A study on Risk Mitigation tools of SMES on Foreign exchange transaction exposure

Abstract

newlineSmall and Medium Enterprises (SMEs) are the lifeblood of the global economy and play a major role in most economies, particularly in developing countries. The importance of SMEs in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. Although often overshadowed by enterprise counterparts, in reality SMEs are responsible for a large proportion of new jobs in countries around the world and are at the core of competitiveness and innovation. SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included. According to the estimates, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create 7 out of 10 jobs (World Bank). newlineSMEs involved in export business always attract foreign currency and involves currency conversion. This can be done through FX market. Also RBI had changed its Exchange rate system from Fixed to Floating. In the Floating Rate Regime, the exchange rates will vary from second to second based on the demand and supply of currency and difficult for the SMEs to track the movement of the market. Also to mount up, foreign exchange market is influenced more by international factors rather than domestic reasons, high volatility can be envisaged in the exchange rates. This market is too complex in nature due to its different timing zone, electronic mode of operation, volume of turnover, number of currencies traded in the market, preciseness of the quotes and other technicalities. FX market is more volatile with more unexpected movements due to international events like Corona af