PROJECT REPORT HEDGING STRATEGIES FOR GARMENT EXPORTERS SUBMITTED TO : PROFESSOR HARKIRAT SINGH SUBMITTED BY : BKC-MUMBAI GROUP Waris S Imam – Roll No. 47 Tanmay Shah – Roll No. 40 Nilesh Mashru – Roll No. 28 Kedar Marathe – Roll No. 21 Joshil A K – Roll No. 18 Anurag Nagaria – Roll No. 12 Anil Agrawal – Roll No. 09
Transcript
1. PROJECT REPORTHEDGING STRATEGIES FOR GARMENT
EXPORTERSSUBMITTED TO: PROFESSOR HARKIRAT SINGHSUBMITTED
BY:BKC-MUMBAI GROUP Waris S Imam Roll No. 47 Tanmay Shah Roll No.
40 Nilesh Mashru Roll No. 28 Kedar Marathe Roll No. 21 Joshil A K
Roll No. 18 Anurag Nagaria Roll No. 12 Anil Agrawal Roll No.
09
2. INDEX1. OVERVIEW OF THE INDIAN TEXTILE INDUSTRY2. CURRENCY
FLUCTUATIONS & RISKS ASSOCIATED3. RISK MANAGEMENT
ALTERNATIVES4. CASE OF THE GARMENT EXPORTER5. HEDGING STRATEGIES
PROCESS, EVALUATION & IMPLEMENTATION6. IMPACT OF HEDGING
STRATEGIES ON HIS BUSINESS7. CONCLUSION AND SUGGESTIONS
3. 1] OVERVIEW OF THE INDIAN TEXTILE INDUSTRY1.1
Background:Indian textile industry is one of the leading textile
industries in the world. The industry has gonethrough a robust
transformation post the liberalization of the economy in 1991 which
gave themuch needed thrust to this industry. Indian textile
industry largely depends on themanufacturing and exports. Textile
exports contribute a major portion of Indias exports.Some figures:
Earns 27% to Indias total foreign exchange Contributes 14% to
Indias total industrial production Contributes 3% to Indias GDP
Largest employment generator for India estimated to be
approximately 35 million peopleSegments of Indian Textile Industry:
Cotton Textiles Silk Textiles Woolen Textiles Readymade Garments
Hand-crafted Textiles Jute & Coir
4. 1.2 Current Scenario:1.3 Technical Textile Segment:This is a
very critical contributor to the India textile industry. The
working committee for the11th 5 year plan has estimated its market
size to be US$ 10.6 Billion in 2011-12 without anyregulatory
framework and US$ 15.16 Billion with regulatory framework. The
scheme for growth& development of technical textiles aims to
promote indigenous manufacture of technicaltextile to leverage
global opportunities and cater to the domestic demand.Further the
govt is set to launch US$ 44.21 Million mission for promotion of
technical textileswhile the finance ministry has cleared up setting
up of 4 new research centres for the industry,which include
products like mosquito and fishing nets, shoe laces and medical
gloves. Theglobal technical industry is estimated at US$ 127
billion and the same in India is pegged at US$11 Billion.
