Pacific B usiness R eview I nternational

A Refereed Monthly International Journal of Management Indexed With Web of Science(ESCI)
ISSN: 0974-438X
Impact factor (SJIF):8.396
RNI No.:RAJENG/2016/70346
Postal Reg. No.: RJ/UD/29-136/2017-2019
Editorial Board

Prof. Mahima Birla
(Editor in Chief)

Dr. Khushbu Agarwal
(Editor)

Dr. Asha Galundia
(Circulation Manager)

Editorial Team

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 30th 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

Monthly Average Exchange Rates of INR/USD for the period 2015 to 2019

 

 

 

 

 

 

Year ->

2015

2016

2017

2018

2019

Month

 

 

 

 

 

January

62.1764

67.283

68.0766

63.6448

70.6595

February

62.0428

68.2812

66.9645

64.4559

71.1954

March

62.5031

66.9023

65.8646

65.0353

69.5846

April

62.6574

66.4686

64.5344

65.6749

69.4124

May

63.7135

66.913

64.4263

67.5296

69.7688

June

63.807

67.256

64.4544

67.7862

69.4234

July

63.6

67.1823

64.4352

68.6785

68.7375

August

65.0852

66.9438

63.9769

69.5434

71.1661

September

66.2377

66.7569

64.4164

72.1397

71.3203

October

65.0274

66.7048

65.0627

73.6061

71.01

November

66.121

67.6687

64.8443

71.8394

71.4973

December

66.4892

67.8108

64.2151

70.7411

71.1728

 

 

 

Annexure –B

Monthly Average Exchange Rates of JPY/USD for the period 2015 to 2019

 

 

 

 

 

 

Year ->

2015

2016

2017

2018

2019

Month

 

 

 

 

 

January

118.3572

118.4884

115.0283

110.9616

108.9479

February

118.7657

114.5176

112.9725

107.8915

110.3563

March

120.3409

112.9739

112.9577

105.9778

111.1153

April

119.4515

109.5889

110.1778

107.6201

111.7092

May

120.8863

108.9486

112.2042

109.6863

109.9846

June

123.7039

105.328

110.8755

110.0934

108.0781

July

123.3322

103.8295

112.2846

111.4041

108.2262

August

123.0971

101.323

109.7488

110.9972

106.1227

September

120.1145

101.9869

110.719

112.0537

107.488

October

120.1824

103.7105

112.9207

112.7174

108.1203

November

122.607

108.5931

112.8233

113.29

108.8695

December

121.5452

116.1185

112.9265

112.1479

109.1585

 

 

 

Annexure-C

 

Monthly average USD LIBOR for 3 months maturity

 

 

 

 

 

 

 

 

Year ->

2015

2016

2017

2018

2019

 

Month

 

 

 

 

 

 

January

0.254

0.62

1.026

1.734

2.774

 

February

0.258

0.623

1.045

1.875

2.677

 

March

0.268

0.632

1.135

2.173

2.606

 

April

0.276

0.633

1.159

2.349

2.59

 

May

0.28

0.645

1.186

2.336

2.532

 

June

0.283

0.652

1.262

2.33

2.397

 

July

0.291

0.696

1.308

2.339

2.294

 

August

0.321

0.81

1.314

2.324

2.165

 

September

0.331

0.85

1.323

2.349

2.125

 

October

0.321

0.879

1.361

2.461

1.977

 

November

0.371

0.908

1.434

2.649

1.905

 

December

0.533

0.975

1.602

2.788

1.908

 
               

 

 

 

 

 

 

 

 

 

Annexure-D

 

Monthly average JPY LIBOR for 3 months maturity

 

 

 

 

 

 

Year ->

2015

2016

2017

2018

2019

Month

 

 

 

 

 

January

0.103

0.08

-0.023

-0.032

-0.078

February

0.102

0.014

-0.008

-0.062

-0.084

March

0.097

-0.005

0.001

-0.05

0.072

April

0.095

-0.019

0.015

-0.036

-0.063

May

0.100

-0.025

-0.007

-0.028

-0.07

June

0.097

-0.032

-0.006

-0.037

-0.067

July

0.098

-0.032

-0.008

-0.039

-0.075

August

0.093

-0.022

-0.026

-0.035

-0.098

September

0.084

-0.031

-0.033

-0.04

-0.093

October

0.081

-0.016

-0.041

-0.082

-0.112

November

0.075

-0.058

-0.035

-0.105

-0.101

December

0.079

-0.039

-0.022

-0.100

-0.063