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

Bharat Exports expects to receive EUR 100,000 in three months and holds a EUR put option with strike Rs 90.00 per EUR, premium Rs 2.00 per EUR. What is the breakeven spot rate at expiry (ignoring interest) below which the option strategy beats leaving the exposure unhedged?

The breakeven is Rs 88 per EUR. Exercising the put yields the strike of Rs 90 less the Rs 2 premium, a net Rs 88. If spot falls below Rs 88, the put strategy beats remaining unhedged; above it, being unhedged is better.

  1. ARs 92.00
  2. BRs 88.00Correct
  3. CRs 90.00
  4. DRs 86.00

Explanation

With the put, net realisation per EUR when exercised = strike - premium = 90 - 2 = Rs 88. Unhedged realisation equals spot. The hedge is better when spot is below Rs 88. Rs 92 wrongly adds the premium; Rs 90 ignores the premium.

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