Indian School of Business
ISB009
February 15, 2013
Rajesh Chakrabarti
op yo Hedging Currency Risk at TT Textiles
It was a hot March morning in Kolkata in the year 2009. Sanjay K. Jain, —Joint Managing Director of TT Textiles, watched the sunlight stream in through his office windowpane. But his mind was elsewhere, tracking the movements of the Swiss franc (CHF) in the last few months and the world events that had caused them. The Swiss franc had touched 1.17 CHF/US$ from the previous year’s record of 0.96CHF/US$. That was good news for him. Or was it? The irony of the situation was not lost on him. Once, the Swiss had franc barely figured among all the different currencies that vied for his attention in the normal course of things. Yet, lately, it was the movement of the CHF that weighed on his mind most heavily.
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As an exporter to more than 30 countries, TT Textiles was no newcomer to the area of currency risk. TT Textiles usually used forwards to manage currency risks. However, during 2006-07, when the
INR was expected to appreciate to an unprecedented high of 35 INR/US$, the company had entered into a swap deal based on the historical stability of the CHF against the US$. At the time, the deal had looked relatively safe and very lucrative. However, when the global financial crisis struck in 2008, it started making sizeable mark-to-market losses. Luckily it turned around in 2009 and was no longer in the red. But with three months left on the contract, the big question Jain faced was whether to quit now or hold it till maturity.
BACKGROUND
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The Textile Industry
The textile and clothing industry in India had traditionally been an export-oriented industry. In 2008, it contributed four per cent to the overall GDP of India and accounted for 14 per cent of the industrial
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production and 14 per cent of total exports of goods . More importantly, India earned about 27 per cent of its total foreign exchange through textile exports. It was also the