1.0848 8.76% Dec-01 1.0372 0.46% Jun-05 0.9998 -1.40% Dec-08 1.1041 1.78% Jan-02 1.0318 -0.52% Jul-05 1.0047 0.49% Jan-09 1.1000 -0.37% Feb-02 1.0329 0.11% Aug-05 0.9974 -0.73% Feb-09 1.0846 -1.40%

Mar-02 1.0355 0.25% Sep-05 0.9824 -1.51% Mar-09 1.0430 -3.84% Apr-02 1.0210 -1.40% Oct-05 0.9724 -1.01% Apr-09 1.1202 7.40%

May-02 1.0374 1.60% Nov-05 0.9973 2.55% May-09 1.1353 1.35% Jun-02 1.0297 -0.74% Dec-05 1.0204 2.32% Jun-09 1.1261 -0.81% Jul-02 1.0289 -0.08% Jan-06 1.0319 1.13% Jul-09 1.1262 0.01%

Aug-02 1.0250 -0.38% Feb-06 1.0181 -1.34% Aug-09 1.1376 1.01% Sep-02 1.0375 1.23% Mar-06 1.0150 -0.30% Sep-09 1.1287 -0.78% Oct-02 1.0207 -1.62% Apr-06 1.0064 -0.84% Oct-09 1.1582 2.62%

Nov-02 1.0193 -0.14% May-06 1.0083 0.19% Nov-09 1.1187 -3.41% Dec-02 1.0176 -0.16% Jun-06 1.0198 1.14% Dec-09 1.1180 -0.06% Jan-03 1.0080 -0.95% Jul-06 1.0181 -0.18% Jan-10 1.1492 2.79% Feb-03 1.0135 0.55% Aug-06 1.0192 0.12% Feb-10 1.1160 -2.89%

Mar-03 1.0114 -0.21% Sep-06 1.0559 3.60% Mar-10 1.1433 2.44% Apr-03 1.0326 2.10% Oct-06 1.0777 2.06% Apr-10 1.1337 -0.83%

May-03 1.0338 0.12% Nov-06 1.0607 -1.58% May-10 1.0848 -4.32% Jun-03 1.0255 -0.80% Dec-06 1.0462 -1.36% Jun-10 1.1067 2.02%

Table 5: Actual PPP Deviation in U.S. Dollar



The competitiveness of India had depreciated in the first six months of 2000 and later

appreciated until July 2001 but in Jan-01 the competitiveness was very close to unity.

Again after July 2001 the competitiveness kept on hovering by Jan 03 came close to

unity. The domestic competition in Feb-02 continued hovering around 1.01 to 1.03

until April-05 with competition increase for the next 3 months. It again decreased in

Aug-05 to Nov-05 and continued floating around 1.006 to 1.086 from Dec-05 to Apr-

08. The competiveness was still floating around 0.982 – 1.032 from May-08 to Oct-08

but after that the competiveness continued a decrease and floating around 1.04 to

1.158 from Nov 08 to June 2010. The measure deviation in the start form the

purchasing power parity was less but continuously increased from Sept- 06 the

deviation was less form purchasing power parity.

4.1.1.1 Euro PPP Devation

Figure 5: Euro PPP Deviation

Euro Actual PPP Deviation

Year Act. Div

Change % Year

Act. Div

Change % Year

Act. Div

Change %

Jan-00 1.0060 Jul-03 1.0567 3.68% Jan-07 1.0722 4.56% Feb-00 1.0464 4.02% Aug-03 1.0350 -2.05% Feb-07 1.0553 -1.57%

Mar-00 1.0580 1.10% Sep-03 1.0027 -3.13% Mar-07 1.0379 -1.65%



Apr-00 1.0566 -0.13% Oct-03 0.9845 -1.81% Apr-07 1.0709 3.18% May-00 1.0752 1.76% Nov-03 1.0034 1.92% May-07 1.0813 0.97% Jun-00 0.9616 -10.57% Dec-03 0.9596 -4.36% Jun-07 1.0448 -3.37% Jul-00 1.0295 7.06% Jan-04 1.0043 4.66% Jul-07 1.0322 -1.21%

