Hedging Currency Risk At Tt Textiles Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Hedging Currency Risk At Tt Textiles Case Study Solution

One of the major challenges faced by TT Textiles was to hedge the adverse exchange rate fluctuations. There are two approaches that could be adopted to deal with these situations. TT Textiles could either put efforts to increase the portion of its revenues from the domestic sales or it could get into certain deals or forward contracts to hedge against the appreciation of IND against USD.

The SWAP Deal

During 2006 and 2007,the company got into the SWAP deal in order to manage the appreciation of INR (Indian Rupee) against USD (US Dollar) due to the backdrop of the economic crisis of 2007-08. The deal was based on the historical stability of CHF against USD. The instrument used in the SWAP deal was the Currency Swaps with a notional principal amount of INR 225 million.

Moreover,under the SWAP deal the TT Textiles was supposed to receive an interest payment in terms of pay-outs over the notional principal amount by the ABC Bank. The A bi-annual interest rate of 1.77% over the notional principal amount was supposed to be paid to the Company. In this regards, the company would receive a bi-annual interest amount of INR 2 million without any substantial payment to ABC Bank. However, the bank is supposed to pay only if the exchange rate is at a particular level i.e. 1.04 CHF/USD. However, if the exchange rate would fall from CHF 1.04/USD, then the decision for pay-outs would be taken on the basis of the spot rate.

Indeed,Swap Deal is a type of hedging contract that was designed to protect the company against the risks of exchange rate fluctuations i.e. appreciation of INR against USD. The appreciation of INR against USD could highly impact the revenues and the profit margins of TT Textiles along with other companies in the industry.

Recommendations

The adverse exchange rate fluctuations and the losses faced by TT Textiles in terms of payoffs shows that the Swap Deal could pose a high currency risk to the company. Moreover, despite of a number of suggestions from various financial advisers, the future exchange rate for CHF/USD could not be determined clearly as the dilemma behind the appreciation of CHF against USD is unclear.

Although, the present scenario implies that Sanjay Jain must continue the SWAP Deal till the maturity, with a current rate of CHF 1.17 /USD, but, as the future exchange rates was unpredictable and the fluctuations in the CHF/USD was high, therefore, it was uncertain that how the exchange rate would change in the remaining 3 months till the maturity. Therefore, on the basis of the uncertainty of the CHF/USD exchange rates, Sanjay Jain is recommended to quit the deal in the current period. In this way,the company would be safe from making any losses due to the appreciation of CHF against USD and would be able to maintain its profit margins.

Conclusion

Although, the current scenario shows that the company must continue the deal till maturity, but with the uncertainty of the exchange rate, it is better for the company to end up the deal in the current time to avoid the risk of substantial losses that could reduce the profit margin of the company………….

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