Question 4 (20 Marks) An Indian importer purchases a medical device that costs USD 5,000,000 from a medical equipment trading company in California. The Indian importer will settle the amount in 90 days. The current spot rate is INR/USD 45.7734. The importer expects the spot rate in 90 days will be trading within INR/USD 44 and INR/USD 47. The interest rate is 6% p.a. in India and 4% p.a. in the U.S.

(a) Using the date count convention of 90 / 360, what is the 90-day INR/USD forward rate? (2 marks) In the Indian option market, a USD 90-day put with an exercise price of INR 46 is trading at INR 0.1 per USD.

(b) The Indian importer decides to hedge the USD exposure with the option. Which option, call or put, should he long? (2 marks)

(c) What is the price of a 90-day USD call with an exercise price of INR 46? (2 marks)

(d) The Indian importer hedges the payment with an option at the strike price of INR 46. What is the total option premium paid? (2 marks)