Aug-00 1.0417 1.19% Feb-04 1.0234 1.90% Aug-07 1.0504 1.77% Sep-00 1.0436 0.18% Mar-04 1.0572 3.30% Sep-07 1.0351 -1.46% Oct-00 1.0135 -2.88% Apr-04 1.0577 0.05% Oct-07 1.0249 -0.99%

Nov-00 0.9880 -2.51% May-04 0.9719 -8.12% Nov-07 0.9934 -3.07% Dec-00 0.9630 -2.53% Jun-04 0.9966 2.54% Dec-07 1.0307 3.75% Jan-01 0.9684 0.56% Jul-04 0.9911 -0.55% Jan-08 1.0151 -1.51% Feb-01 1.0319 6.55% Aug-04 1.0243 3.34% Feb-08 1.0090 -0.60%

Mar-01 1.0114 -1.98% Sep-04 1.0276 0.33% Mar-08 0.9740 -3.47% Apr-01 1.0096 -0.17% Oct-04 1.0050 -2.20% Apr-08 1.0375 6.52%

May-01 1.0084 -0.13% Nov-04 0.9915 -1.34% May-08 0.9991 -3.70% Jun-01 1.0361 2.75% Dec-04 1.0141 2.28% Jun-08 1.0190 1.98% Jul-01 1.0057 -2.93% Jan-05 1.0520 3.74% Jul-08 1.0266 0.75%

Aug-01 0.9842 -2.14% Feb-05 1.0269 -2.38% Aug-08 1.1010 7.25% Sep-01 0.9948 1.07% Mar-05 1.0015 -2.47% Sep-08 1.0421 -5.34% Oct-01 1.0158 2.12% Apr-05 1.0432 4.16% Oct-08 1.0816 3.78%

Nov-01 1.0520 3.56% May-05 1.0411 -0.21% Nov-08 1.1254 4.05% Dec-01 1.0294 -2.15% Jun-05 1.0480 0.67% Dec-08 1.0248 -8.93% Jan-02 1.0251 -0.42% Jul-05 1.0247 -2.23% Jan-09 1.1024 7.57% Feb-02 1.0362 1.09% Aug-05 0.9916 -3.23% Feb-09 1.1198 1.58%

Mar-02 1.0170 -1.85% Sep-05 1.0047 1.32% Mar-09 1.0105 -9.76% Apr-02 1.0049 -1.19% Oct-05 1.0084 0.36% Apr-09 1.1049 9.33%

May-02 1.0039 -0.10% Nov-05 1.0290 2.05% May-09 1.0814 -2.12% Jun-02 0.9714 -3.24% Dec-05 1.0268 -0.21% Jun-09 1.0875 0.56% Jul-02 0.9841 1.31% Jan-06 1.0265 -0.03% Jul-09 1.1005 1.19%

Aug-02 1.0376 5.44% Feb-06 1.0441 1.71% Aug-09 1.1093 0.81% Sep-02 1.0286 -0.87% Mar-06 1.0213 -2.18% Sep-09 1.0936 -1.42% Oct-02 1.0173 -1.10% Apr-06 0.9955 -2.53% Oct-09 1.1282 3.16%

Nov-02 0.9978 -1.92% May-06 0.9851 -1.04% Nov-09 1.1211 -0.63% Dec-02 1.0011 0.33% Jun-06 1.0459 6.17% Dec-09 1.1607 3.53% Jan-03 0.9719 -2.91% Jul-06 1.0331 -1.23% Jan-10 1.1953 2.98% Feb-03 1.0044 3.34% Aug-06 1.0245 -0.83% Feb-10 1.1735 -1.82%

Mar-03 1.0128 0.84% Sep-06 1.0659 4.04% Mar-10 1.1620 -0.97% Apr-03 1.0278 1.48% Oct-06 1.0847 1.76% Apr-10 1.1547 -0.63%

