A company is considering hedging its foreign exchange risk. It has made a purchase on 1st. January, 2008 for which it has to make a payment of US $ 50,000 on September 30,2008. The present exchange rate is 1 US $ = Rs.40. It can purchase forward 1 US $ at Rs. 39. The company will have to make a upfront premium of 2% of the forward amount purchased. The cost of funds to the company is 10% per annum and the rate of corporate tax is 50%. Ignore taxation. Consider the following situations and compute the Profit/Loss the company will make if it hedges its foreign exchange risk:
- If the exchange rate on September 30, 2008 is Rs.42 per US $.
If the exchange rate on September 30, 2008 is Rs.38 per US $.
Solution
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