An Indian exporting firm, Rohit and Bros., would be cover itself against a likely depreciation of pound sterling. The following data is given:
What should the exporter do?
Solution
Rohit and Bros can cover the risk in the money market.
The following steps are required to be taken:
Step 1 : Borrow pound sterling for 3- months @ 5% p.a i.e 1.25% for 3 months
The borrowing has to be such that at the end of three months, the amount becomes £ 500,000.
The amount borrowed is = 5,00,000/ 1.0125 = £493,827
Step 2 : Convert the borrowed sum into rupees at the spot rate.
This gives: £493,827 × Rs.56 = Rs.27,654,312
Step 3 : Sell The sum thus obtained is placed in the money market at 12 % p.a
i.e 3% for 3 months
Amount Receivable = 27,654,312 x 1.03 = Rs.28,483,941
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