May-03 0.9739 -5.25% Nov-06 1.0407 -4.06% May-10 1.1623 0.65% Jun-03 1.0192 4.66% Dec-06 1.0254 -1.47% Jun-10 1.1333 -2.49%

Table 6: Actual PPP Deviation in Euro



The competitiveness of India had declined in the first six months and later continued

flutuating in competitiveness around 0.9596 to 1.0577 from Jul-00 to Jul 04. The

competitiveness of india still deteroited which was much more from the previous

years floating around 0.9851 and 1.0847 from Aug-04 to Dec-07. There was an

improvement in the compitiveness with the actual fluctuation around 0.974 to 1.1254

from Jan-08 to Dec-08. In the year Jan-09 to Sep-09 the compitiveness depreciated

with the fluctuation around 1.0105 to 1.1198 and later it worsened even more by

fluctuation around 1.1211 and 1.1953 from Oct-09 to Jun-10. The real exchange rate

had been continously deviated forn purchasing power parity. Even the expected real

exchange rate is also deviated from actual real exchange rate.

4.1.1.2 British Pound PPP Deviation

Figure 6: British Pound PPP Deviation

GBP Actual PPP Deviation

Year Act. Div

Change % Year

Act. Div

Change % Year

Act. Div

Change %

Jan-00 0.9980 Jul-03 1.0585 4.57% Jan-07 1.0495 3.66% Feb-00 1.0462 4.82% Aug-03 1.0408 -1.68% Feb-07 1.0502 0.07%

Mar-00 1.0654 1.84% Sep-03 1.0077 -3.17% Mar-07 1.0453 -0.47% Apr-00 1.0471 -1.72% Oct-03 0.9912 -1.64% Apr-07 1.0606 1.47%



May-00 1.0922 4.31% Nov-03 1.0050 1.39% May-07 1.0776 1.60% Jun-00 1.0195 -6.66% Dec-03 0.9794 -2.55% Jun-07 1.0310 -4.32% Jul-00 1.0321 1.23% Jan-04 0.9962 1.72% Jul-07 1.0295 -0.15%

Aug-00 1.0307 -0.14% Feb-04 1.0026 0.64% Aug-07 1.0544 2.42% Sep-00 1.0573 2.58% Mar-04 1.0547 5.20% Sep-07 1.0547 0.03% Oct-00 0.9978 -5.63% Apr-04 1.0563 0.15% Oct-07 1.0417 -1.23%

Nov-00 1.0191 2.14% May-04 0.9922 -6.07% Nov-07 1.0211 -1.98% Dec-00 1.0009 -1.79% Jun-04 0.9925 0.02% Dec-07 1.0583 3.65% Jan-01 1.0135 1.26% Jul-04 1.0029 1.05% Jan-08 1.0622 0.37% Feb-01 1.0429 2.90% Aug-04 1.0393 3.63% Feb-08 1.0222 -3.77%

Mar-01 1.0166 -2.52% Sep-04 1.0564 1.65% Mar-08 1.0159 -0.61% Apr-01 1.0116 -0.50% Oct-04 1.0321 -2.30% Apr-08 1.0686 5.19%

May-01 1.0083 -0.32% Nov-04 1.0087 -2.26% May-08 0.9982 -6.59% Jun-01 1.0409 3.23% Dec-04 1.0157 0.69% Jun-08 1.0206 2.25% Jul-01 1.0156 -2.43% Jan-05 1.0615 4.51% Jul-08 1.0249 0.41%

Aug-01 1.0176 0.20% Feb-05 1.0179 -4.11% Aug-08 1.0904 6.39% Sep-01 0.9987 -1.86% Mar-05 1.0070 -1.08% Sep-08 1.0339 -5.18% Oct-01 1.0282 2.95% Apr-05 1.0304 2.33% Oct-08 1.0498 1.54%

Nov-01 1.0538 2.49% May-05 1.0436 1.28% Nov-08 1.1660 11.07% Dec-01 1.0414 -1.18% Jun-05 1.0260 -1.68% Dec-08 1.1021 -5.48% Jan-02 1.0296 -1.13% Jul-05 1.0516 2.49% Jan-09 1.1001 -0.18% Feb-02 1.0380 0.81% Aug-05 0.9880 -6.05% Feb-09 1.0601 -3.64%