5. 1.4 Major Players in the Indian textile Industry: Welspun
India Ltd Vardhman Group Alok Industries Ltd Raymond Ltd Arvind
Mills Ltd Bombay Dyeing & Manufacturing Company Ltd Garden Silk
Mills Ltd Mafatlal Industries Ltd Aditya Birla Nuvo ITC Lifestyle
Reliance Industries Ltd1.5 Government Initiatives & Regulatory
Framework:The GOI has implemented various export promotion policies
for the textile Industry in the unionbudget 2011-12 and the foreign
trade policy 2009-14. This also includes various incentivesunder
focus market scheme and focus product schemes.Below is a gist of
various schemes by the GOI for promotion of this industry:FDI: 100%
FDI allowed in textiles under the automatic route thereby promoting
thedevelopment of the industry and capital inflow in the
country.Welfare Schemes: 161.10 million weavers and ancillary
workers offered health insurance &life insurance under the
handloom weavers comprehensive welfare scheme and 7.33 lacsartisans
provided health coverage under the Rajiv Gandhi Shilpi Swasthya
Bima YojnaE-marketing: The central cottage industries corporation
of India (CCIC) and the handicrafts&handlooms export council of
India (HHEC) have developed various emarketing platformsto simplify
marketing issues.Skill development: The integrated skill
development scheme offers training assistance tothe workers for
enhancement of skills. All 3 sub sectors of the textile industry
viz: Textiles &Apparels, Handicrafts and Jute &
Sericulture.Credit linkages: As per the credit guarantee program,
over 25000 artisan credit cards havebeen supplied to various
artisans and 16.50 million additional applications for issuing
upcredit cards are under consideration.Financial package for waiver
of overdues: The GOI has announced a package of US $ 604.56Million
to waive off overdue loans in the handloom sector.Other
regulations: Government has also levied regulations to prohibit
child labour. Alsogovernment has brought in regulations for better
wages and compensation to workers whodevelop respiratory diseases
due to paint pigments used for dying of the fabrics and
yarns.Textile Parks: The GOI has approved 40 new textile parks to
be set up and this would beexecuted over a period of 36 months.
Thereby leveraging further employment in thisindustry.Recent
developments: Along with the increasing export figures in the
Indian apparel sectorin the country, Bangladesh is planning to set
up two special economic zones for attractingIndian companies in
view of the duty free trade between the two countries. The 2 SEZs
are
6. expected to come up on 100-acres plot of land in Kishoreganj
& Chattak in Bangladesh. Italian luxury major Canali has
entered into a 51:49 joint venture with Genesis luxury fashion
which currently has distribution rights of Canali-branded products
in India. The company will now sell Canali branded products in
India exclusively.1.6 Policy & regulatory Framework:The
ministry of textiles which is responsible for policy formulation,
planning, development,export promotion and trade regulation in the
textile sector. Various policies viz National TextilePolicy 2000,
Technology mission on Cotton (TMC) 2000, National Jute policy 2005,
Jutetechnology Mission (JTM) 2006, Mega cluster schemes laid its
emphasis and focus on:Technological upgradesEnhancement of
productivityQuality consciousness & Strengthening of raw
material baseProduct diversification, Increase in exports and
innovative marketing strategiesFinancing arrangementsIncreasing
employment opportunities & Integrated human resource
development1.7 Investments & Opportunities:Investments: The
industry attracted FDI worth US $ 934.04 million between April 2000
andJanuary 2011. FDI in the textile industry stood at USD 129
Million in FY11.Opportunities: The potential size of the Indian
textiles industry is expected to reach US $ 220billion by
2020.Private sector participation in Silk production, demand for
technical textiles, growth in the retailsector, establishment of
Centres of excellence for research & technical training etc
haveboosted the opportunities in the textile industry.Typical Value
Chain of the textile Industry
7. 2] CURRENCY FLUCTUATIONS & RISKS ASSOCIATED2.1 Risk In
GeneralRisk is defined as the potential that a chosen action or
activity will lead to a loss or anundesirable outcome. To simplify,
it is a potential loss or less than expected returns. It is
thechance that an investments actual return will be different than
expected or required. Differentversions of risk are usually
measured calculating the standard deviation of the historical
returnsor average returns of a specific investment. A high standard
deviation indicates a high degree ofrisk.A fundamental idea in
finance is the relationship between risk and return. The greater
theamount of risk that an investor is willing to take on, the
greater the potential return. The reasonfor this is that investors
need to be compensated for taking on additional risk.This is why
increasing number of companies are allocating large amount of time
and money indeveloping risk management strategies to help manage
risks associated with business andinvestment dealings.Risk
management is a process of identification, analysis and either
acceptance or mitigation ofuncertainty associated in decision
making. Simply put, risk management is basically a 2 stepprocess
determination of risks associated with an investment or a decision
and handling thoserisks in a way best suited to the investment or
decision objectives.However, a broad framework with risk management
is as given below:Risk and return go hand in hand. While the level
of risk increases with increasing expectationsin the returns
required, there are certain risks which are associated with current
level ofbusiness and the concern is not necessarily about the
increase in the return or a potential lossbut to safeguard or be
sure of the current business situation.One such risk associated
with the international business is the risk associated with the
currencyfluctuations. Such risks usually affect the business in
various ways and impact the costs/revenue/ expenditure and
eventually performance of any company/ organization involved
withinternational business.
