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CA Final · Advanced Financial Management · Foreign Exchange Exposure and Risk Management

Mehta Exports, an Indian exporter, expects to receive USD 50,000 in three months and wants to hedge using USD-INR currency futures on an exchange where each contract has a size of USD 1,000. To hedge the receivable, Mehta Exports should:

Mehta Exports should sell 50 USD-INR futures contracts. A dollar receivable loses rupee value if the dollar falls, so a short futures position offsets it. The number of contracts is USD 50,000 divided by the contract size of USD 1,000, which gives 50.

  1. ABuy 50 USD-INR futures contracts
  2. BSell 50 USD-INR futures contractsCorrect
  3. CSell 500 USD-INR futures contracts
  4. DBuy 500 USD-INR futures contracts

Explanation

An exporter with a dollar receivable is long USD and fears the dollar will weaken against the rupee, so it must sell USD futures. Number of contracts = 50,000 / 1,000 = 50. Buying futures would double the exposure rather than offset it.

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