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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
INDEX

1. OVERVIEW OF THE INDIAN TEXTILE INDUSTRY

2. CURRENCY FLUCTUATIONS & RISKS ASSOCIATED

3. RISK MANAGEMENT ALTERNATIVES

4. CASE OF THE GARMENT EXPORTER

5. HEDGING STRATEGIES – PROCESS, EVALUATION & IMPLEMENTATION

6. IMPACT OF HEDGING STRATEGIES ON HIS BUSINESS

7. CONCLUSION AND SUGGESTIONS
1] OVERVIEW OF THE INDIAN TEXTILE INDUSTRY
1.1 Background:

Indian textile industry is one of the leading textile industries in the world. The industry has gone
through a robust transformation post the liberalization of the economy in 1991 which gave the
much needed thrust to this industry. Indian textile industry largely depends on the
manufacturing and exports. Textile exports contribute a major portion of India’s exports.

Some figures:

       Earns 27% to India’s total foreign exchange

       Contributes 14% to India’s total industrial production

       Contributes 3% to India’s GDP

       Largest employment generator for India – estimated to be approximately 35 million
       people

Segments of Indian Textile Industry:

       Cotton Textiles

       Silk Textiles

       Woolen Textiles

       Readymade Garments

       Hand-crafted Textiles

       Jute & Coir
1.2 Current Scenario:




1.3 Technical Textile Segment:

This is a very critical contributor to the India textile industry. The working committee for the
11th 5 year plan has estimated it’s market size to be US$ 10.6 Billion in 2011-12 without any
regulatory framework and US$ 15.16 Billion with regulatory framework. The scheme for growth
& development of technical textiles aims to promote indigenous manufacture of technical
textile 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 textiles
while 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. The
global technical industry is estimated at US$ 127 billion and the same in India is pegged at US$
11 Billion.
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 Ltd

1.5 Government Initiatives & Regulatory Framework:
The GOI has implemented various export promotion policies for the textile Industry in the union
budget 2011-12 and the foreign trade policy 2009-14. This also includes various incentives
under 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 the
    development 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 weaver’s comprehensive welfare scheme and 7.33 lacs
    artisans provided health coverage under the Rajiv Gandhi Shilpi Swasthya Bima Yojna
    E-marketing: The central cottage industries corporation of India (CCIC) and the handicrafts
    &handlooms export council of India (HHEC) have developed various emarketing platforms
    to simplify marketing issues.
    Skill development: The integrated skill development scheme offers training assistance to
    the 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 have
    been supplied to various artisans and 16.50 million additional applications for issuing up
    credit cards are under consideration.
    Financial package for waiver of overdues: The GOI has announced a package of US $ 604.56
    Million to waive off overdue loans in the handloom sector.
    Other regulations: Government has also levied regulations to prohibit child labour. Also
    government has brought in regulations for better wages and compensation to workers who
    develop 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 be
    executed over a period of 36 months. Thereby leveraging further employment in this
    industry.
    Recent developments: Along with the increasing export figures in the Indian apparel sector
    in the country, Bangladesh is planning to set up two special economic zones for attracting
    Indian companies in view of the duty free trade between the two countries. The 2 SEZs are
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 Textile
Policy 2000, Technology mission on Cotton (TMC) 2000, National Jute policy 2005, Jute
technology Mission (JTM) 2006, Mega cluster schemes laid its emphasis and focus on:
        Technological upgrades
        Enhancement of productivity
        Quality consciousness & Strengthening of raw material base
        Product diversification, Increase in exports and innovative marketing strategies
        Financing arrangements
        Increasing employment opportunities & Integrated human resource development

1.7 Investments & Opportunities:
Investments: The industry attracted FDI worth US $ 934.04 million between April 2000 and
January 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 $ 220
billion by 2020.
Private sector participation in Silk production, demand for technical textiles, growth in the retail
sector, establishment of Centres of excellence for research & technical training etc have
boosted the opportunities in the textile industry.
                            Typical Value Chain of the textile Industry
2] CURRENCY FLUCTUATIONS & RISKS ASSOCIATED