8. 2.2 Currency Fluctuations Rupee vs USD/ Euro Source:
Midmarket rates as per Xe.comAbove graphs are clear indications of
the currency fluctuations in past 12 months which wouldhave its
impact not only on the countrys BOP and trade performance but also
oncompetitiveness and profitability of the firms/ companies
involved in international business.USA and Europe being the major
export markets for the Indian textile industry and the
industryitself being a major contributor to the countrys exports,
there is growing significance forcurrency risk management in this
industry. While large size exporting companies havededicated risk
management team, small exporters also have initiated the same to
mitigate therisks associated with currency fluctuations.
9. 2.3 Risks associated with Currency FluctuationsAlthough
exchange rates cannot be forecasted with perfect accuracy, firms
can at leastmeasure their exposure to exchange rate fluctuations.
Technically speaking, there are 3 kinds ofrisks associated with
currency fluctuations which can affect a firms value: Translation
Exposure Transaction Exposure Operational Exposure Moment in time
when exchange rate changesTranslation Exposure Operating Exposure
Changes in reported owners equity Changes in expected future cash
in consolidated financial flows arising from an
unexpectedstatements caused by a change in change in exchange
ratesexchange rates Transaction Exposure Impact of settling
outstanding obligations entered into before change in exchangerates
but to be settled after change in exchange rates Time weeeExample:A
Taiwanese company has the following USD exposures: 1. Owns a
factory in Texas worth US$5 million. 2. Agreement to buy goods
worth US$2 million. 3. Biggest competitor is a US company.What
happens if the NT dollar appreciates? 1. NT$ value of US factory
goes down (translation exposure). 2. NT$ cost of buying goods goes
down (transaction exposure). 3. Global competitiveness of Taiwanese
company decreases (operating exposure).
10. Translation Exposure: The exposure of an MNCs consolidated
financial statements to exchangerate fluctuations is known as
translation exposure. In particular, subsidiary earnings
translatedinto the reporting currency on the consolidated income
statement are subject to changingexchange rates.From a cash flow
perspective: The translation of financial statements for
consolidated reportingpurposes does not by itself affect an MNCs
cash flows.However, a weak spot rate today may result in a weak
exchange rate forecast (and hence aweak expected cash flow) for the
point in the future when subsidiary earnings are to beremitted.From
a stock price perspective: Since an MNCs translation exposure
affects its consolidatedearnings and many investors tend to use
earnings when valuing firms, the MNCs valuation maybe affected.An
MNCs degree of translation exposure is dependent on:The proportion
of its business conducted by foreign subsidiaries,The locations of
its foreign subsidiaries, andThe accounting methods that it
uses.Transaction exposure: The degree to which the value of future
cash transactions can beaffected by exchange rate fluctuations is
referred to as transaction exposure. Transactionexposure measures
changes in the value of outstanding financial obligations incurred
prior to achange in exchange rates but not due to be settled until
after the exchange rates change. Thus,this type of exposure deals
with changes in cash flows that result from existing
contractualobligations.Transaction exposure arises from:Purchasing
or selling on credit goods or services whose prices are stated
inforeign currencies.Borrowing or lending funds when repayment is
to be made in a foreign currency.Being a party to an unperformed
foreign exchange forward contract.Otherwise acquiring assets or
incurring liabilities denominated in foreign currencies.Transaction
exposure is usually measured by estimating the net cash inflows or
outflows ineach currency, and then the potential impact of the
exposure to those currencies. Variousmethods like the standard
deviation, correlation coefficients or the value-at-risk methods
areused for assessing the transaction exposure.Operational
Exposure: Operating exposure, also called economic exposure,
competitiveexposure, and even strategic exposure on occasion,
measures any change in the present valueof a firm resulting from
changes in future operating cash flows caused by an unexpected
changein exchange rates.Measuring the operating exposure of a firm
