An Indian importer has to settle an import bill for Singapore $1,30,000. The exporter has given the Indian exporter two options: (i) Pay immediately without any interest charges (ii) Pay after three months with interest

Given: Import Bill Amount = Singapore $1,30,000 Importer's Overdraft Interest Rate = 15% p.a. Spot Rate (₹/SGD) = 48.35/48.36 (Importer buys SGD, so use Ask rate: ₹48.36) 3-Month Forward Rate (₹/SGD) = 48.81/48.83 (Importer buys SGD, so use Ask rate: ₹48.83) Evaluation of two options offered by exporter for settlement of payment: Option I: Pay immediately without any interest charges If the importer pays immediately, they will need to buy Singapore Dollars at the spot rate. Since the importer needs to pay, they will buy SGD from the bank, so the bank will sell SGD at its 'ask' rate. Bill value converted to Indian rupees (using spot ask rate) = Singapore $1,30,000 * ₹48.36 = ₹62,86,800 If the importer does not have sufficient funds, they will use an overdraft facility for 3 months. Add: Overdraft interest @ 15% p.a. for 3 months = ₹62,86,800 * 15% * (3/12) = ₹2,35,755 Total outflow for Option I = ₹62,86,800 + ₹2,35,755 = ₹65,22,555 Option II: Pay after three months with interest @ 5% per annum If the importer chooses to pay after three months, the exporter charges 5% interest. The importer will then need to buy Singapore Dollars at the 3-month forward rate. Bill value with exporter's interest = Singapore $1,30,000 * (1 + 0.05 * (3/12)) = Singapore $1,30,000 * (1 + 0.0125) = Singapore $1,30,000 * 1.0125 = Singapore $1,31,625 Now, convert this amount to Indian rupees using the 3-month forward ask rate (since the importer will buy SGD from the bank). Total amount to be paid in Indian Rupees after 3 months = Singapore $1,31,625 * ₹48.83 = ₹64,27,249.75 ≈ ₹64,27,249 Total outflow for Option II = ₹64,27,249 Advice: Compare the total outflows: Option I Outflow = ₹65,22,555 Option II Outflow = ₹64,27,249 Difference in outflows = ₹65,22,555 - ₹64,27,249 = ₹95,306 Since the rupee outflow is less by ₹95,306 in Option II, it is advisable for the importer to choose Option II (pay after three months).