Tirupur Based Textile Exporter Avoided Unnecessary Hedging Costs
CASE
- A textile exporter based out of Tirupur seeked Myforexeye’s Trade Finance consultancy and Advisory services.
- The client had to import Solar Panels from China. The import duty was remarkably high hence, the client had to make a choice regarding import funding of nine crores. He had the option of a term loan and a foreign currency loan.
Advisory team of Myforexeye did their research and found that
The client has two options:
When compared, the cost of funding from a Foreign Currency Loan was 32 lacs lower than that of a term loan.
There was an additional concern on this - Payment for the loan had to be made in dollars.
Fearing the exchange rate risk, the client wanted to hedge all of the interest payments and principal amount too, the annualized cost of which would’ve been around 4% which is too high because in 3 years’ time the rupee depreciation is around 3% (based on an “Annualized Premium and Rupee Change Comparative Analysis” by Myforexeye Research Team). This would ultimately lead to a bad risk reward ratio.
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