Textile: LTFX & Bank Negotiation

3 January 2023 | By IFA Global - Category Treasury


About Client:

  • India's leading textile manufacturers providing end-to-end bedding solely focused on creating all-encompassing sleep experiences. The company has a presence across 59 countries.
Industry Savings Scope of Work
Textile Company 45-50 bps on forwards LTFX & Bank Negotiation

Client Requirement:

  • The Company had an annual export exposure of USD 300mn. The company had a policy to hedge a specified % of the FX exposure over the tenor of 12 months.
  • During the Covid-19 pandemic, the company faced delay in shipments due to lockdowns and supply chain disruptions globally. It further led to overdue account receivables and delayed realisations.
  • The company had booked the forward contracts unevenly with higher weightage in near months (1-3 months) based on historical realisation pattern.
  • Delay in the realization of FX account receivables resulted in unutilized forward contracts and cash outlay on cancellation given Rupee depreciation

IFA Global’s Approach:

  • IFA Global evaluated the risk management policy of the company and the current portfolio of its hedging instruments. Based on its legacy experience of advisory over 2 decades, IFA global identified the impact of fully hedging short-term exposure with forward contracts.
  • On further evaluation, IFA global observed that due to uneven hedging, there was the concentration of hedges in a few months while other months were under-hedged based on the company’s risk management policy. IFA Global advised to evenly spread out the hedge over a longer tenure to avoid concentration in any specific months.

Impact Delivered:

  1. Due to delays in shipments, the company was having higher Days Sales Outstanding (DSO). IFA Global advised the company to keep hedges at 70% of the defined hedge ratio so that if there is a disruption in account receivables, the company does not have immediate liability to deliver the foreign currency.
  2. As the forward curve was steep, booking hedges in the 12-18 month tenor resulted in an additional 45-50 bps additional forward yield as compared to the 12 month tenor. Without taking any additional risk, IFA global suggested the company spread the hedges across 18 months instead of restricting it to 12 months. The hedge ratio was capped based on the annual turnover. The Company had additional flexibility by hedging across 18 months as against 12 months.
  3. The bank was providing the forward points for 18 months based on the nominal forward yield up to 12 months. IFA Global’s banking negotiation team assisted the company to avail the additional 22 paise based on the LTFX forward yields and Bloomberg pricing.
  4. Based on the arbitrage in short-term forward points and onshore money market rates, IFA global advised the company to get the receivables delayed and earn additional arbitrage on forward points over and above the local money market rates.


By IFA Global

Category Treasury