Question

ign Exchange Euu XYZ Ltd. is an export oriented business house based in Mumbai. The Com in custmers' currency is receipt of uS $ 1,00,000 is due on Seplember 1,2009c Market informaton as at June 1, 2009 is: pany invoic Currency Futures Exchange Rates Contract size 4.72000 US SR US SR 002126 002140 June Spot 1 Month Forward 0.02136 September 0.02118 3 Months Forward 0.02127 Inital Margin Interest Rates in India 7.50% 18.00% 10,000 June 15,000 September On September 1, 2009 the spot rate US SRe. is 0.02133 and currency future rate is 0.02134. Comment which of the following methods would be most advantageous for X2 Ltd. (a) Using forward contract b) Using currency futures (c) Not hedging currency risks t may be assumed that variaton in margin would be setfed on the maturity of the futures contract

Answer 1

(a) Forward contract rate = 3 months forward = 0.02127

Hence, amount in Rs on Sep 1 2009 under forward contract = 1,00,000 / 0.02127 =  4,701,457

(b) Future rate = 0.02118

Hence, amount in Rs on Sep 1 2009 under future contract = 1,00,000 / 0.02118 - interest lost on the margin amount =   4,721,435 - 10,000 x 7.5% x 3 / 12 =  4,721,248

(c) Spot rate on Sep 1 = 0.02133

Hence, amount in Rs on Sep 1 2009 under no hedging situation = 1,00,000 / 0.02133 =  4,688,233

The company has the highest amount in Rs. in part (b).

Hence, it's most advantageous for the company will be to hedge using currency futures.