JKL Ltd., an Indian company has an export exposure of JPY 10,000,000 receivable December 31, 2022. Japanese Yen (JPY) is not directly quoted against…

(a) Since the direct quote for ₹ and ¥ is not available it will be calculated by cross exchange rate as follows: ₹/$ x $/¥ = ₹/¥ 82.22/132.34 = 0.6213 Spot rate on date of export 1 ¥ = 0.6213 Estimated Rate of ¥ for Dec.31, 2022 = 0.5519 (₹ 85/¥ 154) Forward Rate of ¥ for Dec.31, 2022 = 0.6163 (₹ 86.50/ ¥ 140.35) (i) The expected loss without hedging Value of export at the time of export (0.6213 x ¥ 10,000,000) 62,13,000 Expected payment to be received on 31 st Dec. 2022 as per estimated rates (₹ 0.5519 x ¥ 10,000,000) 55,19,000 Loss 6,94,000 (ii) (a) Hedging of loss under Forward Cover Value of export at the time of export (0.6213 x ¥ 10,000,000) 62,13,000 Payment expected to be received under Forward Cover (0.6163 x ¥ 10,000,000) 61,63,000 Loss 50,000 Thus, by taking forward cover loss is reduced to 50,000 from 6,94,000 (b) Actual Rate of ¥ on December 2022 = 0.6124 (₹ 86.25/ ¥ 140.85) Value of export at the time of export (0.6213 x ¥ 10,000,000) 62,13,000 Payment to be received on 31 st Dec. 2022 as per actual rate (₹ 0.6124 x ¥ 10,000,000) 61,24,000 Loss 89,000 From the above solution, we can find that net loss in actual situation is 89,000 while net loss when taken Forward Cover is only - 50,000. Hence, the decision to take Forward Cover is justified even if the actual rate happens to be as prescribed.