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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Kaveri Exports expects USD 100,000 in 3 months. It buys a USD put option at strike ₹83.00 with a premium of ₹1.20 per USD, paid now. Its cost of funds is 12% p.a. (3% for 3 months). The spot rate at expiry is ₹80.50. Ignoring other costs, what is the net rupee realisation from the option hedge?

The net realisation is ₹8,176,400. The put is exercised because spot is below the strike, giving ₹83 per USD. The premium of ₹1.20 grows to ₹1.236 at 3% financing, so the net is 81.764 per USD on 100,000 USD.

  1. A₹8,176,400Correct
  2. B₹8,180,000
  3. C₹8,050,000
  4. D₹7,930,000

Explanation

Spot (80.50) is below strike (83), so the put is exercised and yields ₹83.00 per USD. The premium's value at expiry = 1.20 × 1.03 = ₹1.236. Net per USD = 83 − 1.236 = 81.764, and × 100,000 = ₹8,176,400. ₹8,180,000 ignores the time value of the premium. ₹8,050,000 is the unhedged outcome.

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