2.1 Risk In General

Risk is defined as the potential that a chosen action or activity will lead to a loss or an
undesirable outcome. To simplify, it is a potential loss or less than expected returns. It is the
chance that an investment’s actual return will be different than expected or required. Different
versions of risk are usually measured calculating the standard deviation of the historical returns
or average returns of a specific investment. A high standard deviation indicates a high degree of
risk.
A fundamental idea in finance is the relationship between risk and return. The greater the
amount of risk that an investor is willing to take on, the greater the potential return. The reason
for 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 in
developing risk management strategies to help manage risks associated with business and
investment dealings.
Risk management is a process of identification, analysis and either acceptance or mitigation of
uncertainty associated in decision making. Simply put, risk management is basically a 2 step
process – determination of risks associated with an investment or a decision and handling those
risks 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 expectations
in the returns required, there are certain risks which are associated with current level of
business and the concern is not necessarily about the increase in the return or a potential loss
but to safeguard or be sure of the current business situation.
One such risk associated with the international business is the risk associated with the currency
fluctuations. Such risks usually affect the business in various ways and impact the costs/
revenue/ expenditure and eventually performance of any company/ organization involved with
international business.
2.2 Currency Fluctuations – Rupee vs USD/ Euro




                           Source: Midmarket rates as per Xe.com

Above graphs are clear indications of the currency fluctuations in past 12 months which would
have its impact not only on the country’s BOP and trade performance but also on
competitiveness 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 industry
itself being a major contributor to the country’s exports, there is growing significance for
currency risk management in this industry. While large size exporting companies have
dedicated risk management team, small exporters also have initiated the same to mitigate the
risks associated with currency fluctuations.
2.3 Risks associated with Currency Fluctuations

Although exchange rates cannot be forecasted with perfect accuracy, firms can at least
measure their exposure to exchange rate fluctuations. Technically speaking, there are 3 kinds of
risks associated with currency fluctuations which can affect a firm’s value:

       Translation Exposure
       Transaction Exposure
       Operational Exposure

                                         Moment in time when
                                         exchange rate changes



                  Translation Exposure                           Operating Exposure

           Changes in reported owner’s equity             Changes in expected future cash
                 in consolidated financial               flows arising from an unexpected
            statements caused by a change in                 change in exchange rates
                      exchange rates


                                       Transaction Exposure
           Impact of settling outstanding obligations entered into before change in exchange
                          rates but to be settled after change in exchange rates


           Time
           weee
Example:

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).
Translation Exposure: The exposure of an MNC’s consolidated financial statements to exchange
rate fluctuations is known as translation exposure. In particular, subsidiary earnings translated
into the reporting currency on the consolidated income statement are subject to changing
exchange rates.
From a cash flow perspective: The translation of financial statements for consolidated reporting
purposes does not by itself affect an MNC’s cash flows.
However, a weak spot rate today may result in a weak exchange rate forecast (and hence a
weak expected cash flow) for the point in the future when subsidiary earnings are to be
remitted.
From a stock price perspective: Since an MNC’s translation exposure affects its consolidated
earnings and many investors tend to use earnings when valuing firms, the MNC’s valuation may
be affected.
An MNC’s degree of translation exposure is dependent on:
        The proportion of its business conducted by foreign subsidiaries,
        The locations of its foreign subsidiaries, and
        The accounting methods that it uses.

Transaction exposure: The degree to which the value of future cash transactions can be
affected by exchange rate fluctuations is referred to as transaction exposure. Transaction
exposure measures changes in the value of outstanding financial obligations incurred prior to a
change 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 contractual
obligations.
Transaction exposure arises from:
        Purchasing or selling on credit goods or services whose prices are stated in
        foreign 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 in
each currency, and then the potential impact of the exposure to those currencies. Various
methods like the standard deviation, correlation coefficients or the value-at-risk methods are
used for assessing the transaction exposure.