requires forecasting and analyzing all the firmsfuture individual
transaction exposures together with the future exposures of all the
firmscompetitors and potential competitors worldwide. Operating
exposure is far more importantfor the long-run health of a business
than changes caused by transaction or accountingexposure. Operating
exposure is inevitably subjective, because it depends on estimates
offuture cash flow changes over an arbitrary time horizon. Planning
for operating exposure is a
11. total management responsibility because it depends on the
interaction of strategies in finance,marketing, purchasing, and
production.An expected change in foreign exchange rates is not
included in the definition of operatingexposure, because both
management and investors should have factored this information
intotheir evaluation of anticipated operating results and market
value.From an investors perspective, if the foreign exchange market
is efficient, information aboutexpected changes in exchange rates
should be reflected in a firms market value.Only unexpected changes
in exchange rates, or an inefficient foreign exchange market,
shouldcause market value to change.Operating exposure is usually
measured using audit/ scenarios analysis or statistical approachand
is managed through various means like pass through the costs to
customers, use ofmarketing strategies and use of production
management. Financial hedging techniques mayalso be used.Day to day
currency risk management is mostly related to the transaction
exposure or riskinvolved on account of currency fluctuation.An
effective tool of currency risk management to mitigate/ manage the
transaction exposure isHEDGING.
12. 3] RISK MANAGEMENT ALTERNATIVES HEDGING3.1 Risk
managementThere are various kinds of risks which a company has to
encounter. We must remember thatforeign currency risk management is
only a small part of the companys overall riskmanagement
process.Below figure illustrates various risks as a part of a
corporate risk management process:Risk management has to be taken
seriously and a modern risk management program issustained over a
period of time with these objectives: Raising the awareness level
of key risks in the business (risk exposure reporting) Proactively
mitigating significant risks so as not to exceed senior managements
defined worst case (risk tolerance level) Incorporating risk
management into capital allocation decisions (risk-adjusted
returns) Strong controls and meaningful reporting to senior
management (governance) Hedging should stabilize earnings and
modify the risk profile of a company.Given below figures to
illustrate the above:
13. Objectives Of Risk ManagementHedging to stabilize cash
flowsThe major aim of currency risk management via Hedging tools is
to determine the appropriatemismatch or imbalance between maturing
foreign assets and liabilities given certain basicinformation such
as current & expected exchange rates, interest rates (both
locally & abroad)and the risk return profile acceptable to a
companys management.
14. 3.2 HedgingHedging is the taking of a position, either
acquiring a cash flow or an asset or a contract(including a forward
contract) that will rise (fall) in value to offset a fall (rise) in
value of anexisting position.Hedging, therefore, protects the owner
of the existing asset from loss (but it also eliminates anygain
resulting from changes in exchange rates on the value of the
exposure).Hedging is an effective tool for currency risk management
and helps reduce the variability ofexpected cash flows about the
mean of the distribution. This reduction of distribution varianceis
a reduction of risk.Whether this reduction of variability in cash
flows then sufficient reason for currency riskmanagement is a
continuing debate in financial management and corporate finance and
thereare several schools of thought to the same.Opponents of
currency hedging commonly make the following arguments:
Stockholders are much more capable of diversifying currency risk
than the management of the firm. Currency risk management does not
add value to the firm and it incurs costs. Hedging might benefit
corporate management more than shareholders.Proponents of currency
hedging cite: Reduction in risk in future cash flows improves the
planning capability of the firm. Reduction of risk in future cash
flows reduces the likelihood that the firms cash flows will fall
below a necessary minimum (the point of financial distress).
