Pharma industry – Mitigating gap risk in Natural Hedging

• ‘A Ltd.’ is a listed pharmaceutical company having an annual turnover of USD 60 mn.
• It is engaged in export and import transactions in a single currency.
• Foreign currency risk was managed assuming a natural hedge (import payments made by export receipts).

Challenge and Observation

• Limited knowledge: The company had limited knowledge on the various strategies to manage forex exposures present on the payment and the receipt side.

Observation:

• IFA Global observed that gap risk (timing mismatch) existed between the export and import payments which could be exploited for the company’s benefit.
• The import and export payments were not of comparable magnitude to nullify each other’s impact.
• In some months, imports were higher than exports and in other months, it was vice versa.

Process

• IFA Global analysed the company’s trade cycle, monthly flows, timings of export and imports, currency of exposure, etc.
• IFA devised strategies that would be beneficial to ‘A Ltd.’ by managing risk separately for both, exports and imports.
• The company adopted these strategies and availed IFA Global’s daily advisory services.

Outcome

• Paid rates for imports which were lower than the export realisation rate.
• Realized exports higher than the average import payment rates. Thus, benefiting and gaining from the structural gaps that existed in the Forex Flows.
• Thus, with the overall advisory, the company accrued benefits of approximately 0.50%-1.00% of the topline which directly boosted its bottomline.