TEXTILESGroup 9

UM15060 VachanadityaUM15008 Ankit ThakurUM15027 Kunal TalwarUM15036 Priya RanjanUM15045 Seema NayakUM15059 Upgeet SinghUM15159 Princy Garg

Question 4: What was the reality of 2007-8?

OVERVIEW:

Textile Industry Traditionally an Export oriented

Industry Accounted for 14% of industrial

production Accounted for 14% of total

exports of goods In 2008-09 Total Sales: US $ 33.4 BillionExports: US $ 21.6 Billion Mature Industry, hence low

margins ( 3% to 12%)

TT Textile The flagship company of TT

Group Vertically integrated company

with presence in the entire cotton chain, from fibre to knitted fabric and garments

75% revenue came from exports Life of typical export transaction

for the company was approximately 3 months

Enjoyed a margin of 5% to 6%

NEED FOR HEDGING IN TEXTILE INDUSTRY :Indian scenario• TT Textile Roughly had an exposure of US$ 25 Mn• In late 2006,Rupee appreciation and Dollar depreciation increased

currency pressure in Indian textile industry• Bankers were forecasting the rupee to appreciate to INR35 from

INR 45/$• Rupee’s appreciation was driven by foreign portfolio investment

flows to India rather than global thus causing Indian exports to lose out to competition• Importing countries did not experience similar currency

appreciation• For low margin industry like textiles, this threatened the viability

of exporters

The main instruments available for hedging of currency risk exposure were:1. Exchange traded currency derivatives a)Forward Contract: INR-USD forwards

Contracted Agreement specifying an amount of currency to be delivered at an exchange rate decided on the date of contract.

b)Currency Options: A contract that gives the owner the right, but not the obligation, to take(call option) or deliver(Put option) a specified amount of currency as an exchange rate decided at the date of purchase.

2. Over the counter Currency Derivatives a)Outright Forwards

Currency forward contract traded between two private parties instead of going to the exchange

b)Forex SwapSimultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward)

INSTRUMENTS AVAILABLE FOR HEDGING

• In late 2006, Indian Rupee was rapidly appreciating and dollar was depreciating with bankers forecasting that the appreciation could reach unprecedented level of 35/ US $• Indian textile was reeling under severe currency pressure and was

looking for solutions in order to stay afloat.• The textile companies could either boost sales in domestic market

or hedge against upward movement of currency.• TT textile when for currency swap option in order to limit exposure

to fluctuations of US $.The swap was on US dollar and Swiss francs as these two currencies traditionally had stable exchange rates and US dollar had never gone below 1.09 CHF • To be on the safer side, TT textiles went for a swap deal at strike

rate of CHF 1.04/$ with notional principal amount totalling INR 225 million.

Pre Recession Scenario

• TT textiles entered into swap contract with ABC bank.• TT would provide ABC with Rs.225 million and ABC would

povide CHF6306554.84 to TT. • Since at the spot rate INR225 million = CHF 6306554.84

therefore no real money was excahnged and hence the priniciple was called the notional principle.

• TT was providing a rupee loan and getting a CHF loan. Since, the interest on a rupee loan is more than the interest on CHF loan, TT would receive a net interest of 1.77% on Rs.225 million paid semiannually and not pay any interest on the CHF loan.

The Swap

• At maturity ABC would pay back Rs.225 million and TT would pay back CHF 6306554.84

• Hence TT would have to pay in rupees 6306554.84 x (

• Therefore if the INR/$ rate increases ie. INR depriciates , TT would have to pay more

• Alternatively if the CHF/$ rate decreases ie CHF appreciates then TT would have to pay more.

The Swap Contd.

• INR/$• As mentioned before if the INR/$ increases then we

incur losses.• According to option, If INR/$ rate increases greater

then 46.25 we have the option buy dollars at 46.25(long call)

• However, if it falls to 45 we have the obligation to buy at 45 (short put)

Option Characteristics

• CHF/$• If the rate falls below 1.04 then TT will have to payout of CHF

6,306,554.84 at spot prices.• If the rate is between 1.04 and 1.27 then TT has the right to

sell CHF 6,306,554.84 at 1.27.• If the rate of is above 1.27 on maturity thrn TT has the

obligation to sell at CHF 6,306,554.84 at 1.27.• Hence between 1.04 and 1.27 TT has protection and can trade

CHF at 1.27 • However below 1.04 it has to trade at spot prices and above

1.27 it cannot take advantage of the higher exchange rate

Option Characteristics Contd.

2007- 2008 SCENARIO

2007The INR appreciated against the US dollar from 45/US$ to

39.6/US$ as Net FII inflow shot up to US $ 20.3 billion.

Exporters lost out to competition due to the rupee’s appreciation.

2008 Rupee drastically

depreciated due to massive FII outflows triggered by a global financial meltdown. The economic recession in importing countries along with decrease in domestic

demand added to the woes of these exporters.

Indian ScenarioNo increase in export

subsidies in textile to help exporters unlike other

countries.Withdrawal of export

incentives at signs of rupee depreciation.

IMPACT ON TT TEXTILES

• Received first cheque of INR 2 million from ABC Bank.

• Belief that rupee will get stronger became firmer.

• Though US had started showing signs of recession, it was strongly believed that US was decoupled from India.

2007

•Crash of Indian stock market.

•Exchange rate creep up to 41 INR/US$ and then to 50 INR/US$.

•Corporations stopped selling and went on over hedging their futures.

•High notional losses on derivative products.

2008 (India)

• No signs of recession.

• Swiss Franc (CHF) started becoming stronger than US$.

• CHF/US$ rate breached the 1.09 mark and crossed 1.04 as specified in swap deal of TT Textiles.

• Continued downward trend below 1.

2008 (Europe)

•IF Exchange rate touched .93 projected losses were estimated to be INR 45 million, and with further decrease expected to cross 55-6 million.

•Decline in sales lead TT Textiles to demand increase in credit limit above INR4.5 crore already grated by ABC.

•ABC bank argues to decrease the existing limit instead of increasing it.

Losses for TT Textiles

• In early 2009, the US dollar gained momentum and started reversing from .96 CHF/$ to reach 1.17 CHF/$ level.• Jain decided to carrying out reverse transaction at 1.17

CHF/$ which meant that if the rates fell below TT textile would cover the existing position at lower rate say 1.12CHF/$ and make some money during that period.• The swap deal however however carried a clause that made

TT textile liable to losses if CHF/US $ exchange rate touched the 1.04 CHF/US $ mark at maturity • Jain had two options :Either continue with the swap deal of

CHF/ US$, which was due to expire in October 2009 or exit it at this favourable juncture and put an end to any uncertainty.

Post Recession Scenario(2009)