Management has a comparative advantage over the individual
shareholder in knowing the actual currency risk of the firm.
Individuals and corporations do not have same access to hedging
instruments or same cost.
15. Hedging of currency in itself is a process and undergoes a
step by step approach in its successfulimplementation. A typical
hedging process can be illustrated in the figure below.As mentioned
earlier, day to day currency risk management is mostly related to
the transactionexposure or risk involved on account of currency
fluctuation.Transaction exposure can be managed by contractual,
operating and financial hedges: Contractual Hedges include -
Forward, Future, Options and Money Market hedges Operating and
Financial Hedges include - Risk-Sharing Agreements, Leads and Lags
in Payment Terms, Swaps and Other StrategiesContractual
hedges:Forward contracts: A forward contract is an agreement
between a firm and a commercial bankto exchange a specified amount
of a currency at a specified exchange rate (called the forwardrate)
on a specified date in the future.There are two types of forward
contracts: Deliverable and non-deliverable forwards (NDF).
Aderivable forward will be exchanged into the spot currency at the
expiry of the forward. An NDFis handy when you need to hedge
currency exposures from countries that have foreignexchange control
where access to the local forward markets are restricted to
domesticcompanies only. A NDF, unlike the deliverable contracts,
only settles the difference betweenthe onshore official fixing and
the NDF rates at contract maturity date. Customer either pays tothe
Bank or receives from the Bank the difference depending on the
onshore official fixing at
16. contract maturity. The customer could then buy/sell the
same currency in the onshore marketto fulfill the physical currency
requirement. Effectively, the customer is buying/selling theonshore
currency at the offshore NDF contract rate.Future contracts:
Currency futures contracts specify a standard volume of a
particular currencyto be exchanged on a specific settlement
date.They are used by MNCs to hedge their currency positions, and
by speculators who hope tocapitalize on their expectations of
exchange rate movements.The contracts can be traded by firms or
individuals through brokers on the trading floor of anexchange
(e.g. Chicago Mercantile Exchange), automated trading systems (e.g.
GLOBEX), or theover-the-counter market.Brokers who fulfill orders
to buy or sell futures contracts typically charge a
commission.Enforced by potential arbitrage activities, the prices
of currency futures are closely related totheir corresponding
forward rates and spot rates.Currency futures contracts are
guaranteed by the exchange clearinghouse, which in turnminimizes
its own credit risk by imposing margin requirements on those market
participantswho take a position.MNCs may purchase currency futures
to hedge their foreign currency payables, or sell currencyfutures
to hedge their receivables.Currency Options: Currency options
provide the right to purchase or sell currencies at
specifiedprices. They are classified as calls or puts. Standardized
options are traded on exchangesthrough brokers. Customized options
offered by brokerage firms and commercial banks aretraded in the
over-the-counter market.A currency call option grants the holder
the right to buy a specific currency at a specific price(called the
exercise or strike price) within a specific period of time.A call
option isin the money if exchange rate > strike price,at the
money if exchange rate = strike price,out of the money if exchange
rate < strike price.Firms may purchase currency call options to
hedge payables, project bidding, or target bidding.A currency put
option grants the holder the right to sell a specific currency at a
specific price(the strike price) within a specific period of time.A
put option isin the money if exchange rate < strike price,at the
money if exchange rate = strike price,out of the money if exchange
rate > strike price.Options are handy toHedge against adverse
exchange rates movement but you do not want to miss thepotential
gain if the future currency movement is in your favor.Have the
right to deal but not the obligation to deal. Options are combined
intostructures that give specific payoff profiles and
exposures.