Operational Exposure: Operating exposure, also called economic exposure, competitive
exposure, and even strategic exposure on occasion, measures any change in the present value
of a firm resulting from changes in future operating cash flows caused by an unexpected change
in exchange rates.
Measuring the operating exposure of a firm requires forecasting and analyzing all the firm’s
future individual transaction exposures together with the future exposures of all the firm’s
competitors and potential competitors worldwide. Operating exposure is far more important
for the long-run health of a business than changes caused by transaction or accounting
exposure. Operating exposure is inevitably subjective, because it depends on estimates of
future cash flow changes over an arbitrary time horizon. Planning for operating exposure is a
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 operating
exposure, because both management and investors should have factored this information into
their evaluation of anticipated operating results and market value.
From an investor’s perspective, if the foreign exchange market is efficient, information about
expected changes in exchange rates should be reflected in a firm’s market value.
Only unexpected changes in exchange rates, or an inefficient foreign exchange market, should
cause market value to change.
Operating exposure is usually measured using audit/ scenarios analysis or statistical approach
and is managed through various means like pass through the costs to customers, use of
marketing strategies and use of production management. Financial hedging techniques may
also be used.

Day to day currency risk management is mostly related to the transaction exposure or risk
involved on account of currency fluctuation.

An effective tool of currency risk management to mitigate/ manage the transaction exposure is
HEDGING.
3] RISK MANAGEMENT ALTERNATIVES – HEDGING

3.1 Risk management

There are various kinds of risks which a company has to encounter. We must remember that
foreign currency risk management is only a small part of the company’s overall risk
management 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 is
sustained 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 management’s 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:
Objectives Of Risk Management




                            Hedging to stabilize cash flows




The major aim of currency risk management via Hedging tools is to determine the appropriate
mismatch or imbalance between maturing foreign assets and liabilities given certain basic
information such as current & expected exchange rates, interest rates (both locally & abroad)
and the risk return profile acceptable to a company’s management.
3.2 Hedging

Hedging 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 an
existing position.

Hedging, therefore, protects the owner of the existing asset from loss (but it also eliminates any
gain 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 of
expected cash flows about the mean of the distribution. This reduction of distribution variance
is a reduction of risk.




Whether this reduction of variability in cash flows then sufficient reason for currency risk
management is a continuing debate in financial management and corporate finance and there
are 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 firm’s 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.
Hedging of currency in itself is a process and undergoes a step by step approach in its successful
implementation. 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 transaction
exposure 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
       Strategies

Contractual hedges:
Forward contracts: A forward contract is an agreement between a firm and a commercial bank
to exchange a specified amount of a currency at a specified exchange rate (called the forward
rate) on a specified date in the future.

There are two types of forward contracts: Deliverable and non-deliverable forwards (NDF). A
derivable forward will be exchanged into the spot currency at the expiry of the forward. An NDF
is handy when you need to hedge currency exposures from countries that have foreign
exchange control where access to the local forward markets are restricted to domestic
companies only. A NDF, unlike the deliverable contracts, only settles the difference between
the onshore official fixing and the NDF rates at contract maturity date. Customer either pays to
the Bank or receives from the Bank the difference depending on the onshore official fixing at
contract maturity. The customer could then buy/sell the same currency in the onshore market
to fulfill the physical currency requirement. Effectively, the customer is buying/selling the
onshore currency at the offshore NDF contract rate.

Future contracts: Currency futures contracts specify a standard volume of a particular currency
to be exchanged on a specific settlement date.
They are used by MNCs to hedge their currency positions, and by speculators who hope to
capitalize on their expectations of exchange rate movements.
The contracts can be traded by firms or individuals through brokers on the trading floor of an
exchange (e.g. Chicago Mercantile Exchange), automated trading systems (e.g. GLOBEX), or the
over-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 to
their corresponding forward rates and spot rates.
Currency futures contracts are guaranteed by the exchange clearinghouse, which in turn
minimizes its own credit risk by imposing margin requirements on those market participants
who take a position.
MNCs may purchase currency futures to hedge their foreign currency payables, or sell currency
futures to hedge their receivables.

