Chemical Industry - Benefits of Hedging Pre-Shipments and Post-Shipment exposure

17 August 2021 | By IFA Global

‘XYZ Ltd.’ is a company in the business of exporting and importing manufacturing chemicals.
The company has an annual turnover of $100 million.

Challenge and Observation

The company has 5 months of exposure wherein it took them 2 months to produce the product and 3 months to receive the funds after shipment.
The company used to cover their exposure only after the invoice had been raised and the product has been shipped which caused the company to have an FX risk while the product was in the production cycle.
The company was not willing to expose its balance sheet towards unwanted MTM gain/losses on account of pre-shipment exposure.
When the Rupee started appreciating, the company was not able to meet its benchmark cost and had to bear the losses which impacted their profit margins.

Observation:

IFA Global advised the company to also hedge their Pre-shipment exposures taking into account the overall time to receive the funds after shipment and adding some extra buffer time for the collection.
IFA Global was confident that we could add value by analyzing the cycle of import and export exposures, and the costing methodology of the company.

Process

A Risk management policy was developed taking month-on-month exposure into consideration and we advised to hedge at least the confirmed orders(pre+post).
A Risk management policy was generated by analyzing the payment cycles of exports & imports, studying the currency and their quantum of exposures.
After complete due diligence, IFA was able to develop appropriate strategies which would help the client manage their exposures efficiently.

Outcome

The Risk Management Policy encapsulated the precise details of steps to be taken to hedge the exposures.
By locking in the price at the pre-shipment stage, the company was able to quote more competitively to buyers.
The above recommendations from IFA helped the client to gain an additional 0.67% on their top-line without taking FX volatility risk into consideration.
The above process enabled the company to earn consistent profits out of forex transactions.

Services: