answer clearly

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 British Pound GBP 73,500 on September 30, 2008. The present exchange rate is 1 GBP = ` 82.3953. It can purchase forward 1 1 GBP at `81.5375. The company will have to make a upfront premium of 2% of the forward amount purchased. The cost of funds to the company is 11% per annum and the rate of corporate tax is 45%. Ignore taxation. Consider the following situations and compute the Profit/Loss the company will make if it hedges its foreign exchange risk: i. If the exchange rate on September 30, 2008 is ` 84.5000 per . ii. If the exchange rate on September 30, 2008 is ` 83.0000 per . Solution : ` Present Exchange Rate `82.3953 = 1 GBP If company purchases 73,500 forward premium is 73,500 81.5375 2% 119860 Interest on `119860 for 9 months at 11% 9888 Total hedging cost 129748 If exchange rate is `84.50/GBP Then gain (`84.5000 - `81.5375) for 73,500 217744 Less: Hedging cost 129748 Net gain 87996 If = `83.0000 Then loss (81.5375 - 83.00) for 73,500 107494 Add: Hedging Cost 129748 Total Loss 237242 Forex-Practice Problems 4 SANJAY SARAF SIR PROBLEM - 3 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 British Pound GBP 73,500 on September 30, 2008. The present exchange rate is 1 GBP = ` 82.3953. It can purchase forward 1 1 GBP at `81.5375. The company will have to make a upfront premium of 2% of the forward amount purchased. The cost of funds to the company is 11% per annum and the rate of corporate tax is 45%. Ignore taxation. Consider the following situations and compute the Profit/Loss the company will make if it hedges its foreign exchange risk: i. If the exchange rate on September 30, 2008 is ` 84.5000 per . ii. If the exchange rate on September 30, 2008 is ` 83.0000 per .

ABC Ltd. of USA has exported goods worth Can $ 3,90,000 receivable in 9 months. The exporter wants to hedge the receipt in the forward market. The following information is available: Spot Exchange Rate ` 64.56/$ Interest Rate in USA 1.25% Interest Rate In Indian 8% The forward rates truly reflect the interest rates differential. Find out the gain/loss to USA exporter if Indian ` spot rates (i) declines 1.5%, (ii) gains 5.5% or (iii) remains unchanged over next 6 months. Solution : Forward Rate 64.56[{1+(0.08) 9/12}/{1+(0.0125) 9/12}] = `67.7980 i. If spot rate decline by 1.5% Spot Rate = ` 64.56x 1.015 =`65.5284/$ $ receipt as per Forward Rate ($ 3,90,000 / `67.7980) 5752 receipt as per Spot Rate ($ 3,90,000/ `65.5284) 5952 Loss due to forward contract 200 ii. If spot rate gains by 5.5% Spot Rate = ` 64.56x 1.055 =`68.1108/$ $ receipt as per Forward Rate ($ 3,90,000 / `67.7980) 5752 receipt as per Spot Rate ($ 3,90,000/ `68.1108) 5725 Gain due to forward contract 27 Strategic Financial Management 5 SANJAY SARAF SIR PROBLEM - 4 ABC Ltd. of USA has exported goods worth Can $ 3,90,000 receivable in 9 months. The exporter wants to hedge the receipt in the forward market. The following information is available: Spot Exchange Rate ` 64.56/$ Interest Rate in USA 1.25% Interest Rate In Indian 8% The forward rates truly reflect the interest rates differential. Find out the gain/loss to USA exporter if Indian ` spot rates (i) declines 1.5%, (ii) gains 5.5% or (iii) remains unchanged over next 6 months.

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