Editorial Board

A Refereed Monthly International Journal of Management

Case Study

Transaction Exposure Management: A Case of Shipra Industries Pvt Ltd.

Dr. Manisha Goel

Associate Professor

Dept of Management Studies

J C Bose university of science & technology, YMCA, Faridabad

Shipra Industries Pvt Ltd. is a textile company in Mumbai. The company has widely spread its business of textile in different states with 10 branches all over India. It has been in existence for more than 35 years. In the year 2014, the company realised the need of latest machinery with modern technology for the modernisation of its production plant. After making cost benefit analysis, Mr. Swaroop , the Managing Director of the company decided to import a machinery with in the price range of $ 2 – 3 million. He asked Mr. Anoop, the General Manager Financeto make a suitable arrangement to finance the purchase of the imported machinery.

Mr. Anoopcommunicated with suppliers of textile machinery in Switzerland, China and America through emails. He also had several rounds of meetings with their local representatives. He reviewed thoroughly the machinery manufactured by these companies on the basis of specifications given by the Mr. Swaroop.  Finally, the company decided to purchase a machinery produced by McCoy Machinery Corporation, USA for USD 2.4 million with delivery at Mumbai.

Mr. Anoopwas asked to workout various options to finance the purchase of the imported machinery. It is generally the practice amongst the machinery companies to arrange for the finance from various international banks if the buyer so desires. Being a company based in USA, McCoy Machinery Corporation, had to be paid in USDollar, Mr. Anoop thought of an idea of borrowing long term loan denominated in USDollar(USD) from ICICI Bank. The Mr. Swaroop asked Mr. Anoopalso to analyse the option of borrowing in Japanese Yen (JPY).

Mr. Anoop with all his experience did a thorough analysis of raising a loan in USD vis-à-vis JPY. He recommended to the Mr. Swaroop that borrowing in USD is the best option given the volatility in JPY. However, the thinking of the Mr. Swaroop was totally different and he insisted on going for a loan in JPY. Mr. Anooparranged for a meeting between the Mr. Swaroop and Foreign exchange Dealer of ICICI Bank. The foreign exchange dealer of ICICI Bank recommended that a loan in USD with a forward contract to cover the exchange rate risk would be a safe option. The foreign exchange dealer also advised to cover the interest rate risk also. 

Mr. Swaroop was in favour of option of JPY loan as the rate of interest on JPY was very low at the time being @ 1.5% p.a., (LIBOR + 150 basis points) as compared to rate of interest on a USD denominated loan which was @ 2.5% p.a. (LIBOR + 220 basis points). He was primarily attracted by the interest rate differential of these two currencies. Further, he also had strong view that in the coming years, JPY may not strengthen so much against the USD from the then level of JPY 120 per USD at the time of availing the loan. He believed that any movement of JPY from the level of 120 per USD on either side may be evened out during the period of the loan. Therefore he decided to hold an open positionof JPY.  Mr. Swaroop asked Mr. Anoopto go for a JPY loan with floating interest rates. Any amount of persuasion by Mr. Anoopto cover at least a part of the loan exposure for exchange rate risk and interest rate risk was not matter of concern for Mr. Swaroop as his decision on the structuring of the loan with open position was final.

At the time of concluding the purchase of the machinery, the INR/USD was hovering around ₹62 per dollar; the JPY/USD was at 120per dollar. Interest ratespegged to LIBOR on USD loan was at 2.5% p.a. and the JPY denominated loan was available at 1.5% p.a. for a 5 year loan. These interest rates were floating and were subject to reset clause every quarter based on the 3 months LIBOR prevailing at the beginning of every quarter following the month of availing the loan. The loan of JPY 216 million being 75% of the cost of the machinery ($ 2.4 million X 120 = JPY 288 million X 75%) was repayable in 60 monthly instalments with interest to be funded separately every month.

All the necessary bank documents to securitize the machinery to the bank were executed in December 2014 and McCoy Machinery Corporation, USA was paid off in USD on 30^th December 2014 by availing the loan from the bank in JPY and swapping it to USD at the rate of 120. The machinery was flown from McCoy Machinery Corporation, USA to Mumbai in the first week of January 2015 and the repayment of the JPY loan was to begin from January 2015.

The monthly average exchange rate movement between INR/USD during the years 2015 to 2019 is given in the Annexure-A, the monthly average cross rate between JPY and USD for the period 2015 to 2019 is given in Annexure-B, monthly average LIBOR rates in USD for three months maturity during the period 2015 to 2019is given in  Annexure-C and the monthly average LIBOR rates in JPY for three months maturity covering the period 2015 to 2019 is given in Annexure-D.

Questions to discuss

• Critically evaluate the decision of Mr. Swaroop to takea loan in Yen whereas the company need US Dollar to make payment to McCoy Machinery Corporation, USAfor the machinery?
• Do you agree with the Mr. Swaroopnot to hedge the exchange rate risk in JPY against any aggressive movement of the currency against the USD and INR? Justify your answer.
• Analyse the option of loan in USD instead of loan in JPY with the help of given exchange rates and the LIBOR rates. Do you justify the action of Mr. Swaroopwhen Mr. Anoop who is the functional head would have been in a better position to take such decisions?
• Is there any other better option to finance the imported machinery rather than going for a loan either in USD or JPY? Justify your answer.

Annexure –A

Annexure –B

Annexure-C

Annexure-D