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CMA Final · Strategic Financial Management · The International Financial Environment

An Indian firm has a 6-month USD payable. Spot is Rs 83.00/USD and the 6-month forward is Rs 84.00/USD. The firm's expected spot after 6 months is Rs 83.60. Compared with remaining unhedged, by how much per USD does the forward hedge cost or save if the expectation proves right?

A payable hedged at Rs 84.00 costs more than the expected unhedged outlay of Rs 83.60, so the forward costs Rs 0.40 more per dollar if the expectation proves right. The comparison must use the expected future spot, not today's spot.

  1. ACosts Rs 0.40 more per USDCorrect
  2. BSaves Rs 0.40 per USD
  3. CCosts Rs 1.00 more per USD
  4. DSaves Rs 0.60 per USD

Explanation

Forward cost is Rs 84.00 versus expected spot payment of Rs 83.60. The difference is 84.00 - 83.60 = Rs 0.40 extra per USD. Rs 1.00 compares the forward with today's spot, which is not the unhedged expected cost.

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