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

Meridian Pharma, an Indian firm, has a USD 1,000,000 receivable in 6 months. It considers a zero-cost collar: buy a USD put with strike Rs 82.00 (premium Rs 1.40) and sell a USD call with strike Rs 85.00 (premium Rs 1.40). Ignoring interest, what are the rupee realisations per USD if spot at expiry is (i) Rs 80.00, (ii) Rs 83.50, (iii) Rs 87.00?

A collar sets a floor at the put strike and a cap at the call strike. Realisations are Rs 82.00 when spot is 80.00, Rs 83.50 when spot is within the band, and Rs 85.00 when spot is 87.00, because the written call is exercised.

  1. A82.00; 83.50; 85.00Correct
  2. B80.00; 83.50; 87.00
  3. C82.00; 83.50; 87.00
  4. D82.00; 85.00; 85.00

Explanation

Net premium is zero. At 80.00 the put is exercised, giving 82.00. At 83.50, between strikes, neither is exercised, so the exporter sells at spot 83.50. At 87.00 the call written is exercised against the firm, so it effectively sells at 85.00. Option 82.00; 83.50; 87.00 ignores the short call's cap. Option 80.00; 83.50; 87.00 is an unhedged result.

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