Edible Oil Industry – Structured Hedging Mechanism
19 February 2020 | By IFA Global
- The XYZ Company based in India has imported from Ghana. Currently, the company has a subsidiary ABC Company in Ghana.
- The ABC Company procures the raw material from a local market in Ghana in the local currency i.e. Ghana Cedi (GHS) & exports the raw material to its parent XYZ Company in India. The XYZ Company processes the raw material and exports the finished goods globally in USD.
- The billing from ABC Company to XYZ Company is in USD Dollars. The payment terms in Ghana’s local market are 100% advance
Challenge and Observation
- Depreciating Currency: Any depreciation witnessed in the local currency (GHS) will be beneficial for the ABC Company, vis-à-vis negative for XYZ Company being an importer.
- Illiquidity: The GHSINR is not a liquid currency pair quotable by Indian Banks. Thus, resulting in higher transaction and slippage cost to the XYZ Company.
- Direct quoting: GHSINR is not a directly quoted currency and requires double conversion i.e. USDINR & USDGHS.
- IFA Global observed that XYZ Company had been mulling whether making payment in some other currency could minimize its cost, but as per our recommendation, they continued billing in USD because it will curtail transaction and slippage cost. Additionally, on the date of import payment, The XYZ Company should hedge for its corresponding export receivables against the sale of finished goods which will act as a natural hedge against imports & exports.
- Despite minimal engagement on this special project from XYZ’s Treasury Team, relevant discussions, bank transitions, and service adjustments were made on authorization from XYZ Company.
- The current payment terms are 100% advance. This involves the company’s own capital for funding. Going forward, the company can explore the buyer’s credit to reduce the cost of borrowing.
- Preferred currency for import payments
- Savings on banking charges & transaction costs
- Structured hedging mechanism