Currency Options: Currency options provide the right to purchase or sell currencies at specified
prices. They are classified as calls or puts. Standardized options are traded on exchanges
through brokers. Customized options offered by brokerage firms and commercial banks are
traded 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 is
        in 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 is
        in 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 to
      Hedge against adverse exchange rates movement but you do not want to miss the
      potential gain if the future currency movement is in your favor.
      Have the right to deal but not the obligation to deal. Options are combined into
      structures that give specific payoff profiles and exposures.
Contingency Graphs for Currency Options

                For Buyer of £ Put Option              For Seller of £ Put Option
                   Strike price = $1.50                   Strike price = $1.50
                   Premium      = $ .03                   Premium      = $ .03
          Net Profit                             Net Profit
          per Unit                               per Unit
           +$.04                                  +$.04
                                       Future
           +$.02                        Spot      +$.02
                                        Rate
                  0                                      0
                       $1.46   $1.50   $1.54                  $1.46   $1.50   $1.54
            –   $.02                               –   $.02                   Future
                                                                               Spot
            –   $.04                               –   $.04                    Rate


Money 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 use

Operational 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
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 garments
majorly 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 to
produce 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 the
globe.
Core products: Men’s & Women’s fashion wear
Core 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 brands
This company has been into exports for over 20 years and their major markets have been USA
and Europe. Their typical sales include the merchandise meant for fashion industry and the
value chain cycle time from production to consumption is approximately 8 to 12 months. Hence
in 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 value
chain shared earlier could be as below:




8 to 12
months
 cycle
5] HEDGING STRATEGIES – PROCESS, EVALUATION & IMPLEMENTATION
5.1 Current Hedging strategy

Mahalaxmi group have been into the exports business for the past 20 years and are working
with their bankers (Citibank) for as many years. This has enabled them to enjoy high bargaining
power 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.
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 business

Mahalaxmi group uses hedging strategies with an objective of risk managing and not with the
profit objective. A forward contract thus impacts their business as per the following illustration:

    Forward            USD/INR as on          Fx P/L for unhedged             Fx P/L for hedged
    Contract           delivery date               Exporter                       exporter

  1$ = Rs 53.00        1 $ = Rs 56.00                + Rs 3.00                          Nil

                       1 $ = Rs 50.00               - (Rs 3.00)                         Nil



As seen above, a hedged exporter will not earn any profit or incur any loss on account of a forex
fluctuation. However, there could be gain (on account of a forward contract) in the price
realization since the company follows a cost plus model with current INR costs as the base cost
to 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
                       Particulars                      US $           INR
                          Qty                            100           100
                Selling price per piece                  $10
                   Total selling price                 $1,000                             (a)
                 Cost price per piece                                  424
                    Total 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 maturity
                Price 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%)
6] CONCLUSIONS & SUGGESTIONS
6.1 Conclusions: A forward Contract booked by an Exporter seeks to protect his profitability

from 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 per

the agreed timeline, the Exporter does not make any gains/losses on account of the

fluctuations 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 foreign

currency (vs INR) price depreciates as on date of cancellation as compared to the spot rate on

date of booking the contract.


If a Forward Contract (Exports) is cancelled, there could a loss to the Exporter, if the foreign

currency (vs INR) price appreciates as on date of cancellation as compared to the spot rate on

date of booking the contract.
6.2 Suggestions – Final word of advice:

   1. Financial hedging: In the light of the current trend in currency fluctuations, the exporter
      can use put option in combination with forward contracts to increase profitability in the
      event that rupee depreciates beyond the forward contract rate of 1.20 premium over
      spot rate (as per their current contract with the bankers). However if rupee appreciates
      then the exporter could incur loss arising out of insufficient cover under a forward
      contract (as partial amounts will be hedged using a put option).

   2. Dealing with bankers: Due to Mahalaxmi’s long relationship with the Citibank on one
      hand its stands benefitted but at the same time risks complacency an thereby risk of
      getting exploited by Citibank. So before Mahalaxmi hedges its funds it is advisable that
      they survey the market at least intermittently if not regularly.

   3. Money market hedge: The exporter may also get into money market hedge and borrow
      foreign 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 steep
      appreciation of rupee against US dollar (relatively higher compared to its valuation
      against EURO), the company can get into risk shifting and increase proportion of exports
      to USA compared to Europe. Also risks related to eurozone should support this move if
      adequate business is available in US markets and if the company has a competitive
      advantage.




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.

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Project report - Hedging strategies for garment exporter

  • 1. 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
  • 2. INDEX 1. OVERVIEW OF THE INDIAN TEXTILE INDUSTRY 2. CURRENCY FLUCTUATIONS & RISKS ASSOCIATED 3. RISK MANAGEMENT ALTERNATIVES 4. CASE OF THE GARMENT EXPORTER 5. HEDGING STRATEGIES – PROCESS, EVALUATION & IMPLEMENTATION 6. IMPACT OF HEDGING STRATEGIES ON HIS BUSINESS 7. CONCLUSION AND SUGGESTIONS
  • 3. 1] OVERVIEW OF THE INDIAN TEXTILE INDUSTRY 1.1 Background: Indian textile industry is one of the leading textile industries in the world. The industry has gone through a robust transformation post the liberalization of the economy in 1991 which gave the much needed thrust to this industry. Indian textile industry largely depends on the manufacturing and exports. Textile exports contribute a major portion of India’s exports. Some figures: Earns 27% to India’s total foreign exchange Contributes 14% to India’s total industrial production Contributes 3% to India’s GDP Largest employment generator for India – estimated to be approximately 35 million people Segments 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 the 11th 5 year plan has estimated it’s market size to be US$ 10.6 Billion in 2011-12 without any regulatory framework and US$ 15.16 Billion with regulatory framework. The scheme for growth & development of technical textiles aims to promote indigenous manufacture of technical textile 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 textiles while 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. The global 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 Ltd 1.5 Government Initiatives & Regulatory Framework: The GOI has implemented various export promotion policies for the textile Industry in the union budget 2011-12 and the foreign trade policy 2009-14. This also includes various incentives under 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 the development 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 weaver’s comprehensive welfare scheme and 7.33 lacs artisans provided health coverage under the Rajiv Gandhi Shilpi Swasthya Bima Yojna E-marketing: The central cottage industries corporation of India (CCIC) and the handicrafts &handlooms export council of India (HHEC) have developed various emarketing platforms to simplify marketing issues. Skill development: The integrated skill development scheme offers training assistance to the 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 have been supplied to various artisans and 16.50 million additional applications for issuing up credit cards are under consideration. Financial package for waiver of overdues: The GOI has announced a package of US $ 604.56 Million to waive off overdue loans in the handloom sector. Other regulations: Government has also levied regulations to prohibit child labour. Also government has brought in regulations for better wages and compensation to workers who develop 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 be executed over a period of 36 months. Thereby leveraging further employment in this industry. Recent developments: Along with the increasing export figures in the Indian apparel sector in the country, Bangladesh is planning to set up two special economic zones for attracting Indian 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 Textile Policy 2000, Technology mission on Cotton (TMC) 2000, National Jute policy 2005, Jute technology Mission (JTM) 2006, Mega cluster schemes laid its emphasis and focus on: Technological upgrades Enhancement of productivity Quality consciousness & Strengthening of raw material base Product diversification, Increase in exports and innovative marketing strategies Financing arrangements Increasing employment opportunities & Integrated human resource development 1.7 Investments & Opportunities: Investments: The industry attracted FDI worth US $ 934.04 million between April 2000 and January 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 $ 220 billion by 2020. Private sector participation in Silk production, demand for technical textiles, growth in the retail sector, establishment of Centres of excellence for research & technical training etc have boosted the opportunities in the textile industry. Typical Value Chain of the textile Industry
