A Japanese company imports hi-tech printer cartridges from US worth $1 million. The chief financial officer of the company wishes to know the best…

CA Final · Advanced Financial Management · MTP · January 2026
A Japanese company imports hi-tech printer cartridges from US worth $1 million. The chief financial officer of the company wishes to know the best strategy for protection against uncertainty, for the payment that has to be made at the end of 3 months. Financial team of the company has collected the following options for evaluation: Table-1: Exchange rates quoted in FOREX Market: ¥/$ Quotations Bid Price Offer/Ask Price Spot Rates 146.03 146.63 3 M – Forward Rates 144.03 145.00 6 M – Forward Rates 146.35 146.70 Table-2: Options Market rates for European options with 3 months expiry: Type of Option Strike Price (X) (¥/$) Premium (%) for Call & Put Options Call & Put 145.20 1.6766% (Call) & 1.7414% (Put) Call & Put 146.00 1.3505% (Call) & 2.1006% (Put) The expected spot price at expiry is ¥/$: 144.90/145.05 Suggest the best strategy for CFO of the Japanese Company to protect against uncertainty, with respect to the following alternatives: (i) Forward Hedge (ii) Buy 3 months call, X = 145.20 (iii) Sell 3 months put, X = 145.20 (iv) Buy call & sell put both having X = 146.00

Suggested Answer and Working Notes:

(i) Forward Hedge Amount payable after 3 months $1000000 3 month applicable buying rate ¥145/$ Amt. payable in Yen ¥145 million (ii) Buy 3 month call option X = ¥145.20 If expected spot price after 3 month is ¥145.05 Then company would not exercise its option. Accordingly, the cost of import will be: Buying Yen in spot Market after 3 month ¥145.05 million Add: Premium Paid ¥145.20 x 1.6766%x $1 million ¥2.43 million ¥147.48 million (iii) Selling 3 month Put at X = ¥145.20 If expected spot price after 3 month ¥144.90, then Put Option buyer will exercise his/her option. Accordingly, the import Bill will be: Buying Yen in under option after 3 month ¥145.20 million Less: Premium Receipt ¥145.20 x 1.7414%x $1 million ¥2.53 million ¥142.67 million (iv) Buying Call and selling Put at X = ¥146 Net Premium receipt Premium paid on call option = ¥146.00 x 1.3505% ¥1.9717 million Premium Receipt on Put option = ¥146.00 x 2.1006% ¥3.0669 million ¥1.0952 million If expected spot Rate expiry happens to be ¥144.90/145.05, then call option will be lapsed and Put option by buyer will be exercised. Accordingly, the import bill will be: Buying US$ under Put Option ¥146.00 million Less: Receipt of Net Premium ¥1.09520 million ¥144.905 million Decision: Since expected outflow is least in case of selling Put option, the same strategy is recommended.

Topics: Foreign Exchange Exposure and Risk Management

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