17. Contingency Graphs for Currency OptionsFor Buyer of Put
OptionFor Seller of Put Option Strike price = $1.50 Strike price =
$1.50 Premium= $ .03 Premium= $ .03Net Profit Net Profitper Unit
per Unit +$.04+$.04 Future +$.02Spot+$.02Rate00 $1.46 $1.50
$1.54$1.46 $1.50 $1.54 $.02 $.02 Future Spot $.04 $.04RateMoney
Market hedge: This is taking a money market position to hedge
future receivables/payables. This usually is done in following
steps: borrow foreign currency to be received convert to domestic
currency invest for future useOperational hedges: Risk shifting
& risk sharing Leading & Lagging Leading (accelerate timing
of depreciating currency) Lagging (delay timing of appreciating
currency) Exposure Netting Cross-Hedging Currency Diversification
Use of marketing strategies Use of product management Transferring
the risk to the buyers
18. 4] CASE OF THE GARMENT EXPORT M/S MAHALAXMI TEXTILES
(INDIA)About the company: Mahalaxmi Textiles is a textile
manufacturer established in 1985 &exporter based out of Worli,
Mumbai. The company is into the export of all kinds of
garmentsmajorly to USA and Europe markets and has a turnover of INR
100 crores.Their vision: To become world leaders in innovation
& consolidation with a potential toproduce and market quality
oriented customer products.Their mission: To endure our brands with
integrity and solidity by consistently manufacturing &supplying
our branded consumer products through well organized business
channel across theglobe.Core products: Mens & Womens fashion
wearCore competencies: Developing new items as per specifications
of overseas buyers Use of latest technology and manufacturing
techniques Strong focus on quality and 20 years of experience in
exports market OEM suppliers to international brandsThis company
has been into exports for over 20 years and their major markets
have been USAand Europe. Their typical sales include the
merchandise meant for fashion industry and thevalue chain cycle
time from production to consumption is approximately 8 to 12
months. Hencein June 2012 they would manufacture merchandise meant
for the expected fashion trend &demand for Winter 2013. An
illustrative interpretation of the cycle time in the typical
valuechain shared earlier could be as below:8 to 12months
cycle
19. 5] HEDGING STRATEGIES PROCESS, EVALUATION &
IMPLEMENTATION5.1 Current Hedging strategyMahalaxmi group have been
into the exports business for the past 20 years and are workingwith
their bankers (Citibank) for as many years. This has enabled them
to enjoy high bargainingpower over their bankers with respect to
interest rates/ exchange rates and other services.The company
follows a typical 4 step hedging process as illustrated below:
Identifying exposures: With the growing currency fluctuations in US
dollars and Euro, and the company being 100% export oriented, the
complete business revenue of the company is exposed to currency
fluctuations risk. While the rupee has been stable against Euro, it
has been volatile against the US dollar although recent trends have
seen rupee depreciating against the same. Formulate hedging
strategy: Mahalaxmi group works on a cost plus model and all its
procurement and manufacturing costs are in INR. At the time of
executing a contract in foreign currency i.e. an export, the costs
in INR are converted to the denomination of foreign currency to
arrive at expected costs of that contract in foreign currency and
includes finance cost for 6 months considering the payment cycle.
Margin is then added over this cost in foreign currency to arrive
at selling price. To cover the risks hence Mahalaxmi group signs a
forward contract with their bank and the future rate available to
them is Rs. 1.20 higher than the spot rate on the date of executing
such a contract for a period of 12 months. Hence if the spot rate
is Rs. 53 against 1 US $, the forward rate would be Rs. 54.20
thereby improving the price realization of the exporter at the time
of maturity. Execute hedging strategy: Mahalaxmi group regularly
signs forward contracts with their bankers for a period of 12
months.
