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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

A firm has a USD 500,000 payable in 3 months. Spot is Rs 83.00. A 3-month call option on USD with strike Rs 83.50 costs Rs 0.40 per USD. If spot at maturity is Rs 85.00, what is the effective total rupee outflow using the option (ignore interest on premium)?

The firm exercises the call at Rs 83.50 because spot is Rs 85.00. Adding the Rs 0.40 premium gives an effective Rs 83.90 per dollar, so the total outflow is 500,000 x 83.90 = Rs 4,19,50,000. Leaving out the premium understates the cost.

  1. ARs 4,17,50,000
  2. BRs 4,19,50,000Correct
  3. CRs 4,22,50,000
  4. DRs 4,25,00,000

Explanation

The call is exercised at 83.50. Cost per USD = 83.50 + 0.40 = 83.90. Total = 500,000 x 83.90 = Rs 4,19,50,000. Option 1 omits the premium; option 4 is the unhedged cost.

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