  • 7. 2] CURRENCY FLUCTUATIONS & RISKS ASSOCIATED 2.1 Risk In General Risk is defined as the potential that a chosen action or activity will lead to a loss or an undesirable outcome. To simplify, it is a potential loss or less than expected returns. It is the chance that an investment’s actual return will be different than expected or required. Different versions of risk are usually measured calculating the standard deviation of the historical returns or average returns of a specific investment. A high standard deviation indicates a high degree of risk. A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for 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 in developing risk management strategies to help manage risks associated with business and investment dealings. Risk management is a process of identification, analysis and either acceptance or mitigation of uncertainty associated in decision making. Simply put, risk management is basically a 2 step process – determination of risks associated with an investment or a decision and handling those risks 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 expectations in the returns required, there are certain risks which are associated with current level of business and the concern is not necessarily about the increase in the return or a potential loss but to safeguard or be sure of the current business situation. One such risk associated with the international business is the risk associated with the currency fluctuations. Such risks usually affect the business in various ways and impact the costs/ revenue/ expenditure and eventually performance of any company/ organization involved with international business.
  • 8. 2.2 Currency Fluctuations – Rupee vs USD/ Euro Source: Midmarket rates as per Xe.com Above graphs are clear indications of the currency fluctuations in past 12 months which would have its impact not only on the country’s BOP and trade performance but also on competitiveness 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 industry itself being a major contributor to the country’s exports, there is growing significance for currency risk management in this industry. While large size exporting companies have dedicated risk management team, small exporters also have initiated the same to mitigate the risks associated with currency fluctuations.
  • 9. 2.3 Risks associated with Currency Fluctuations Although exchange rates cannot be forecasted with perfect accuracy, firms can at least measure their exposure to exchange rate fluctuations. Technically speaking, there are 3 kinds of risks associated with currency fluctuations which can affect a firm’s value: Translation Exposure Transaction Exposure Operational Exposure Moment in time when exchange rate changes Translation Exposure Operating Exposure Changes in reported owner’s equity Changes in expected future cash in consolidated financial flows arising from an unexpected statements caused by a change in change in exchange rates exchange rates Transaction Exposure Impact of settling outstanding obligations entered into before change in exchange rates but to be settled after change in exchange rates Time weee Example: 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 MNC’s consolidated financial statements to exchange rate fluctuations is known as translation exposure. In particular, subsidiary earnings translated into the reporting currency on the consolidated income statement are subject to changing exchange rates. From a cash flow perspective: The translation of financial statements for consolidated reporting purposes does not by itself affect an MNC’s cash flows. However, a weak spot rate today may result in a weak exchange rate forecast (and hence a weak expected cash flow) for the point in the future when subsidiary earnings are to be remitted. From a stock price perspective: Since an MNC’s translation exposure affects its consolidated earnings and many investors tend to use earnings when valuing firms, the MNC’s valuation may be affected. An MNC’s degree of translation exposure is dependent on: The proportion of its business conducted by foreign subsidiaries, The locations of its foreign subsidiaries, and The accounting methods that it uses. Transaction exposure: The degree to which the value of future cash transactions can be affected by exchange rate fluctuations is referred to as transaction exposure. Transaction exposure measures changes in the value of outstanding financial obligations incurred prior to a change 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 contractual obligations. Transaction exposure arises from: Purchasing or selling on credit goods or services whose prices are stated in foreign 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 in each currency, and then the potential impact of the exposure to those currencies. Various methods like the standard deviation, correlation coefficients or the value-at-risk methods are used for assessing the transaction exposure. Operational Exposure: Operating exposure, also called economic exposure, competitive exposure, and even strategic exposure on occasion, measures any change in the present value of a firm resulting from changes in future operating cash flows caused by an unexpected change in exchange rates. Measuring the operating exposure of a firm requires forecasting and analyzing all the firm’s future