With respect to information given in Para 5, (i) Calculate the expected loss, if the hedging is not done. How the position will change, if the firm…

CA Final · Integrated Business Solutions (Multidisciplinary Case Study) · MTP · May 2024
With respect to information given in Para 5, (i) Calculate the expected loss, if the hedging is not done. How the position will change, if the firm takes forward cover? (ii) If the spot rates on March 31, 2024 are: INR/US $ = 66.25 JPY/US $ = JPY 110.85 Is the decision to take forward cover justified? Note: For cross rate of ₹/¥ round off up to 4 decimal points.

Suggested Answer and Working Notes:

Since the direct quote for ¥ and is not available it will be calculated by cross exchange rate as follows: ₹/$ x $/¥ = ₹/¥ 62.22/102.34 = 0.6080 Spot rate on date of export 1¥ = 0.6080 Expected Rate of ¥ for March 2024 = 0.5242 (₹ 65/¥124) Forward Rate of ¥ for March 2024 = 0.6026 (₹ 66.50/¥110.35) (i) Calculation of expected loss without hedging Value of export at the time of export (₹ 0.6080 x ¥10,00,000) 6,08,000 Estimated payment to be received on March 2024 (₹ 0.5242 x ¥10,00,000) 5,24,200 Loss 83,800 Hedging of loss under Forward Cover Value of export at the time of export (₹ 0.6080 x ¥10,00,000) 6,08,000 Payment to be received under Forward Cover (₹ 0.6026 x ¥10,00,000) 6,02,600 Loss 5,400 By taking forward cover loss is reduced to 54,00 (ii) Actual Rate of ¥ on March 2024 = 0.5977 (₹ 66.25/¥110.85) Value of export at the time of export (₹ 0.6080 x ¥10,00,000) 6,08,000 Estimated payment to be received on March 2024 (₹ 0.5977 x ¥10,00,000) 5,97,700 Loss 10,300 The decision to take forward cover is still justified.
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