Paper Corporation Ltd., have imported 10,000 Nos. cartridges at landed cost in Mumbai, of US $ 30 each. They have the choice for paying for the goods immediately or in 3 months' time. They have a clean overdraft limit wh

Total exposure = 10,000 cartridges * $ 30/cartridge = $ 3,00,000 Option 1: Pay in 3 months' time with interest @ 15% p.a. and cover risk forward for 3 months. Spot rate: INR/$ 71.25-71.55 3 month swap: 25/35 3 month forward rate = Spot Ask + Swap Ask = 71.55 + 0.35 = 71.90 (for payment) Interest for 3 months = $ 3,00,000 * 15% * (3/12) = $ 11,250 Total amount to be covered forward = $ 3,00,000 + $ 11,250 = $ 3,11,250 Cost of exposure = ₹ 71.90 * $ 3,11,250 = ₹ 2,23,78,875 Option II: Settle now at a current spot rate and pay interest of the overdraft for 3 months. Settle now at spot rate = $ 3,00,000 * ₹ 71.55 (Spot Ask rate) = ₹ 2,14,65,000 Overdraft interest @ 18% p.a. for 3 months = ₹ 2,14,65,000 * 18% * (3/12) = ₹ 9,65,925 Total cost = ₹ 2,14,65,000 + ₹ 9,65,925 = ₹ 2,24,30,925 Conclusion: Option I is cheaper (₹ 2,23,78,875) compared to Option II (₹ 2,24,30,925).