An Indian importer company has to settle an import bill of $1,30,000. The exporter has given the Indian importer two options: (a) Pay immediately without any interest charges; or (b) Pay after three months with interest

Evaluation of two options offered by exporter for settlement of payment Option I: Pay immediately without any interest charges Bill value converted to Indian rupees ($1,30,000 x ₹48.36) = ₹62,86,800 Add: Overdraft interest @ 15% p.a. for 3 months (₹62,86,800 * 15% * 3/12) = ₹2,35,755 Total = ₹65,22,555 Option II: Pay after 3 months with interest @ 5% p.a Bill value = $1,30,000 Add: Interest @ 5% p.a. for 3 months = $1,625 Total = $1,31,625 Therefore amount to be paid in Indian Rupees after 3 months under forward purchase contract = $1,31,625 x ₹48.83 = ₹64,27,249 Difference in outflows in Option I and Option II = ₹65,22,555 - ₹64,27,249 = ₹95,306 Advice: It is advisable to settle bill payable after three months (i.e. choose option II) since rupee outflow is less by ₹95,306.