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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

An Indian exporter will receive USD 500,000 in three months and wants to fix the rupee amount it will receive today, without paying an upfront premium and without the right to walk away from the deal. Which instrument best meets this aim?

A forward contract to sell dollars in three months is best. It fixes the rupee proceeds today, usually needs no upfront premium, and binds both parties to deliver. Options cost a premium and are optional, and an interest rate swap addresses interest rate risk rather than currency risk.

  1. AA forward contract to sell USD against rupees in three monthsCorrect
  2. BA purchased USD put option on the rupee
  3. CA purchased USD call option
  4. DA payer interest rate swap
  5. A long position in a rupee call warrant issued by the exporter

Explanation

A forward sale locks in the exchange rate with no upfront premium, and both parties are obliged to complete it. An option requires a premium and gives the holder the right to walk away, so it fails the stated aim. A swap deals with interest rates, not currency receipts.

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