The rising cost of raw materials for a certain industry consequently leads to high costs of production and market instability. The case is what was experienced at Banbury Impex Private Company in 2010. To alleviate the effects of rising costs of production, it is necessary to hedge the costs in the preparation for future unknown costs. Foreign businesses require hedging most as the exchange rates keep changing.
According to the chief executive officer of Banbury Impex Private Company back in November 2010, the company had recorded a drop in the growth of sales and a subsequent plummeting of the profits made. All in all, the gains were positive. Lapura attributed the slowed performance to two factors. One of the elements was the rising prices of cotton, the raw material used by the company. The second factor was the increasing power of the Indian rupee against the United States dollar. The second element posed a more significant problem than the first since the invoices were prepared using the dollar.
Delegate your assignment to our experts and they will do the rest.
It is recommended for Lapura to hedge the current costs of cotton with the anticipated future costs. First and foremost, the practice of hedging reduces the risks of an anticipated cost instability in future. Secondly, hedging allows companies to set targets for their anticipated profits and lay down their strategies to gain the benefits (The Motley Fool, 2015). Therefore, I would recommend Lapura to hedge the costs of the future cotton for Banbury Impex Private Company.
It is advisable for the chief executive officer of Banbury Impex, Lapura to consider using the United States dollar. By using the United States dollar for the Turkish sale, Lapura will save money used in the conduction of business for Banbury Impex. The savings would be as a result of the dollar is stronger than the other currencies provided as options. Additionally, he has had experience in the Turkish markets. It was also possible for Lapura to use some of the money as collateral for borrowing from the Turkish banks, a region he had conducted business with for over five years.
Hedging the Turkish sale receipts is the surest thing Lapura can do to ensure that the future business activities of Banbury Impex are secured against the unstable markets. Hedging the Turkish sale receipts will save the company from the disadvantages of unexpected variations in the foreign currency exchanges (Döhring, 2008).
It is true to say that an increase in the cost of raw materials leads to an increase in the costs of production. Chief executive officers have an uphill task in managing the rising costs by hedging them. A good example is Lapura, the CEO of Banbury Impex Private Company. For Lapura to engage in the Turkish business, it is imperative to hedge the sale receipts against instability in the market.
References
Döhring, B. (2008). Hedging and invoicing strategies to reduce exchange rate exposure-a euro-
Area perspective (No. 299). Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
The Motley Fool. (2015, November 16). What Are the Advantages and Disadvantages of Hedging in Finance? Retrieved from https://www.fool.com/knowledge-center/advantages-and-disadvantages-of-hedging-in-finance.aspx
