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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Ganga Pharma must pay USD 500,000 in 3 months. It can buy a USD call option at strike ₹83.50 for a premium of ₹0.80 per USD, paid now. Ignore the time value of money. If the spot rate at expiry is ₹85.00, the effective total rupee outflow is:

The call is exercised because the spot rate of ₹85 exceeds the ₹83.50 strike. The cost is 500,000 × 83.50 = ₹41,750,000 plus a premium of ₹400,000, giving a total outflow of ₹42,150,000.

  1. A₹41,750,000
  2. B₹42,150,000Correct
  3. C₹42,500,000
  4. D₹42,900,000

Explanation

Spot 85.00 exceeds strike 83.50, so the option is exercised: 83.50 × 500,000 = ₹41,750,000. Add premium 0.80 × 500,000 = ₹400,000. Total = ₹42,150,000. Omitting the premium gives ₹41,750,000, which is wrong.

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