An Indian exporting firm, Rohit and Bros., would be cover itself against a likely depreciation of pound sterling. The following data is given :
Receivables of Rohit and Bros : £500,000
Spot rate : Rs.56,00/£
Payment date : 3-months
3 months interest rate : India : 12 per cent per annum
: UK : 5 per cent per annum
What should the exporter do?
Solution
Indian exporter can hedge his exposure through money Market Operation Indian exporter – £ 5,00,000 receivable after 3 months
MMC (Borrow – sell – invest)
Step 1 : Borrow £ so that amt payable is £ 5,00,000 after 3 months Amount to be Borrowed = 5,00,000/1.0125
= £ 4,93,827.1605
Step 2 : Sell Rs.493827.1605 at spot Rs./ £ 56
Amt receivable = 493827.1605 x 56 = Rs.2,76,54,320.988
Step 3 : Invest Rs.2,76,54,320.988 for 3 months
Amount receivable = 2,76,54,320.988*1.03 = Rs.2,84,83,950.6176
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