CMA Final · Strategic Financial Management · Foreign Exchange Risk Management
Infosys-linked vendor Kaveri Ltd must pay USD 500,000 in 3 months. Spot is Rs 83.00. A 3-month call option on USD with strike Rs 83.50 costs a premium of Rs 0.60 per USD. If the spot at expiry is Rs 84.80, the total effective cost per USD, including premium (ignore interest), is:
The call is exercised because spot Rs 84.80 is above the strike Rs 83.50. The payer buys dollars at Rs 83.50 and also bears the premium of Rs 0.60, so the effective cost is Rs 84.10 per USD. Adding premium to spot would be wrong.
- ARs 84.80
- BRs 84.10Correct
- CRs 83.50
- DRs 85.40
Explanation
Spot 84.80 exceeds strike 83.50, so the call is exercised and USD is bought at 83.50. Add premium 0.60: effective cost 84.10 per USD. Rs 85.40 wrongly adds the premium to the spot rate.
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