BDR Ltd. is an Indian export business house. The company prepares invoice in customers' currency. It has debtors amounting US$ 10 Million which are…

CA Final · Advanced Financial Management · MTP · November 2024
BDR Ltd. is an Indian export business house. The company prepares invoice in customers' currency. It has debtors amounting US$ 10 Million which are due to be received on April 1, 2023. Market information as at January 1, 2023 is: Exchange rates US$/INR Currency Futures US$/INR Spot 0.012500 Contract size:32,816,474 1-month forward 0.012422 1-month 0.012417 3-months forward 0.012195 3-month 0.012189 Initial Margin Interest rates in India 1-Month - 22,500 6.5% 3-Months - 27,500 7% On April 1, 2023, the spot rate US$/INR is 0.012199 and Currency Futures rate is 0.012198. Advise which of the following methods would be most advantageous to BDR Ltd. or keep the exposure unhedged. (i) Using forward contract (ii) Using currency futures.

Suggested Answer and Working Notes:

(i) Receipts using a Forward Contract = US$ 10 Million/0.012195 = 820,008,200 (ii) Receipts using Currency Futures The number of contracts needed is (US$ 10 Million/0.012189)/32,816,474 = 25 Initial margin payable is 25 contracts x 27,500 = 687,500 On April 1,2023 Close at 0.012198 Receipts = US$ 10 Million/0.012199 = 819,739,323 Variation Margin = [(0.012198 – 0.012189) x 25 x 32,816,474]/0.012199 OR (0.000009 x 25 x 32,816,474)/.012199 = 7383.71/0.012199 = 605,271 Less: Interest Cost - 6,87,500 x 0.07 x 3/12 = 12,031 Net Receipts = 820,332,563 (iii) Receipt if exposure is kept unhedged. US$ 10 Million/0.012199 = 819,739,323 Advise: The most advantageous option would hedge with Futures because it has highest receipt.

Topics: Foreign Exchange Exposure and Risk Management

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