Skip to content

CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Spot GBP/INR is Rs 100. An importer must pay GBP 50,000 in 3 months and buys a call option on GBP with strike Rs 101 at a premium of Rs 1.50 per GBP. At expiry the spot is Rs 104. Ignoring interest on the premium, the effective total rupee outflow is:

The total outflow is Rs 51,25,000. The call is exercised because spot of Rs 104 exceeds the Rs 101 strike, costing Rs 50,50,000 for 50,000 pounds, and the premium of Rs 75,000 is added to it.

  1. ARs 50,50,000
  2. BRs 51,25,000Correct
  3. CRs 52,00,000
  4. DRs 51,00,000

Explanation

Spot 104 exceeds strike 101, so exercise: 50,000 x 101 = Rs 50,50,000. Premium 50,000 x 1.50 = Rs 75,000. Total = Rs 51,25,000. Rs 52,00,000 wrongly uses spot rate without the option.

Did you get it right without looking?

One question tells you little. A timed set on Foreign Exchange Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Foreign Exchange Risk ManagementFree diagnostic mock

More Foreign Exchange Risk Management questions