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IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses

The spot rate is ₹80 per US dollar. An Indian importer must pay US$250,000 in three months. Which action fully removes the exchange rate risk on this payment?

Buying US$250,000 forward for three months removes the risk. The importer owes dollars, so locking in the rupee price of those dollars today fixes the cost, whereas selling forward or waiting leaves or increases exposure to rate movements.

  1. ABuying US$250,000 forward for delivery in three months at an agreed rupee rateCorrect
  2. BSelling US$250,000 forward for delivery in three months
  3. CWaiting and buying dollars at the spot rate in three months
  4. DAsking the supplier to raise the dollar price
  5. Holding rupee deposits for three months

Explanation

The importer is short dollars, so it needs to buy dollars forward, fixing the rupee cost today. Selling forward would double the exposure. Waiting leaves the rate uncertain.

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