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CMA Final · Strategic Financial Management · Foreign Exchange Market

Spot GBP/INR is 100.00 and the 6-month forward is 102.00. A firm will pay GBP 2,00,000 in six months and covers via a forward contract. Six months later the spot rate is 104.50. What is the gain from hedging compared with remaining unhedged?

Hedging saves INR 5,00,000. The forward contract fixes the cost at 102 per pound, or INR 2.04 crore, while paying at the later spot of 104.50 would cost INR 2.09 crore. The difference of 2.50 per pound on 2,00,000 pounds is the gain.

  1. AINR 5,00,000Correct
  2. BINR 4,00,000
  3. CINR 9,00,000
  4. DINR 2,50,000

Explanation

Forward cost = 2,00,000 x 102 = INR 2,04,00,000. Unhedged cost = 2,00,000 x 104.50 = INR 2,09,00,000. Gain = 2,09,00,000 - 2,04,00,000 = INR 5,00,000. The 4,00,000 figure wrongly compares with spot of 100 on the other basis.

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