Mitsubishi Ltd. is operating in Japan and dealing with Zen Ltd. in India. The payment is due three months from the date of invoice and the invoice value is Yen 108 lakh. At today's spot rate, it is equivalent to ₹66,96,0

CS Professional · Financial, Treasury and Forex Management · PYQS · June 2019
Mitsubishi Ltd. is operating in Japan and dealing with Zen Ltd. in India. The payment is due three months from the date of invoice and the invoice value is Yen 108 lakh. At today's spot rate, it is equivalent to ₹66,96,000. It is anticipated that the exchange rate will decline by 10% over the three months period, and in order to protect the Yen payments, the importer proposes to take appropriate action in the foreign exchange market. The three-month forward rate is presently quoted at 1.48 Yen per Rupee. You are required to calculate the expected loss, and to show how it can be hedged by a forward contract?

Answer & Explanation:

Answer 4(d) Spot Rate = Yen 108,00,000 / 66,96,000 = 1.613 yen per rupee Forward Rate = Yen 1.48 per rupee Expected Rate over three months period = 90% of 1.613 = 1.4517 yen per rupee Present Cost of 108,00,000 Yen = ₹66,96,000 Total amount Required at 1.4517 yen per rupee (108,00,000 Yen / 1.4517) = ₹74,39,554 Forward Rate = Yen 1.48 per rupee Total Yen Required = Yen 108,00,000 Rupee Commitment under Forward Contract = Yen 108,00,000 / 1.48 = ₹72,97,297 If expectations were to materialize rupee commitment = ₹74,39,554 If Forward contract is taken then rupee commitment = ₹72,97,297 Difference being excess outflow (or Loss) = ₹1,42,257 Thus, by taking Forward Contract, a total loss of ₹1,42,257 can be avoided.

Topics: Forex Management

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