Northern Textiles Limited (A)

NTL is an Indian company that earns much of its revenues from exports. Its hedging activities had become increasingly sophisticated under a treasury that was incentivized to generate profits. As a rising rupee reduced NTL’s competitiveness in global markets, it has come to rely more and more on treasury income to remain profitable. NTL’s treasury under Thomas has responded to this challenge by embracing highly complex leveraged structured products. As the Global Financial Crisis (GFC) hit in 2007 and 2008, exchange rates and interest rates started moving in ways that Thomas had never anticipated, inflicting serious losses on NTL.
Seth, the founder Chairman of NTL is upset after a bank wrote to him demanding payment of the loss incurred by NTL on a derivative product that NTL had bought from the bank. Seth has no knowledge of the rest of the hedge book and is unaware of the seriousness of the problem. One of his banker friends has suggested that he should hire a more professional CFO to replace the current CFO, Rao. From Seth’s point of view, the case presents interesting issues of risk governance and risk management policies.
Rao is immersed in firefighting, figuring out the gravity of the problem and managing the liquidity needs of NTL. Thomas is the only person who understands the derivative book in its entirety, but is obviously not keen to let his superiors know how big the problem really is.