Managing Exchange Rate Risk CASE STUDY ANSWER

Managing Exchange Rate Risk CASE STUDY ANSWER

Mahindra International (India) imported spares of an engine from a US manufacturer for $ 5,000 per

annum at a price of $ 2.5 per piece. The average exchange rate during 2001-02 was Rs. 47.70/$. The

Indian company imported the spares also from a British manufacturer. In fact, it had diversified its

import in view of reducing the risk associated with the supply. The import from the USA was

competitive in view of the fact the same spares imported from the UK was slightly costlier. The

American spares cost Rs. 119.25 per piece, while the British spares cost Rs. 120.00 per piece. In

2002-03, US dollar appreciated to Rs. 48.40 with the result that the cost of American spares turned

higher than the British spares. In the sequel of the appreciation of US dollar, the Indian importer cut

its demand from 2,000 pieces to 500 pieces. The loss to the US exporter was colossal. But at the same

time, the Indian Importer suffered a lot. It had to pay a higher price for the US spares in terms of

rupee. And also, it had to divert its import from the USA to the UK insofar as the pound sterling did

not appreciate during this period. All this happened in the wake of the exchange rate changes.

Questions:

1. Mention the loss borne by the US exporter in the sequel of appreciation of dollar.

2. What strategy the Indian importer needs to follow to hedge the exchange rate risk?