Z Ltd. importing goods worth USD 2 million, requires 90 days to make the payment. The overseas supplier has offered a 60 days interest free credit…

CA Final · Advanced Financial Management · RTP · May 2025
Z Ltd. importing goods worth USD 2 million, requires 90 days to make the payment. The overseas supplier has offered a 60 days interest free credit period and for additional credit for 30 days an interest of 8% per annum. The bankers of Z Ltd offer a 30 days loan at 10% per annum and their quote for foreign exchange is as follows: ₹ Spot 1 USD 82.50 60 days forward for 1 USD 83.40 90 days forward for 1 USD 83.90 You are required to evaluate the following options: (i) Pay the supplier in 60 days, or (ii) Avail the supplier's offer of 90 days credit. Note: - 1. Consider 360 day a year.

Suggested Answer and Working Notes:

(i) Pay the supplier in 60 days If the payment is made to supplier in 60 days, the applicable forward rate for 1 USD 83.40 Payment Due USD 2,000,000 Outflow in Rupees (USD 2000000 × ₹ 83.40) 16,68,00,000 Add: Interest on loan for 30 days@10% p.a. 13,90,000 Total Outflow in ₹ 16,81,90,000 (ii) Availing supplier's offer of 90 days credit Amount Payable USD 2,000,000 Add: Interest on credit period for 30 days @ 8% p.a. USD 13,333 Total Outflow in USD USD 2,013,333 Applicable forward rate for 1 USD 83.90 Total Outflow in ₹ (USD 2,013,333 × ₹ 83.90) 16,89,18,639 Advise: Alternative 1 is better as it entails lower cash outflow.

Topics: Foreign Exchange Exposure and Risk Management

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic