Swap and Derivatives
Swap is one of the type of hedging instrument as it is meeting all of the characteristics of derivative instruments as it Â has been known that derivate instrument are not priced on their own, but the prices are determined from another financial instrument. Secondly, the initial investment of instrument is very low or zero. Lastly, derivatives are tend to be settled on later date.
Therefore, it has been analyzed that instrument used by TT company is derivatives as it fulfill all the characteristics of derivative instrument, as there is no initial investment to be paid or received by either party. Moreover, there is no value of the currency as they are based on spot rates of both currencies. Lastly, the settlement would take pace after three years that would take place after the effectiveness of swap.
It has been argued that whether company would be using currency swap in order to reduce currency exposure being faced by the company. the foreign currency risk that would be facing by the company would be reduced and minimized bycurrency swap as received currency would be protected from changes in exchange rates.
Companyâ€™s situation in 2007-2008
In the Fiscal year 2007, Indian rupee appreciated against the US dollars. Earlier it was 45 Indian rupees per US dollar and then in the year 2007 is appreciated to 39.6 Indian Rupees per US dollar. Net foreign investment Inflow has increased to 20.3 billion dollars and that was one of the causes of appreciation of Indian rupee. Due to the rupeeâ€™s appreciation, Exporters lose in the competition.
Its impact on the TT Textiles were that, they received the first cheque of 2 million Indian rupees from ABC Bank.
In the fiscal year 2008, Indian rupee severely depreciated due to the increase in foreign investment outflow that was produced by global financial breakdown.
The economic recession in importing countries along with reduced domestic demand created problems for the exporters.
This scenario affect the TT Textile in a way that, Indian stock market crashed. First India rupee depreciated to 41 Indian rupees per US dollar and then at the end of the year 2008, it depreciated to 50 Indian rupees per US dollar.
Moreover, due to that event, companies in India stopped selling and went over hedging to secure the future of the company.
The currency swap may facilitate TT textile with profitability, but, it could also face adverse effects on companyâ€™s profitability. Moreover, the swap agreement have facilitated Mr. Jain with the right to terminate the swap arrangement or to maintain its current position which means that payments could be made and received till the end of swap agreement life.
It has been anticipated by the company that swap agreement would bring profitability to the company due to good performance of CHF to USD. In addition, the economic environment of India and general environment is also very favorable for business. However, the great economic recession that affected him economic environment of world could also affect negatively to the currency values……………………..
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