Submitted by: Submitted by bravo1oh1
Views: 277
Words: 594
Pages: 3
Category: Other Topics
Date Submitted: 11/25/2014 11:39 AM
Banbury Impex (India)
In late 2010, CEO Aadesh Lapura of Banbury Impex, an Indian textile firm, was faced with some important decisions regarding the future of his company. Banbury had recently been experiencing a slow increase in sales with a slow decrease in profits. The declining profitability of the company was due primarily to an increase in the price of cotton as well as an increase in the value of the Indian rupee against the U.S. dollar. Lapura had to decide if he should hedge his cotton costs with cotton futures in order to protect against the rising cost of cotton. In addition, he had to figure out the best way to protect the financial value of a sale to a Turkish customer from currency losses. These decisions would help shape the future of the company.
Which factor do you think is more threatening to Banbury's profitability, cotton prices or the rising value of the rupee?
Although rising cotton prices are an important threat to Banbury's profitability, the rising value of the rupee is an even more significant threat. Since cotton is a global commodity, its rising price has a similar effect on companies in various nations throughout the world. While some companies may be able to handle rising cotton prices better than others, there are similar consequences for all textile manufacturers, so there is not a significant change in competition. However, the rising value of the rupee harms only Indian companies who use it as their primary currency. Companies in other nations either face no harmful effects, or possibly even benefit from an appreciating rupee. Since the industry operates at a small profit margin to begin with, Banbury would be forced to raise prices in order to remain profitable. By raising prices relative to its competitors who use other currencies, Banbury will become less competitive, resulting in fewer sales and smaller profits.
Do you think that Lapura should hedge his cotton costs with cotton futures? What would you...