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  • The Management of Foreign Exchange Risk Exposure in the Process of Shifting to a Floating Exchange Rate in Russia

Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Arsenij Nikul`shin
The Management of Foreign Exchange Risk Exposure in the Process of Shifting to a Floating Exchange Rate in Russia
Bachelor’s programme
2014
It is known that the Central bank of Russian Federation announced its moving to targeting the inflation rate and its shifting to the floating exchange rate regime. It plans a slow reduction of the Central bank interventions and shifting to the floating exchange rate regime by the year 2015.This decision will change the Central bank behavior on the currency market radically. That can lead to the increase of exchange rate volatility and, as a consequence, to the increase of currency risks.That is why the management of foreign exchange risk exposure is so important for numerous closely related international companies. In addition, possible changes will highly influence Russian population. Highly leveraged import commodities in Russian pattern of consumption means a strong dependence of the quantity consumed on the exchange rate.The aim of this paper is to determine possible consequences of moving to the floating exchange rate regime and to overview principal methods of the management of foreign exchange risk exposure.The paper is organized as follows. The first part of the research describes possible exchange rate regimes; the second part provides regression model based exchange rate projection; the third part examines the influence of the crisis of 2008 on the Russian market and on the exchange rate; the fourth part presents the analysis of possible consequences in the process of shifting to a floating exchange rate regime in Russia; and the last part is devoted to the possible ways of management of foreign exchange risks and to the hedging of these risks in Russia.With the help of regression model and official forecasts the author determined possible consequences of shifting to a floating exchange rate regime: the ruble devaluation and the increase of the exchange rate volatility. In addition, the own forecast of the ruble to dollar exchange rate was constructed: 37,01 rubles by the end of 2014.The increase of the exchange rate volatility may lead to numerous problems, dealing with the uncertainty and the complicacy of the cash flow analysis. Well-developed derivatives market could solve this problems, however derivative instruments is Russia are not developed. That is why shifting to the floating exchange rate seems unprepared.

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