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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

An Indian exporter, Kaveri Exports, 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 firm hedges with a forward contract. At maturity the spot rate turns out to be Rs 84.10/USD. What is the rupee amount received because of the hedge, and how does it compare with remaining unhedged?

The forward contract locks in Rs 83.60 per dollar, giving Rs 1,67,20,000 on USD 200,000. Staying unhedged would have given Rs 1,68,20,000 at the spot of Rs 84.10, so the hedge produced Rs 1,00,000 less in this outcome, though it removed uncertainty.

  1. ARs 1,67,20,000 received; Rs 1,00,000 lower than unhedgedCorrect
  2. BRs 1,67,20,000 received; Rs 1,00,000 higher than unhedged
  3. CRs 1,68,20,000 received; Rs 1,00,000 higher than unhedged
  4. DRs 1,66,00,000 received; Rs 2,20,000 lower than unhedged

Explanation

Hedged receipt = 200,000 x 83.60 = Rs 1,67,20,000. Unhedged receipt = 200,000 x 84.10 = Rs 1,68,20,000. The hedge therefore gives Rs 1,00,000 less. Option C wrongly treats the unhedged amount as the hedged amount and reverses the comparison.

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