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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Kaveri Textiles must pay USD 200,000 in six months. Spot rate is ₹83.00/USD. The six-month USD deposit rate is 4% p.a. and the INR borrowing rate is 10% p.a. (simple interest, pro-rated). Using a money market hedge, the rupee outflow at the end of six months is closest to:

The outflow is about ₹1,70,88,235. The firm deposits USD 196,078.43 (the payable discounted at 2% for six months), buys it at ₹83 using borrowed rupees of ₹1,62,74,510, and repays that loan with 5% half-year interest, giving ₹1,70,88,235.

  1. A₹1,70,88,235Correct
  2. B₹1,66,00,000
  3. C₹1,74,30,000
  4. D₹1,79,01,961

Explanation

USD to deposit now = 200,000/1.02 = 196,078.43. Rupees borrowed = 196,078.43 × 83 = ₹1,62,74,510. Repaying with 5% six-month interest gives 1,62,74,510 × 1.05 = ₹1,70,88,235. Option ₹1,74,30,000 skips discounting the USD amount; ₹1,79,01,961 applies a full-year 10% rate.

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