Hedging Strategy : Tackling Uncertainities in Business

8/13/2019 Hedging Strategy : Tackling Uncertainities in Business

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IY2515 Strategy and Marketing 2013Assignment 4: Strategy in Uncertainty

Sayyed Saahir Bahuddin (800511-0914) Page 2 (3)

strategy, where the production and distributions decisions are based on real customer demand

rather than forecasted (David Simchi-Levi, 2002, p. 11).

Hedging Strategies

Hedging strategies should be used by the company to reduce the negative effects of the

uncertainty in demand or prices of gold. Using hedge strategies Titan Industries, can organize its

supply chain in such a way that the losses in one part can be compensated by the gains in the

another part (David Simchi-Levi, 2002, p. 12).

Gold is used as the major raw material for making jewellery. The jewellery companies have two

options of procuring gold; first is buying the gold outright and holding it in the inventory, the

second option is known as gold leasing or gold on loan, which is a hedging strategy.

If the company buys gold outright it sits on its balance sheet as inventory and also exposes the

company to the fluctuations in gold foreign exchange rates. If the price of the gold crashes from

the time they have bought the gold to the time the jewellery is sold, they may have to deal with

the pressures on their profit margins.

By gold leasing or loan, Titan Industries can lease the gold from the bank, usually, for a period of

180 days, by paying the bank the leasing interest rate of 5-8%. The company pays the bank at the

spot price of the gold for the amount of gold they use on that particular date. At the end of the

lease period of 180 days, Titan Industries settles with the bank. Since the price of the gold is paid

by the company as the gold is used. Titan Industries is able to side-step the risk of buying largequantities of gold and the drop in price by the time the gold is sold (EquityMaster.com, 2012).

Also, in the case of gold on lease, the company holds no inventories and hence no loss or profit

occurs from it. This also enables Titan Industries to safe-guard itself from falling customer

demands but on the flip side makes them less responsive to increasing customer demand

(MoneyControl.com, 2013).

Conclusion

The unpredictability of the global economy and Titan Industries dependence on the gold imports

makes it necessary for it to use a hedging strategy. The "Gold on lease", is the hedging strategy,

best suited to Titan Industries for dealing with the uncertainties around the gold prices and

currency fluctuations. In addition, they do not have to hold any inventories and pay considerably

lower interest rates compared to capital loans .

The recent government interventions of increasing the gold leasing interest rate from 8% to 12%

and bringing down the lease period from 180 days to 90 days can have significant impact on

Titan Industries cash flows and return ratios considering the turnaround time on gold jewellery

lying around 120 days (Business Standard, 2012).



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Hedging Strategy : Tackling Uncertainities in Business