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CA Final · Advanced Financial Management · Foreign Exchange Exposure and Risk Management

An Indian exporter will receive USD 2,00,000 in 6 months. Spot is ₹83.00/USD. The 6-month USD borrowing rate is 6% p.a. and the 6-month INR deposit rate is 8% p.a. (rates are nominal annual; use half the rate for 6 months). The exporter plans a money market hedge: borrow dollars now, convert to rupees at spot, and deposit the rupees. What rupee amount is available at the end of 6 months, to the nearest rupee?

The money market hedge yields about ₹1,67,61,165. The exporter borrows the present value of the receivable, USD 1,94,175 (2,00,000 ÷ 1.03), converts it at ₹83 to ₹1,61,16,505, and deposits it at 4% for six months, so the receipt repays the loan.

  1. A₹1,67,61,165Correct
  2. B₹1,72,64,000
  3. C₹1,61,16,505
  4. D₹1,66,00,000

Explanation

Borrow the PV of USD 2,00,000 at 3% for the half-year: 2,00,000/1.03 = USD 1,94,174.76. At ₹83 this is ₹1,61,16,505. Deposited at 4% for 6 months it grows to ₹1,67,61,165. Option B skips discounting the dollar loan. Option C stops before earning interest on the deposit.

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