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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Aarav Exports Pvt Ltd, Surat, will receive USD 400,000 in 3 months. Spot is Rs 83.00/USD. A bank quotes a 3-month forward bid of Rs 83.60 and a 3-month put option on USD with strike Rs 83.20 at a premium of Rs 0.50 per USD, payable now. Ignore interest on the premium. If the spot after 3 months is Rs 82.00, which hedge gives the higher rupee realisation, and by how much compared with the other? Select the correct option.

The forward gives 400,000 x 83.60 = Rs 3,34,40,000. The put option is exercised at 83.20 less a premium of 0.50, netting 82.70 per dollar, or Rs 3,30,80,000. The forward is better by Rs 3,60,000 when spot falls to 82.

  1. AForward, by Rs 4,40,000Correct
  2. BOption, by Rs 4,40,000
  3. CForward, by Rs 1,20,000
  4. DForward, by Rs 1,60,000

Explanation

Forward realisation = 400,000 x 83.60 = Rs 3,34,40,000. Option is exercised at 83.20, net per USD = 83.20-0.50 = 82.70, so 400,000 x 82.70 = Rs 3,30,80,000. The difference is Rs 3,60,000, not matching 4,40,000, so recheck: 3,34,40,000-3,30,80,000 = 3,60,000.

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