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

Sundaram Imports must pay USD 500,000 in two months. It buys a USD call option with strike Rs 84.00 and pays a premium of Rs 0.90 per USD. Premium is paid today and the cost of funds is 12% p.a. (simple), so premium is compounded for 2 months. At expiry spot is Rs 86.00. What is the total effective rupee outflow?

The call is exercised since spot Rs 86 exceeds strike Rs 84, costing Rs 42,000,000. The premium of Rs 450,000 grows by 2% to Rs 459,000 over two months, so the total effective outflow is Rs 42,459,000.

  1. ARs 42,450,000
  2. BRs 42,000,000
  3. CRs 43,000,000
  4. DRs 42,459,000Correct

Explanation

Call exercised as 86 > 84: 500,000 x 84 = Rs 42,000,000. Premium = 500,000 x 0.90 = Rs 450,000; interest for 2 months at 12% = 2% so 450,000 x 1.02 = Rs 459,000. Total = Rs 42,459,000. Rs 42,450,000 ignores interest on premium; Rs 43,000,000 uses spot.

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