Mar-02 1.0353 -0.26% Sep-05 0.9933 0.54% Mar-09 1.0209 -3.69% Apr-02 1.0099 -2.45% Oct-05 1.0168 2.37% Apr-09 1.0536 3.20%

May-02 1.0286 1.86% Nov-05 1.0283 1.13% May-09 1.0442 -0.89% Jun-02 1.0200 -0.84% Dec-05 1.0286 0.03% Jun-09 1.0281 -1.55% Jul-02 0.9837 -3.56% Jan-06 1.0431 1.41% Jul-09 1.0830 5.34%

Aug-02 1.0335 5.07% Feb-06 1.0419 -0.12% Aug-09 1.0913 0.77% Sep-02 1.0203 -1.28% Mar-06 1.0336 -0.79% Sep-09 1.1127 1.96% Oct-02 1.0248 0.44% Apr-06 1.0082 -2.46% Oct-09 1.1509 3.44%

Nov-02 1.0169 -0.77% May-06 0.9725 -3.54% Nov-09 1.0905 -5.25% Dec-02 1.0157 -0.12% Jun-06 1.0512 8.09% Dec-09 1.1404 4.57% Jan-03 1.0016 -1.39% Jul-06 1.0355 -1.50% Jan-10 1.1451 0.41% Feb-03 1.0306 2.90% Aug-06 1.0059 -2.85% Feb-10 1.1435 -0.14%

Mar-03 1.0443 1.32% Sep-06 1.0553 4.90% Mar-10 1.1760 2.84% Apr-03 1.0466 0.22% Oct-06 1.0731 1.69% Apr-10 1.0964 -6.77%

May-03 1.0111 -3.39% Nov-06 1.0339 -3.65% May-10 1.1183 1.99% Jun-03 1.0123 0.12% Dec-06 1.0124 -2.08% Jun-10 1.0784 -3.56%

Table 7: Actual PPP Deviation in GBP



The competiveness of India is depreciated in the in the first 6 months but has seen an

improvement from Jul-00 to Sep-06 by floating around 0.9725 to 1.0615. The next

month again the competitiveness of India has depreciated by the deviation around

1.0124 to 1.0776 from Oct-06 to Apr-08 and a slight improvement in May-08.

However it has again seen further competiveness depreciation by deviating around

1.0206 to 1.1760 from Jun-08 to Jun-10. Even deviation between Expected exchange

rate and the Actual exchange which has been deviating at a high rate from the

purchasing power parity. It has also shown an improvement in Apr. & June 2010.

4.1.2 Leather Import & Export

Figure 7: Leather Export Import (RBI : 2010)

The above Export and Import Figure 7, shows the details from Jan 2008 to Sept 2009

where in the first 4 months the export have been seen reducing until Apr 2008. It can

be noticed increase in the imports from Feb-08 this is due to the appreciation of rupee

which increased the purchasing power of the Indian Rupee. The rupee is again

depreciated against all major currencies from May to August 2008 and can be noticed

an increase in exports taken place with a high increase in July-08. However the rupee

appreciates from Sept to Oct 08 which reveals reduction in export and with a slight

increase in imports. In Nov-Dec 08 rupee depreciates against USD and Euro but

appreciates against GBP which still reveals a rise to export and import. Later from

Jan-09 to Apr-09 rupee appreciated against GBP and Euro that initiate reduction in

import and export from Feb to Jun-09 which is caused due to appreciation of Rupee.



The currencies from Jul-09 till Sep-09 the rupee depreciates against Euro and GBP

that gives a rise to exports.