individual transaction exposures together with the future exposures of all the firm’s competitors and potential competitors worldwide. Operating exposure is far more important for the long-run health of a business than changes caused by transaction or accounting exposure. Operating exposure is inevitably subjective, because it depends on estimates of future 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 operating exposure, because both management and investors should have factored this information into their evaluation of anticipated operating results and market value. From an investor’s perspective, if the foreign exchange market is efficient, information about expected changes in exchange rates should be reflected in a firm’s market value. Only unexpected changes in exchange rates, or an inefficient foreign exchange market, should cause market value to change. Operating exposure is usually measured using audit/ scenarios analysis or statistical approach and is managed through various means like pass through the costs to customers, use of marketing strategies and use of production management. Financial hedging techniques may also be used. Day to day currency risk management is mostly related to the transaction exposure or risk involved on account of currency fluctuation. An effective tool of currency risk management to mitigate/ manage the transaction exposure is HEDGING.
  • 12. 3] RISK MANAGEMENT ALTERNATIVES – HEDGING 3.1 Risk management There are various kinds of risks which a company has to encounter. We must remember that foreign currency risk management is only a small part of the company’s overall risk management 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 is sustained 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 management’s 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 Management Hedging to stabilize cash flows The major aim of currency risk management via Hedging tools is to determine the appropriate mismatch or imbalance between maturing foreign assets and liabilities given certain basic information such as current & expected exchange rates, interest rates (both locally & abroad) and the risk return profile acceptable to a company’s management.
  • 14. 3.2 Hedging Hedging 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 an existing position. Hedging, therefore, protects the owner of the existing asset from loss (but it also eliminates any gain 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 of expected cash flows about the mean of the distribution. This reduction of distribution variance is a reduction of risk. Whether this reduction of variability in cash flows then sufficient reason for currency risk management is a continuing debate in financial management and corporate finance and there are 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 firm’s 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 successful implementation. 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 transaction exposure 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 Strategies Contractual hedges: Forward contracts: A forward contract is an agreement between a firm and a commercial bank to exchange a specified amount of a currency at a specified exchange rate (called the forward rate) on a specified date in the future. There are two types of forward contracts: Deliverable and non-deliverable forwards (NDF). A derivable forward will be exchanged into the spot currency at the expiry of the forward. An NDF is handy when you need to hedge currency exposures from countries that have foreign exchange control where access to the local forward markets are restricted to domestic companies only. A NDF, unlike the deliverable contracts, only settles the difference between the onshore official fixing and the NDF rates at contract maturity date. Customer either pays to the 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 market to fulfill the physical currency requirement. Effectively, the customer is buying/selling the onshore currency at the offshore NDF contract rate. Future contracts: Currency futures contracts specify a standard volume of a particular currency to be exchanged on a specific settlement date. They are used by MNCs to hedge their currency positions, and by speculators who hope to capitalize on their expectations of exchange rate movements. The contracts can be traded by firms or individuals through brokers on the trading floor of an exchange (e.g. Chicago Mercantile Exchange), automated trading systems (e.g. GLOBEX), or the over-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 to their corresponding forward rates and spot rates. Currency futures contracts are guaranteed by the exchange clearinghouse, which in turn minimizes its own credit risk by imposing margin requirements on those market participants who take a position. MNCs may purchase currency futures to hedge their foreign currency payables, or sell currency futures to hedge their receivables. Currency Options: Currency options provide the right to purchase or sell currencies at specified prices. They are classified as calls or puts. Standardized options are traded on exchanges through brokers. Customized options offered by brokerage firms and commercial banks are traded 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 is in 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 is in 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 to Hedge against adverse exchange rates movement but you do not want to miss the potential gain if the future currency movement is in your favor. Have the right to deal but not the obligation to deal. Options are combined into structures that give specific payoff profiles and exposures.
