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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Sagar Ltd will pay USD 100,000 in 3 months. Spot is Rs 83.00/USD and the 3-month forward is Rs 83.50. A 3-month call option on USD with strike Rs 83.20 costs a premium of Rs 0.40 per USD. If the spot at maturity is Rs 84.10, what is the effective total outflow using the option (premium ignoring interest)?

The call is exercised because spot of 84.10 is above the 83.20 strike, costing Rs 8,320,000, and adding the Rs 40,000 premium gives a total outflow of Rs 8,360,000, which beats both the forward and the unhedged spot cost.

  1. ARs 8,360,000Correct
  2. BRs 8,400,000
  3. CRs 8,320,000
  4. DRs 8,350,000

Explanation

Spot 84.10 exceeds strike 83.20, so the call is exercised: 100,000 x 83.20 = Rs 8,320,000. Add premium 100,000 x 0.40 = Rs 40,000. Total = Rs 8,360,000. Rs 8,320,000 omits the premium; Rs 8,410,000 would be unhedged spot plus none.

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