4.2 Summary on Findings As per the Exchange rate Analysis under section 4.1.0 provides information of the

currency fluctuation for the past 10 years. The data available for export of leather

goods on a monthly basis is available for 1 year 9months. Even in this less time

period it can be seen that when the Indian Rupee appreciates, there is a decline in

exports, for example from Jan-08 to Apr-08 the GBP and USD depreciated and due

to which a decline in export can be noticed during that period. The Indian rupee

depreciates than the exports will increase, for example May-08 to Aug-08 all the

currencies appreciated against Indian Rupee and so the increase in export has taken

place. Hence the affect on the Leather Industry is that a slight appreciation of the

Indian currency the purchasing power of the foreign countries will decline and cause

a reduction in exports. If the Indian Rupee depreciates than the purchasing power of

the foreign countries will increase causing increase in imports. Hence we have found

that the currency fluctuation effects export and import.

Now looking at the analysis carried out with the Theory of Purchasing Power Parity,

where we find the real exchange rate by extracting the inflation and check how much

the deviation is from the Purchasing Power Parity. If the Indian rupee decline less

than the inflation than this causes a decline in competitiveness of the Indian

Industries trading in the international market as the real exchange rate will be greater

than unity. The competitiveness of the firms against U. S. Dollar was not at high

decline, but which has increased much higher from Dec 08 to Jun-10 that has

deteriorated the competitiveness of the Indian industry international trade. The Euro

has been continuously hovering around 0.96 to 1.08 but in the recent period from Nov

09 the competitiveness of the Indian Industry has decline which affects the

purchasing power of the foreign countries. The British pound also had continuous

hovering around 0.973 to 0.093 from Jan-00 to Oct-08. The competitiveness of the

Industry has decline much higher from Sep-09 to May-10 and also an improvement in

Jun-10 against British Pound.



In current year 2010 the Indian Rupee has appreciated against these major

currencies with Euro by 10.6%, GBP by 7.5% and USD by 5.6% and even the

competitiveness of the Industry has depreciated against all the major countries. There

has been a slight improvement against the British pound and Euro. However It has

been noted that the inflation of the developing countries is always at a high rate. In

the recent months the competitiveness of India has depreciated against all the major

currencies. This will affect the purchasing power of the foreign countries which will

decrease export and affect the trade balance which in turn will affect the GDP of the

country.

The export and import of the Leather Industry is affected due the exchange rate

fluctuation. If Indian Rupee depreciates it will increase in the purchasing power and

simultaneously increase in export and it will cause a vise versa effect when the Indian

Rupee appreciates, which will give a rise to Imports. The impact on import is low due

to large availability of raw materials domestically but the effect is high on exports is

much high due reduction in sale of goods. Thus the currency fluctuation affects

occurs for a short period and will come to a balance due to the demand and supply of

currency and the market conditions. These are the economic exposure which affects

the Industry that are not within the control but can use some measures to prevent

from these exposures.



5. Conclusions and Recommendations

5.0 Conclusions The exchange rate variation has affected different industries in the recent past, which

had occurred due the Financial Crises of December 2007 which devalued the dollar

against the Rupee. The recent Euro crises have affected the exporting firms and as

per the recent scenario due to devaluation of the Euro against the Indian Rupee have

affected the leather firms. The leather firms that are dealing in import and export have

faced an adverse effect of currency fluctuation in the past few months as the Rupee

appreciated against the Euro at a very high rate. The devaluation of Euro had

reduced the purchasing power of the European Nations and had affected the sales of

the leather industry. The customers of the Euro Nations had requested some

companies to hold back the shipment, in another case the customers refused to

accept the immediate delivery. Hence the Indian leather firms had to rent a temporary

store to stock the shipment. The leather firms had been worried as 75 % the leather

export is to the European nations and the firms could not absorb the currency

fluctuation. The leather industry had been doing well till the recession but still the

growth has been positive. The appreciation of the rupee has affected the profit

margins of the leather firms and this affect might initiate them to shut down the firm.

The nominal exchange rate variation affects the purchasing power of the foreign

companies. It has been seen in the analysis that the currencies used in my analysis

had been appreciating from the year 2001 to 2005 and later depreciated in 2008 due

to the Financial Crises problem. The Financial Crises the U.S Dollar was devalued

that caused problem for most of the companies had been affected in their export and

also the leather industry. Again in 2009, the evaluation of major currencies had seen

a depreciation of Rupee that gave a rise to the purchasing power of foreign countries.

