Hedging Currency Risk At Tt Textiles Harvard Case Solution & Analysis

Nature of the Currency Exposure on TT Textile

The company which had expanded their business and are dealing internationally are faced with significant currency exposure, such as in the case the TT textile is faced with the currency exposure. The company revenues were mainly generated from exports by 75% and 25% was generated locally. While selling the products through exports, the clients usually paid in foreign currency which caused the currency exposure to increase. This meant that the 75% of its revenues would be coming from exports which is taking place in 30 different countries. In addition, exposition of $25 million could be made at any time in the company as sales is taking place in country other than India.

Company have to receive a significant amount of money in United States currency. Therefore, exposure of currency is very important. However, the payment had to be made in Indian rupees, which increased the level of currency exposure. As the cash flows could be offset if dealing would be made in same currency. Moreover, it hasbeen analyzed that profitability of textile industry has been squeezing as it had been reduced by almost 50%

The TT Company is experiencing less effect of currency exposures due to its increasing sales at that time period. However, in the present situation, the currency exposure could be dangerous to the company as it will high positively or negatively effect on the company’s profitability. Moreover, it has also been analyzed that people were not using highly risky financial instruments. As a result, the risk was stable and minimal. Comparing it to the recent times, the use of financial instruments have been increased which have consequently increased the risk of currency exposures.
Hedging Currency Risk At Tt Textiles Harvard Case Solution & Analysis

Other than currency exposure, the company is also facing threat as there is significant decrease in the value of CHF, therefore, the company’s management is using hedging instrument in order to hedge their risk. Under this agreement, the hedging is taking place between two currencies which are USD and CHF, which will further effect the currency exposure of USD as well as CHF.

Analysis of Financial Instruments

It has been organized that swap would become effective from 19 October 2006 and will be ending on 15 October 2009. This instrument has been used by the company in order to reduce the risk of currency exposure. However, the currency swaps have been very different from traditional swaps, therefore, the total notional principle was INR 225 million while that is equivalent to $4,965,791.22 and in CHF t the notional principle is CHF 6,306,554.84.

While considering payments, there is no principal to be paid in the beginning of agreement. Moreover, the interest is to be paid semiannually of 1.77%, which would be based on the notionalprinciple paid in INR. Total interest payment would be calculated to four million per year and twelve million in full agreement life.

It can be seen that hedging instrument would facilitate profits and loss to both parties. If the CHF/USD goes below to 1.04, the TT Textile will have to pay on the basis of spot rate prevailing at the spot rate at that time, if the CHF/USD goes below to 1.04, TT Textile would have to pay INR 41.4 million more than the expected payments which can have very adverse implications on the profitability of TT Textile......................

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