Jul 13 2018

Apparel Exporter – Risk Management

CASE

A Tirupur based exporter in apparel industry has an exposure of INR 300 million. They are banking with a PSU bank having exposure in GBP and Euro. They were not following a particular strategy in order to manage their currency risk and were doing window forwards. They didn’t have a medium to cross check the rates that bank offers them against their export remittances.

They wanted to lay more emphasis on the currency risk management process & to keep a track of all the transactions & exposures.

Myforexeye Value Addition

Considering the nature of business of the company and the ongoing practices they are following for the forex exposure management, we made them aware about benchmarking of their forex exposure and to form a risk management system to be followed. The bank used to charge a margin of 12 paisa per transaction – we suggested that their margins can be negotiated considering their annual forex business. Recommended to negotiate with their bank and reduce the margin to 3-5 paisa per USD.

The client was hedging their exposure on their own, not following a process to monitor and record their exposure. We advised them to follow a risk management process and to maintain a record of their export orders with a first day forward benchmarking strategy. We initiated fixed date forward for them and set a target hedge ratio of 70-75% as they were comfortable with the same. The hedging decisions were taken considering the first day forward rate as benchmark and the order addition with them. Whenever the hedge ratio falls below 50% an aggressive call to bring it towards 60% within a few days is taken. Majority of times we managed to capture a rate well above the targeted benchmarks as we comfortably waited for our target levels to initiate forward booking.

Recommended the client that our existing service namely Forex Portfolio Management in which we keep a track of client exposure, advise them on costing part and benchmarking of the exposure. We provide client with various hedging strategies and to choose the best as per the current market scenario. The client subscribes to our services and shares their exposure on a regular basis with us. Periodical review meetings are done every 3/6 months as pre decided at the time of contract.