Quick & Smart Inc. is a leading software development company in the UK. It has a substantial portfolio of its trade in various countries…

CA Final · Advanced Financial Management · PYQS · September 2025
Quick & Smart Inc. is a leading software development company in the UK. It has a substantial portfolio of its trade in various countries including the USA. It has recently invoiced a USA customer the sum of USD ($) 75,00,000 receivable in one year's time. Quick & Smart Inc.'s Chief Finance Officer (CFO) is considering two alternatives for hedging the exchange risk: Alternative I: Borrowing present value of USD ($) 75,00,000 now for one year, converting the amount into GBP (£), and repaying the loan out of eventual receipts. Alternative II: Entering into a 12 month forward exchange contract with the company's bank to sell the USD ($) 75,00,000. The spot exchange rate is GBP (£) 1 = USD ($) 1.3288 The 12 month forward exchange rate is GBP (£) 1 = USD ($) 1.3128 Interest rates for 12 months are = USA 4.50%; and UK 5%. You are required to Calculate net proceeds in GBP (£) under both the alternatives and advise the company. Note: Ignore bank commission and decimals.

Suggested Answer and Working Notes:

Alternative I Borrowing PV of US$ 75,00,000 (US$ 75,00,000/ 1.045) $71,77,033 Converting it into GBP (£) at Spot Rate $1.3288 Converted Amount £54,01,139 Add: Interest on the same @ 5% £2,70,057 £56,71,196 Alternative II Applicable Forward Rate of 1 £ $1.3128 Amount Receivable in $ after one year $75,00,000 Amount receivable in £ after £57,12,980 Advise: Since amount receivable is higher under alternative II the company should opt for it.

Topics: Foreign Exchange Exposure and Risk Management

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