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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

An Indian exporter expects to receive USD 200,000 in 3 months. Spot is Rs 83.00/USD and the 3-month forward rate is Rs 83.60/USD. The exporter sells the dollars forward. What is the rupee amount locked in, and what is the forward premium on the dollar, annualised, approximately (on spot)?

The exporter locks in 200,000 x 83.60 = Rs 1,67,20,000. The dollar trades at a forward premium of 0.60/83.00, about 0.72% for three months, which annualises to roughly 2.89%. Not annualising or using spot gives the wrong figures.

  1. ARs 1,66,00,000; premium about 2.89% p.a.
  2. BRs 1,67,20,000; premium about 2.89% p.a.Correct
  3. CRs 1,67,20,000; premium about 0.72% p.a.
  4. DRs 1,66,00,000; premium about 0.72% p.a.

Explanation

Locked amount = 200,000 x 83.60 = Rs 1,67,20,000. Premium = (83.60-83.00)/83.00 = 0.723% for 3 months; x4 = 2.89% p.a. Option 3 forgets to annualise; options using 83.00 ignore the forward rate.

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