'Global Textiles Ltd.' (GTL), a major Indian textile exporter, currently exports 80 per cent of its output to the USA and Europe and sources 50 per cent of its raw cotton from Brazil and Australia. The company has taken an External Commercial Borrowing (ECB) of 500 million USD. The company's Rupee-Dollar exchange rate assumption for the current fiscal year was 83.00 INR/USD. However, due to global factors, the Rupee has suddenly depreciated to 86.00 INR/USD. Considering the company's global exposure, which of the following is the most accurate assessment of the net financial impact of the Rupee depreciation and the most appropriate hedging strategy to mitigate the key risk?

Question

Accepted Answer

The depreciation is a net positive for GTL because the gain on its large export receipts (in USD) is significantly higher than the increased cost of raw material imports. The company should hedge the ECB principal repayment risk by buying a Forward Contract for the US Dollar equivalent.

Answer

The depreciation has no significant net impact as the company's assets and liabilities are naturally hedged. The company should use a Plain Vanilla Rupee Interest Rate Swap.

Answer

The depreciation is a net loss due to the massive increase in the Rupee equivalent of the ECB interest payment. The most appropriate strategy is to increase the local sourcing of raw materials.

Answer

The depreciation is entirely detrimental, as the loss on raw material imports and ECB repayment outweighs the gain on exports. The company must enter into a Currency Swap agreement to exchange the floating interest rate.

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