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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

An Indian firm exports machinery priced at USD 200,000 and receives payment in 3 months. The spot rate is Rs 80 per USD and the 3-month forward rate is Rs 82 per USD. The spot rate at payment turns out to be Rs 78 per USD. Compared with having sold the dollars forward at the outset, the firm's rupee receipt by not hedging is:

The unhedged receipt is Rs 8,00,000 lower. The forward contract would have locked in 200,000 x 82 = Rs 1.64 crore, while converting at the later spot rate of 78 yields Rs 1.56 crore. The comparison must use the forward rate, not the original spot rate.

  1. ARs 8,00,000 lowerCorrect
  2. BRs 4,00,000 higher
  3. CRs 8,00,000 higher
  4. DRs 4,00,000 lower
  5. Rs 6,00,000 lower

Explanation

Hedged receipt = 200,000 x 82 = Rs 1,64,00,000. Unhedged receipt = 200,000 x 78 = Rs 1,56,00,000. The difference is Rs 8,00,000 lower without hedging. Using the spot rate of 80 as the base would give Rs 4,00,000, which is the wrong comparison.

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