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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

A firm has a net receivable of USD 1,000,000 and a net payable of USD 400,000, both due in 3 months. The forward rate is Rs 83.40 per USD. If the firm hedges only the net exposure through a forward sale, the rupee amount locked in is:

Netting leaves a USD 600,000 receivable exposure, which is sold forward at Rs 83.40, giving Rs 5,00,40,000. Hedging the gross receivable would overstate the amount because the payable offsets part of it.

  1. ARs 8,34,00,000
  2. BRs 3,33,60,000
  3. CRs 5,00,40,000Correct
  4. DRs 4,67,04,000

Explanation

Net exposure = 1,000,000 - 400,000 = USD 600,000. Locked-in amount = 600,000 x 83.40 = Rs 5,00,40,000. Rs 8,34,00,000 ignores the payable.

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