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

CA Final · Integrated Business Solutions (Multidisciplinary Case Study) · MTP · September 2025
With respect to information given, (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 at the date of realization of the export receivables 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:

₹/$ x $/¥ = ₹/¥ 62.22/102.34 = 0.6080 Spot rate on date of export 1¥ = 0.6080 Expected Rate of ¥ = 0.5242 (₹ 65/¥124) Forward Rate of ¥ = 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 (₹ 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 5,400 (ii) Actual Rate of ¥ on the date of export realisation = 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 2025 (₹ 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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