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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

A firm will pay USD 100,000 in 3 months and buys a call option on USD with strike Rs 83.50 at a premium of Rs 0.80 per USD. Ignoring interest on the premium, if spot after 3 months is Rs 85.00, what is the effective rupee cost per USD?

The effective cost is Rs 84.30 per dollar. The option is exercised at the Rs 83.50 strike because spot is higher, and the Rs 0.80 premium paid upfront adds to the cost. Total outflow is therefore Rs 84,30,000 for USD 100,000.

  1. ARs 84.30Correct
  2. BRs 85.80
  3. CRs 83.50
  4. DRs 85.00

Explanation

The call is exercised since 85.00 > 83.50. Effective cost = strike 83.50 + premium 0.80 = Rs 84.30. Rs 85.80 wrongly adds the premium to the spot rate.

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