In the recent past the Rupee appreciated against the major currencies with a high

appreciation against the Euro, which has affected the leather small and cottage firms.

The purchasing power of the European Nations had decreased due to the high

depreciation of Euro which affected the Leather industry in India.



The Real Exchange rate evaluation has seen that in the past the real exchange

deviation against the Dollar, Euro and Pound had not been very high which can be

noticed in the evaluation of each currency Purchasing Power Parity figures. Hence,

the real exchange rate did not affect largely the competitiveness of the Indian

Industries in the past. The deviation in recent past was very high against the major

leather importing countries, which had reduced the purchasing power of the foreign

countries and deteriorated the competitiveness of the Indian Industries. Now it has

seen a slight improvement in the competitiveness of the Indian Industries as the

Rupee has been seen depreciating against the major currencies. The actual real

exchange deviation of the Dollar did not see high fluctuation from the expected real

exchange rate deviation. The actual real exchange rate deviation against Euro and

Pound has been fluctuating continuously and hardly in line with the expected

exchange rate. The competitiveness of the leather industry has been affected due to

the appreciation of the rupee that has deteriorated the competitiveness of the leather

industry and currently has noticed slight improvement from the evaluation carried out

by the Purchasing Power Parity Theory.

The export had been affected when the rupee had appreciated against the other

currencies which reduced the purchasing power of the Euro nations and caused a

reduction in the competitiveness of the leather industry. The imports are affected

when the rupee depreciates against other countries the firms that are been sourcing

raw material. The leather industry raw material is available locally due to high live

stock availability for example Sheep, Cattle and Goats and hence very low imports of

raw materials are required for the production of leather goods. In recent times the

exporters had been worried due to the appreciation of the Rupee which reduced the

exports to the European Nations as they had been delaying in placing the orders and

some companies even kept on hold the dispatch of the consignment. The reduction in

the exports will affect the competitiveness of the leather industry and even the

economy.

In the past the Indian Industries had not been affected due to the currency fluctuation

as Reserve Bank of India managed currency fluctuation by regular intervention and



policies. The Rupee had been stable and industries in India did not find it is

necessary to make use of the available measures to prevent from the risk of currency

fluctuation. The leather firms are not financially strong due to low profit margin, as the

industry is made up of small and cottage firms. The firms were largely affected due to

the devaluation of Rupee against the Euro that reduced sales, as well as the

competitiveness of the industry with other countries. The leather firms can make use

of the exchange traded derivative like currency futures and Currency Options. In

currency futures they have the obligation that they have to execute the futures

contract but the options contract which has been recently introduced has no

obligation to execute the contract. Hence I could say that the option contract will be of

benefit to the leather firms to protect from the currency fluctuation.

In concluding I would like to say that the leather industry is highly dependent on

exports and orders from foreign buyers and the customers prefer to be quoted in their

own currency. The current Rupee appreciation caused a problem for the exporters to

negotiate with huge buyers and reduction of orders for the European Union nations.

This could also cause problems for the people employed without contract in the

leather Industry as these employees will lose their job when firms are affected in thir

exports. The reduction in export also reduced the profit margin as well as working

capital. This will lead the exporters into a vicious cycle of low productivity and affect

the competitiveness the leather industry. Hence suitable measures should be taken to

mitigate the risk of currency fluctuation.

5.1 Recommendations In the past the Indian Rupee was stable against the dollar due to the policy and

intervention of Reserve Bank of India (RBI). The leather product manufacturing small

and cottage firms therefore did not consider contingency measures for the impact of

economic exposure, by making use of hedging technique to mitigate the risk of

currency fluctuation. In the impact of currency fluctuation, special attention has been

given to the economic exposure of exchange rate variations that affects imports and

export of the leather industry. The exchange rate will affect the firm’s net revenues if

receivables are in foreign currency, which will affect the profit margin of the firm and



the value of the organizations. Hedging Options (2010) divulge that exporters will

have to analyze the exchange rate risk and check if the currency loss can be passed

to customers by increase in the prices. The firm involved in exporting must negotiate

the clauses with customers of foreign countries for the price variance due to

exchange rate fluctuation, when confirming a deal.

