Hedging Currency Risk at TT Textiles
Case Questions
Question 1
What is TT Textiles’ intrinsic risk posture?
The majority portion of the revenues for TT Textiles Company came from the export revenues. The export revenues for TT Textiles Company were equal to about 75% of the total revenues for the company. On average the exposure for the company to the currency risk was equal to about US$ 25 million. If the current spot rate is known, then the current exposure based upon the current income for the company could be easily determined.
All the major firms in this market were exposed to the currency risk as a result of the fluctuations between the INR and USD and the main reason for this is that this industry has been traditionally dependent upon the export revenues. If we talk about the total demand of the textile industry in the world today, then it has been consistently increasing over the years and today the total demand for the textiles in the world has reached a level of about $ 30trillion.
As the demand increases, the firm starts to sell more and as a result of that, the currency exposures faced by these firms also increases significantly since the major portion for these firms comes from the exporting of the textiles. This demand for the textiles is further projected to increase in future as well.
There have been a range of contributing factors to the rising exports for the Asian textile companies and some of the important contributing factors include the import slowdown in thus industry, rapid increase in the overseas costs, increased interest for the companies in re-shoring, much improved marketing strategies and more innovation, rising profits, increased capital spending and a more level playing field has been created in the market of textiles.
All such Asian export firms in the textile market are also exposed to a number of the risks in the international as well as their domestic markets. The negative geographical and the negative macroeconomic changes that are consistently changing increase the risk exposure faced by these firms.
If the weather conditions deviate from the normal sales condition for the firms then these firms face increased risk of their exports. These firms also face huge uncertainties related to the currency fluctuations, the costs of buying the raw material, capacity changes for the suppliers and the significant fluctuations in the supplier’s costs.
In some of the sourcing markets, the firms also face social tensions. Furthermore, as the sourcing currency is USD therefore, these firms are highly sensitive to changes or fluctuations in the USD rates or the Euro rates. Lastly, the companies dealing with major exports in the textile industry are also exposed to the complex issues and risks associated with taxes.
On an average nearly 60% to 70% of the sales in this business are export based therefore; the magnitude for the risk exposure in this industry is very high. This is also the intrinsic risk posture for TT Textiles Company.....................................
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