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CA Final · Advanced Financial Management · Risk Management

Sundaram Exports Ltd expects to receive USD 200,000 in 3 months. Spot is Rs 83.00/USD. The 3-month forward rate is Rs 83.60/USD. The firm enters a forward contract to sell USD. What is the rupee inflow at the end of 3 months, and what is the hedge nature?

The inflow is Rs 1,67,20,000, being USD 200,000 multiplied by the forward rate of Rs 83.60. The forward contract is binding, so the rupee receipt is locked in irrespective of the spot rate at maturity, eliminating the exporter's transaction exposure.

  1. ARs 1,66,00,000, since the spot rate applies to forward contracts
  2. BRs 1,67,20,000, locking in the rupee amount and removing exchange-rate uncertaintyCorrect
  3. CRs 1,67,20,000, but only if spot at maturity is above Rs 83.60
  4. DRs 1,65,80,000, since the forward rate is subtracted from spot

Explanation

A forward sale fixes the rate at Rs 83.60 regardless of future spot. 200,000 x 83.60 = Rs 1,67,20,000. The spot-based figure of Rs 1,66,00,000 ignores the forward rate and is wrong. The contract is binding, so it does not depend on the future spot.

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