The steps of how to manage the economic exposure of exchange rate variation are

provided by SivaKumar and Sarkar (2010) as follows: Firstly the leather firm has to

identify the economic exposure, which affects the competitiveness of the firm. The

leather firm will have to forecast and monitor the market trends and the direction of

the exchange rates. According to the forecast the leather firms must measure the

value at risk and then set the measures to handle the foreign exchange exposure.

The leather firm has to decide right strategy with a long term perspective to mitigate

the exposure, which affects the competitiveness and the value of the leather firm.

Therefore, the exporting firms need to have a smart strategy to mitigate the risk of

currency volatility.

Indaheng (2010) says that the importing and exporting firms can make use of

derivative as a hedging strategy. A derivative is a financial instrument whose value

depends on another basic underlying security. The currency hedge is carried out by

buying and selling foreign currency with the amount of revenue receivable and

payable in foreign currency. The exchange traded securities that have been permitted

by Securities and Exchange Board of India, are the currency futures contract in 2008

and in recent past currency options contract is introduced, which has been mentioned

by Khanna R. (2010).

In Madura (2003) conveys that the firms that desire to hedge transaction exposure

can make use of futures contract. The contract is standardized contract with

standardized delivery date and initiated at a small security deposit. The futures

contract is traded on the exchange and is similar to forward that allows the customer

to lock the exchange rate for specific price, for a stated future date. The Leather SME

can make use of futures contract as they are used for hedging smaller amounts and

are secured. The leather exporters can hedge the future foreign currency receivables



in the home currency, by selling the currency futures contract and locking the

exchange rate for the expected receipt of revenue. The importing leather firms can

buy the foreign currency futures contract, in which the firm will be entitled to receive

specific amount at a future stated date, for a specific currency and specific price. In

this way, the firm locks the amount of payment to be made in foreign currency.

The currency option gives the owner the right to buy and sell currencies, for agreed

price on or before the specific date. The option gives the holder the right but has no

obligation to buy or sell foreign currencies at the specified price. The put option gives

the right to sell a specific security and is used if there are receipts in foreign currency.

If the currency spot rate is above the present spot rate, than the firm is not obliged to

use the option and hence sell the currency at the spot price. The call option gives the

right to buy specific asset and is used if there are payment to be made in foreign

currency. If the spot rate remains lower than the option price throughout the life of the

option than the owner has to flexibility, not to exercise the option and buy at the

present price.

The over the counter techniques used for hedging are Currency Forward contract and

Currency Swap. The currency forward contract is an agreement between two parties

for a financial transaction for a pre-determined price and date in future. The forward

price may differ according to contract of the maturity. The forward contract is self

regulating and flexible as agreed by the parties. The forward contract can be of risk

since it is not exchange traded as any of the party might default.

The Currency Swap is where one party pays principle amount in one currency and

the other party pays principle amount in another currency with the exchange of cash

flow for periodic settlement date, for certain period of time. At the initial stage no need

of payment and carried out over the counter. The currency swap is similar to forward

contract, that is difficult to find counter party and subject to default risk from

counterparty.

Hence leather exporting firms can take advantage of the above derivatives to hedge

the foreign exchange risk as per a suitable strategy. The derivatives traded on



exchange does not have counter party risk of default and are highly liquid, whereas

securities traded over the counter implies a counter party risk and difficult to find a

party, which will force the customer to sell at a lower price. The newly introduced

options contract would be better for the leather industry or the firms have to make use

of the above steps to determine the economic exposure that affects the

competitiveness and use suitable hedging techniques to mitigate the risk.



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7. Appendix

7.0 US Dollar Deviation in PPP





7.1 Euro Deviation in Exchange rate





7.2 GBP Deviation in PPP



Documents

Impact of Currency Fluctuation on Leather Industry in India