Hedging Currency Risk at TT Textiles

Currency exposures assume many forms: they can be assets or liabilities; current or committed; contracted or merely forecast; they can be for trade, investment or balance sheet purposes. Cases of currency exposure can emerge at any point along the value chain, with various repercussions. Each requires a transfer of funds, and for each the rate of exchange is uncertain. Examples of different types of currency exposures are presented below.

Often, when we think of a t-shirt, not much consideration goes past throwing it on and walking out the door. We discover in The Travels of a T-Shirt in the Global Economy, author Pietra Rivoli conveys the story of a t-shirt she purchased in Florida for just $5.99. Beginning with core element of the t-shirt, she describes the cotton boom in the United States and why we have reigned supreme as the leading cotton producer. She even meets with a Texan farmer who warms your heart from the very beginning of the chapter. Next, the cotton goes on to textile mills and factories, and Rivoli explains the history of the textile industry. With this lesson, she demonstrates how the textile industry boom was a

The above figure represent the amount (in terms of a percentage) of revenue gained that the above exports (top 10 in the year 2012) contribute to the UK’s economy. Source www.telegraph.co.uk

Esquel, one of the leading cotton-shirt-manufacturers in the world came from China and it supplies lots of clothing brand such as Banana Republic, Tommy Hilfiger, Hugo Boss, Brooks Brothers, Abercrombie and Fitch, Nike, Nordstrom and Lands’ End, in addition to private companies (Plunkett Research, Ltd.). However, due to the high demand of the US apparel stores for Chinese products, the low cost, which was the main reason why raw materials are being purchased from China, have increased. China’s competition is huge, with Vietnam, the Philippines, Malaysia and Sri Lanka also producing material at cheap prices (Plunkett Research, Ltd.). The US apparel stores can instead purchase from these other Asian countries. It is hard to determine the exact number of suppliers in this industry; but, in general, majority of them are in Asian countries that can provide low-cost raw materials to US-based apparel stores. Therefore, the US apparel stores may acquire higher net profi

New Look Jacket Inc. (NLJ) specializes in the production of Nylon Jackets and Leather Jackets. The company delivers successful financial records at the end of the 2012 fiscal year with the net income of $ 417,100, which is $170,850 greater than the net income budgeted for the 2012 fiscal year despite that the company operations goes through some turmoil. A more detail variance shows that the external factor largely responsible for the growth of leather markets that rapidly increase than anticipated making NLJ to catch with the increase in market demand.

The film ‘T-shirt Travels’ takes us to the Sub-Saharan African nation of Zambia, a country who in the 1960’s was know for having a thriving, domestic textile industry. As of late, with the countries immense amount of debt and the constant nagging of their creditors, such as the IMF, Zambia’s local economy has deteriorated and the textile industry has vanished. However, there is another issue present that has also contributed to the decline of Zambia’s economy: the second-hand clothing industry. All three of these factors; immense debt, hassling creditors, and the second-hand clothing industry, as seen in the film, are contributing to the crash of a once thriving Zambian economy.

The producers in the new T-shirt value chain do not operate in a free market system. Government protectionist measures such as subsidies, quotas, and tariffs have limited economic success to a fortunate few. According to the author Pietra Rivoli, “the winners at various stages of my T-shirt’s life are adept not so much at competing in markets but at avoiding them.” These winners include the U.S. cotton farmer and the China apparel industry. Their market dominance and profitability have benefitted significantly from the political prowess of their government to limit competition.

First, MIT’s Observatory of Economic Complexity 2015 China export visualization also shows that garments account for 16% of the goods imported by Americans.

The textile industry has undergone enormous change in the past ten years. Global trade in textiles was once regulated by high tariffs and a complex system of import quotes. Not anymore. Textiles used to be produced predominantly in the U.S., Europe and Japan. Not anymore. Textile mills used to dictate fashion, everything from fabric construction to fiber content. Not anymore.

Multinational corporations often sell products in various countries with prices denominated in corresponding local currencies. It is widely recognized that as the volatility in exchange rates has increased dramatically after the breakdown of the Bretton Woods system of fixed exchange rates (Smith, Smithson and Wilford, 1990), multinational corporations may have become increasingly vulnerable to exchange risk since the short term movements in exchange rates are often not accompanied by offsetting changes in prices in the corresponding countries (Shapiro, 1992). Exchange rate exposure is an important source of risk for multinational corporations such as transaction exposure, economic exposure, and translation exposure. Thus, managers of multinational firms employ a number of foreign exchange hedging strategies in order to protect against exchange rate risk. The primary reason companies would hedge foreign exchange risk is so that they do not want to lose money on capital or assets they have stored in different

This paper will examine the role of the United States in textile and apparel production in the age of globalization and will provide an overview of trade agreements enacted in the textile and apparel industry. A discussion of the different trade agreements and how the U.S. textile and apparel industry has been affected by those agreements will be given along with ideas about what the United States can do to continue to operate in the domestic market of textiles and apparel.

Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk

Nestlé S.A. is a Swiss company and owns a prestigious position being the world’s leading nutrition, health and wellness group (Nestlé, 2016). According to its annual report (2015), this company is exposed to many risks caused by movements in foreign currency exchange rates, interest rate and market prices. The foreign exchange risk comes from transactions and translations of foreign operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable rates. The market price risk comes from commodity price and equity price. The former risk arises from world commodity market for the supplies of coffee, cocoa beans, sugar and others. The later risk arises from the fluctuations of the prices of investments held. (Nestle annual reports, 2015). Thus, financial derivatives instruments are used by this multinational corporation in order to hedge these risks.

According to the data, the total volume of textiles exported from China has started a continuous rapid growth since 2001 (the year of China’s accession to the WTO) as shown in the first graph above, which roughly

billion (Exhibit 1 provides a summary of financial information). After a decade of rapid growth,