Q50026 Arnie operating a garment store in US has imported garments from Indian exporter

Arnie operating a garment store in US has imported garments from Indian exporter of invoice amount of Rs.1,38,00,000 (equivalent to US$ 3,00,000). The amount is payable in 3 months. It is expected that the exchange rate will decline by 5% over 3 months period. Arnie is interested to take appropriate action in foreign exchange market. The three month forward rate is quoted at Rs.44.50.

You are required to calculate expected loss which Arnie would suffer due to this decline if risk is not hedged. If there is loss, then how he can hedge this risk.

Solution

Arnie us imports fc Rs.1,38,00,000 payable after 3 months

Spot Rs. / $ 138,00,000/ 3,00,000 = 46

Expected 3 months spot        Rs. / $ 43.7

21 7 Capture 22

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