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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

An Indian exporter, Kaveri Textiles, expects to receive USD 200,000 in 3 months. Spot is Rs 83.00/USD. The 3-month forward rate is quoted at Rs 83.60/USD. If the firm sells the dollars forward, how many rupees will it receive at maturity?

The exporter receives Rs 1,67,20,000. A forward sale fixes the rupee proceeds at the forward rate of Rs 83.60, so 200,000 dollars multiplied by 83.60 gives the amount. Spot is irrelevant once the forward contract is entered into.

  1. ARs 1,66,00,000
  2. BRs 1,67,20,000Correct
  3. CRs 1,68,40,000
  4. DRs 1,65,40,000

Explanation

Forward sale locks in the forward rate: 200,000 x 83.60 = Rs 1,67,20,000. Using the spot rate (Rs 1,66,00,000) ignores the forward premium and is wrong, since the hedge fixes the forward rate.

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