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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

A company has a net receivable of USD 300,000 due in 1 month. Spot is Rs 83.20 and the 1-month forward is Rs 83.50. On the due date spot turns out to be Rs 83.90. By hedging with the forward, compared with staying unhedged, the company's rupee result is:

Hedged, the company gets 300,000 x 83.50 = Rs 2,50,50,000; unhedged it would get 300,000 x 83.90 = Rs 2,51,70,000. The forward hedge therefore leaves it Rs 1,20,000 worse off, because the dollar strengthened beyond the forward rate.

  1. AGain of Rs 1,20,000
  2. BLoss of Rs 1,20,000Correct
  3. CLoss of Rs 90,000
  4. DGain of Rs 90,000

Explanation

Hedged receipt = 300,000 x 83.50 = Rs 2,50,50,000. Unhedged = 300,000 x 83.90 = Rs 2,51,70,000. Difference = Rs 1,20,000 less under the hedge, i.e. an opportunity loss.

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