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

Sharma Traders will pay USD 200,000 in two months. Spot is Rs 83.00 and the two-month futures price is Rs 83.40. It hedges by buying USD futures (contract size USD 1,000) and closes out when payment is due. At that time spot is Rs 84.10 and the futures price converges to spot. Ignoring margins, what is the effective rupee cost of the payable?

The effective cost is Rs 1,66,80,000. Paying at the spot of 84.10 costs Rs 1,68,20,000, but the long futures position gains Rs 1,40,000 as the price rises from 83.40 to 84.10. The hedge effectively locks the entry futures rate of 83.40 on USD 200,000.

  1. ARs 1,66,00,000
  2. BRs 1,66,80,000Correct
  3. CRs 1,68,20,000
  4. DRs 1,67,80,000

Explanation

Pay at spot: 200,000 x 84.10 = Rs 1,68,20,000. Futures gain = (84.10 - 83.40) x 200,000 = Rs 1,40,000. Net cost = 1,68,20,000 - 1,40,000 = Rs 1,66,80,000. Check: locked rate 83.40 x 200,000 = Rs 1,66,80,000. Distractor Rs 1,66,00,000 wrongly uses the original spot of 83.00.

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