Madhur Ltd., an Indian company has an export exposure of 100 lakh Yen value at December end. Yen is not directly quoted against Rupee. The current spot rates are INR/USD = ₹63.60 and JPY/USD = 124.75 Yen. In December end

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2015
Madhur Ltd., an Indian company has an export exposure of 100 lakh Yen value at December end. Yen is not directly quoted against Rupee. The current spot rates are INR/USD = ₹63.60 and JPY/USD = 124.75 Yen. In December end, it is estimated that Yen will be depreciated to 144 and Rupee to 65 against a Dollar. You are required to calculate the expected loss if hedging is not done.

Answer & Explanation:

Calculation of Spot (current) rate of Yen = (INR/USD) × (USD/JPY) = 63.60 × 1/124.75 = 0.5098 or ₹50.98 per 100 yen Calculation of forward rate of Yen = (INR/USD) × (USD/JPY) = 65 × 1/144 = 0.4514 or ₹45.14 per 100 yen Calculation expected loss if hedging is not done:- ₹ Exposure of 100 lakh yen at Current spot rate of ₹50.98 per 100 JPY 50,98,000 Expected rate of ₹45.14 per 100 JPY 45,14,000 Expected loss without forward cover 5,84,000

Topics: Forex Management

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