EFD Ltd. is an export business house. The company prepares invoice in customers' currency. Its debtors of US$. 10,000,000 is due on April 1, 2025.…

CA Final · Advanced Financial Management · MTP · May 2026
EFD Ltd. is an export business house. The company prepares invoice in customers' currency. Its debtors of US$. 10,000,000 is due on April 1, 2025. Market information as at January 1, 2025 is: Exchange rates US$/INR Currency Futures US$/INR Spot 0.011765 Contract size: 35,66,334 1-month forward 0.011627 1-month 0.011617 3-months forward 0.011227 3-month 0.011216 Initial Margin 1-Month 1,750 Interest rates in India 6.5% 3-Months 2,250 7% On April 1, 2025, the spot rate US$/INR is 0.011234 and currency future rate is 0.011232. Which of the following methods would be most advantageous to EFD Ltd? (i) Using forward contract (ii) Using currency futures (iii) Not hedging the currency risk

Suggested Answer and Working Notes:

(i) Receipts using a forward contract = $10,000,000/0.01127 = 89,07,09,896 (ii) Receipts using currency Futures The number of contracts needed is ($10,000,000/0.011216)/3566334 = 250 Initial margin payable is 250 contracts x 2,250 = 5,62,500 On April 1,2025 Close at 0.011232 Receipts = US$10,000,000/0.011232 = 89,03,13,390 Variation Margin = [(0.011232 – 0.011216) x 250 x 35,66,334/-]/0.011234 OR (0.000016x 250 x 35,66,334)/.011234 = 9926.79/0.011234 = 12,69,836 Less: Interest Cost - 5,62,500x 0.07 x 3/12 = 9,844 Net Receipts - 89,15,73,382 (iii) Receipts under different methods of hedging Forward contract 89,07,09,896 Futures 89,15,73,382 No hedge (US$ 10,000,000/0.011234) 89,01,54,887 The most advantageous option would have been to hedge with Futures.

Topics: Foreign Exchange Exposure and Risk Management

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