9. On 1st February 2025, XYZ Ltd. a laptop manufacturer imported a particular type of Memory Chips from SKH Semiconductor of South Korea. The…
CA Final · Advanced Financial Management · RTP · September 2025
9. On 1st February 2025, XYZ Ltd. a laptop manufacturer imported a particular type of Memory Chips from SKH Semiconductor of South Korea. The payment is due in one month from the date of Invoice, amounting to 1190 Million South Korean Won (SKW). Following Spot Exchange Rates (1st February) are quoted in two different markets: in Mumbai USD/ INR 85.00/85.50 in New York USD/ SKW 1390.00/1390.90 Since hedging of Foreign Exchange Risk was part of company's strategic policy and no contract for hedging in SKW was available at any in-shore market, it approached an off-shore Non-Deliverable Forward (NDF) Market for hedging the same risk. In NDF Market a dealer quoted one-month USD/ SKW at 1390.00/1390.60 to be settled at reference rate declared by Bank of Korea. After 1 month (1st March 2020) the dealer agreed for SKW 1385/ USD as rate for settlement and on the same day the Spot Rates in the above markets were as follows: in Mumbai USD/ INR 85.50/85.75 in New York USD/ SKW 1388.00/1388.60 Analyze the position of company under each of the following cases, comparing with Spot Position of 1st February: (i) Do Nothing. (ii) Opting for NDF Contract. Note: Both ₹/ SKW Rate and final payment (to be computed in ₹ Lakh) to be rounded off upto 4 decimal points.
Suggested Answer and Working Notes:
9. (i) Do Nothing We shall compute the cross rates on both days and shall compare the amount payable in INR on these two days. On 1st February 2025 Rupee - Dollar selling rate = 85.50 Dollar - SKW = SKW 1390.00 Rupee - SKW cross rate = 85.50 / 1390.00 = 0.0615 Amount payable to Importer as per above rate (1190 Million x 0.0615) = 731.8500 Lakh On 1st March 2025 Rupee - Dollar selling rate = 85.75 Dollar - SKW = SKW 1388.00 Rupee - SKW cross rate = 85.75 / 1388.00 = 0.0618 Amount payable to Importer as per above rate (1190 Million x 0.0618) = 735.4200 Lakh Thus, Exchange Rate Loss = (₹ 735.4200 Lakh -731.8500 Lakh) = 3.5700 Lakh (ii) Hedging in NDF Since company needs SKW after one month it will take long position in SKW at quoted rate of SKW 1390/ USD and after one-month it will reverse its position at fixing rate of SKW 1385/USD. The profit/ loss position will be as follows: Buy SKW 1190 Million and sell USD (1190 Million/ 1390) USD 8,56,115 Sell SKW 1190 Million and buy USD at Fixing Rate (1190 Million/ 1385) USD 8,59,206 Profit USD 3,091 Final Position Amount Payable in Spot Market (as computed earlier) 735.4200 Lakh Less: Profit form NDF Market USD 3091 x 85.50 2.6428 Lakh 732.7772 Lakh Thus, Exchange Rate Loss = (₹ 732.7772 Lakh - 731.8500 Lakh) 0.9272 Lakh Decision: Since Exchange Loss is less in case of NDF same can be opted for.
Topics: Foreign Exchange Exposure and Risk Management
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