20. Monitor performance & adjust: Mahalaxmi group regularly
keeps pace with overseas market. However since they use forward
contracts only to hedge against the currency risks, there is little
need for adjustments in the hedging strategies.5.2 Impact of
hedging strategies on businessMahalaxmi group uses hedging
strategies with an objective of risk managing and not with
theprofit objective. A forward contract thus impacts their business
as per the following illustration:ForwardUSD/INR as onFx P/L for
unhedged Fx P/L for hedgedContract delivery date Exporter
exporter1$ = Rs 53.001 $ = Rs 56.00+ Rs 3.00Nil 1 $ = Rs 50.00 -
(Rs 3.00) NilAs seen above, a hedged exporter will not earn any
profit or incur any loss on account of a forexfluctuation. However,
there could be gain (on account of a forward contract) in the
pricerealization since the company follows a cost plus model with
current INR costs as the base costto arrive at selling price for a
particular contract. This is however a notional gain. Considering
an export order for 1000 shirts @ USD 10 each and spot rate assumed
at 53. Payment terms are 90 days ParticularsUS $ INRQty100
100Selling price per piece$10 Total selling price $1,000 (a) Cost
price per piece424Total cost price 42,400 (b) Total cost price $
$800 (c = b/53) Expected gross margin $$200(d = a-c)Keeping the
cost price constant at INR 42400, and selling price at 54.20 on
date of maturityPrice realization in INR 54,200(e = a * 54.2) Costs
in INR (being constant) 42,400 (b)Actual Gross Margin in INR 11,800
(f = e-b)Actual Gross Margin $ $218(g = f/54.2) Change in gross
margin $ $18 (h = g-d) Change in gross margin % 8.9% (I =
h/d%)
21. 6] CONCLUSIONS & SUGGESTIONS6.1 Conclusions: A forward
Contract booked by an Exporter seeks to protect his
profitabilityfrom his business operations (Export of Shirts in the
present example)As long as the Forward Contract is not cancelled,
and the contracted export takes place as perthe agreed timeline,
the Exporter does not make any gains/losses on account of
thefluctuations in the foreign currency versus INR (if exports
invoiced in foreign currency)If a Forward Contract (Exports) is
cancelled, there could be a gain for the Exporter, if the
foreigncurrency (vs INR) price depreciates as on date of
cancellation as compared to the spot rate ondate of booking the
contract.If a Forward Contract (Exports) is cancelled, there could
a loss to the Exporter, if the foreigncurrency (vs INR) price
appreciates as on date of cancellation as compared to the spot rate
ondate of booking the contract.
22. 6.2 Suggestions Final word of advice: 1. Financial hedging:
In the light of the current trend in currency fluctuations, the
exportercan use put option in combination with forward contracts to
increase profitability in theevent that rupee depreciates beyond
the forward contract rate of 1.20 premium overspot rate (as per
their current contract with the bankers). However if rupee
appreciatesthen the exporter could incur loss arising out of
insufficient cover under a forwardcontract (as partial amounts will
be hedged using a put option). 2. Dealing with bankers: Due to
Mahalaxmis long relationship with the Citibank on onehand its
stands benefitted but at the same time risks complacency an thereby
risk ofgetting exploited by Citibank. So before Mahalaxmi hedges
its funds it is advisable thatthey survey the market at least
intermittently if not regularly. 3. Money market hedge: The
exporter may also get into money market hedge and borrowforeign
currency to be received, convert to domestic currency and invest
for future use.This would however invite risks in case if rupee
appreciates. 4. Operation hedging: Considering the current trend of
fluctuations and steepappreciation of rupee against US dollar
(relatively higher compared to its valuationagainst EURO), the
company can get into risk shifting and increase proportion of
exportsto USA compared to Europe. Also risks related to eurozone
should support this move ifadequate business is available in US
markets and if the company has a competitiveadvantage.It is however
imperative for Mahalaxmi textiles to stay updated with the
fluctuation trends,market exposure and internal factors to
implement an overall risk management process.