Lamuna Ltd., a carpet manufacturer in India is tendering for an export order for an America based buyer. The tender conditions state that payment will be made in US$ at the end of 18 months from now. The marginal cost of

Forward rate at the end of one year from now, through the application of purchasing power parity principle. Here, bid rate will be applicable, as banker is going to buy the foreign currency. Forward 12 months/ Spot = (1 + rate in home currency)/(1+ rate in Foreign currency) Forward 12 months/65.08 = (1+0.09)/(1+0.03) Forward 12 months = ₹68.87 per $ Forward rate at the end of 18 months from now, through the application of purchasing power parity principle Here, bid rate will be applicable, as banker is going to buy the Foreign currency Forward 18 months/ Forward 12 months = (1+ rate in Home currency)/ (1+ rate in foreign currency) Forward 18 months/68.87 = (1+0.045)/(1+0.015) Forward 18 months = ₹70.91 per US $ Computation of normal tender price in India ₹. Marginal cost of manufacturing (2,00,000 * ₹600) = ₹12,00,00,000 Add: Markup (25%) = ₹3,00,00,000 Normal tender price = ₹15,00,00,000 Quotation in US $ Normal tender price = ₹15,00,00,000 Forex rate applicable (forward 18 months) = ₹70.91 per US $ Quote in US $ = US$ 21,15,357.49