  • 17. Contingency Graphs for Currency Options For Buyer of £ Put Option For Seller of £ Put Option Strike price = $1.50 Strike price = $1.50 Premium = $ .03 Premium = $ .03 Net Profit Net Profit per Unit per Unit +$.04 +$.04 Future +$.02 Spot +$.02 Rate 0 0 $1.46 $1.50 $1.54 $1.46 $1.50 $1.54 – $.02 – $.02 Future Spot – $.04 – $.04 Rate Money 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 use Operational 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 garments majorly 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 to produce 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 the globe. Core products: Men’s & Women’s fashion wear Core 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 brands This company has been into exports for over 20 years and their major markets have been USA and Europe. Their typical sales include the merchandise meant for fashion industry and the value chain cycle time from production to consumption is approximately 8 to 12 months. Hence in 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 value chain shared earlier could be as below: 8 to 12 months cycle
  • 19. 5] HEDGING STRATEGIES – PROCESS, EVALUATION & IMPLEMENTATION 5.1 Current Hedging strategy Mahalaxmi group have been into the exports business for the past 20 years and are working with their bankers (Citibank) for as many years. This has enabled them to enjoy high bargaining power 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 $, the forward rate would be Rs. 54.20 thereby improving the price realization of the exporter at the time of maturity. Execute hedging strategy: Mahalaxmi group regularly signs forward contracts with their bankers for a period of 12 months.
  • 20. Monitor performance & adjust: Mahalaxmi group regularly keeps pace with overseas market. However since they use forward contracts only to hedge against the currency risks, there is little need for adjustments in the hedging strategies. 5.2 Impact of hedging strategies on business Mahalaxmi group uses hedging strategies with an objective of risk managing and not with the profit objective. A forward contract thus impacts their business as per the following illustration: Forward USD/INR as on Fx P/L for unhedged Fx P/L for hedged Contract delivery date Exporter exporter 1$ = Rs 53.00 1 $ = Rs 56.00 + Rs 3.00 Nil 1 $ = Rs 50.00 - (Rs 3.00) Nil As seen above, a hedged exporter will not earn any profit or incur any loss on account of a forex fluctuation. However, there could be gain (on account of a forward contract) in the price realization since the company follows a cost plus model with current INR costs as the base cost to 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 Particulars US $ INR Qty 100 100 Selling price per piece $10 Total selling price $1,000 (a) Cost price per piece 424 Total 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 maturity Price 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 & SUGGESTIONS 6.1 Conclusions: A forward Contract booked by an Exporter seeks to protect his profitability from 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 per the agreed timeline, the Exporter does not make any gains/losses on account of the fluctuations 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 foreign currency (vs INR) price depreciates as on date of cancellation as compared to the spot rate on date of booking the contract. If a Forward Contract (Exports) is cancelled, there could a loss to the Exporter, if the foreign currency (vs INR) price appreciates as on date of cancellation as compared to the spot rate on date 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 exporter can use put option in combination with forward contracts to increase profitability in the event that rupee depreciates beyond the forward contract rate of 1.20 premium over spot rate (as per their current contract with the bankers). However if rupee appreciates then the exporter could incur loss arising out of insufficient cover under a forward contract (as partial amounts will be hedged using a put option). 2. Dealing with bankers: Due to Mahalaxmi’s long relationship with the Citibank on one hand its stands benefitted but at the same time risks complacency an thereby risk of getting exploited by Citibank. So before Mahalaxmi hedges its funds it is advisable that they survey the market at least intermittently if not regularly. 3. Money market hedge: The exporter may also get into money market hedge and borrow foreign 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 steep appreciation of rupee against US dollar (relatively higher compared to its valuation against EURO), the company can get into risk shifting and increase proportion of exports to USA compared to Europe. Also risks related to eurozone should support this move if adequate business is available in US markets and if the company has a competitive advantage. 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.