Skip to content

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

Case: Kaveri Textiles Ltd, Coimbatore, will import machinery from Germany and must pay EUR 200,000 in 3 months. Spot is Rs 90.00/EUR and the 3-month forward is Rs 91.50/EUR. The finance head decides to buy EUR forward for the full amount. What is the rupee outflow in 3 months, and what is the forward premium on an annualised basis (to the nearest 0.1%)? Select the correct option.

The forward purchase costs 200,000 x Rs 91.50 = Rs 1,83,00,000. The euro trades at a premium of Rs 1.50 on Rs 90, which is 1.667% for three months and about 6.7% annualised, because the quarterly figure is multiplied by four.

  1. ARs 1,80,00,000; premium 6.7% p.a.
  2. BRs 1,83,00,000; premium 6.7% p.a.Correct
  3. CRs 1,83,00,000; premium 1.7% p.a.
  4. DRs 1,83,00,000; premium 3.3% p.a.

Explanation

Outflow = 200,000 x 91.50 = Rs 1,83,00,000. Premium for 3 months = (91.50-90)/90 = 1.667%; annualised = 1.667% x 4 = 6.67%, i.e. 6.7%. Option 3 gives only the 3-month premium, and option 1 uses the spot rate.

Did you get it right without looking?

One question tells you little. A timed set on Advanced Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise Advanced Financial ManagementFree diagnostic mock

More Advanced Financial Management questions