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

An Indian importer must pay USD 5,00,000 to a US supplier in three months. The treasury expects the dollar to appreciate against the rupee more than the forward market implies. Which internal forex risk management technique is most appropriate for this payable?

Leading is appropriate. Because the importer owes dollars and expects the dollar to strengthen, each rupee cost of the payable will rise over time. Paying earlier locks in the current, cheaper exchange rate. Lagging would be used only if the dollar were expected to weaken.

  1. ALeading: pay the supplier earlier than the due date, if permittedCorrect
  2. BLagging: delay the payment as long as possible
  3. CDo nothing, since expected dollar appreciation benefits a payer
  4. DInvoice the exporter's future receivables in rupees only

Explanation

An importer with a foreign currency payable loses if that currency appreciates. Paying early (leading) fixes the rupee cost at today's lower rate. Lagging suits a payable only when the foreign currency is expected to depreciate, so it would worsen the loss here. Appreciation of the payable currency hurts, not benefits, the payer.

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