An Indian importer has to settle an import bill for $ 1,30,000. The exporter has given the Indian exporter two options:
- Pay immediately without any interest charges.
- Pay after three months with interest at 5 percent per annum.
The importer’s bank charges 15 percent per annum on overdrafts. The exchange rates in the market are as follows:
Spot rate (Rs./$) : 48.35 /48.36
3-Months forward rate (Rs./$) : 48.81 /48.83
The importer seeks your advice. Give your advice.
Solution
If importer pays now, he will have to buy US$ in Spot Market by availing overdraft facility. Accordingly, the outflow under this option will be
Rs.
Amount required to purchase $130000[$130000 X Rs.48.36]62,86,800
Add: Overdraft Interest for 3 months @15% p.a. 2,35,755
65,22,555
If importer makes payment after 3 months then, he will have to pay interest for 3 months @ 5% p.a. for 3 month along with the sum of import bill. Accordingly, he will have to buy $ in forward market. The outflow under this option will be as follows:
Amount to be paid in Indian Rupee after 3 month under the forward
purchase contract
Rs. 6427249 (US$ 131625 X Rs. 48.83)
Since outflow of cash is least in (ii) option, it should be opted for.
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