DISCUSSIONSurya Garments, one of the leading garment company in Nepal, is requesting you for your help to manage foreign exchange risk in the following scenario

About 75 percent of revenues come from exports and at any particular point in time it would have an exposure of roughly US$25 million and major export markets are

- India – 30%

- USA – 25%

- Germany - 25%

- Other EU Countries – 20%

Company imports wool & cotton from China and has exposure of US$15 million a year and has payment frequency of quarterly. The company also receives export revenue in quarterly basis.

The margin of the business is 5% yearly.

SCB, NIBL and Everest Banks has proposed for the currency derivative products with the following terms.

a. SCB proposal : Forward contract (5% commission on spot rate, today’s spot rate in Rs.100/$)

b. NIBL proposal : Any types of option (Rs. 2 premium)

c. EBL proposal : Conditional option (Rs. 4 if the currency fluctuates by 3 percent otherwise there is no option premium)

Discussion Question

What would be your choice of currency derivative or keep open position?

If you think currency will depreciate and the exchange rate scenario in the next four quarters will be Rs. 102, 105, 110 and 115. What would be your strategies?

If you think currency will appreciate and the exchange rate scenario in the next four quarters will be Rs. 95, 90, 85 and 80. What would be your strategies?

If you think currency will fluctuate remarkably but don’t know the trend, in this scenario what would be your strategies? And calculate cost and benefit if the currency rate will be Rs. 90/$, Rs. 95, Rs. 100, 110.

If the company has to choose any of bank proposal, which bank you choose based on the total cost of premium?