An exporter protects part of a dollar receipt

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

Mira Exports will receive USD 100,000 in three months. Its costs are paid in rupees, so a fall in the rupee value of one US dollar would reduce its rupee receipts. The treasurer decides to hedge 60% of the receipt through a forward contract at ₹84 per USD. The remaining 40% stays unhedged. On the receipt date, the spot exchange rate is ₹82.50 per USD. The forward is cash-settled: a sale of dollars forward earns the contracted dollar amount multiplied by the forward rate less the settlement spot rate. The full export receipt is converted at the spot rate. Ignore charges, taxes, credit risk and discounting.

The ₹84 forward and ₹82.50 spot rates are fictional.

No exchange contract size or current trading eligibility is implied.

1. Q1Which forward position matches Mira Exports’ stated hedge?

   • A

     Option A. Buy USD 60,000 forward

     Why it is wrong: Buying dollars increases the exposure to a rising dollar instead of protecting the dollar receivable.

   • B

     Option B. Sell USD 60,000 forward — Correct answer

   • C

     Option C. Sell USD 100,000 forward

     Why it is wrong: This hedges 100%, while the case specifies 60%.

   • D

     Option D. Buy USD 40,000 forward

     Why it is wrong: This is the wrong direction and uses the unhedged share.

   Answer: B. The firm will receive dollars and is hurt if each dollar buys fewer rupees. Selling 100,000 × 60% = USD 60,000 forward offsets that risk for the chosen share. Remember: A receivable is normally hedged by selling the foreign currency forward.

   Hint, shown before you answer in practice mode: Identify what currency the firm will receive, then apply the 60% hedge.

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2. Q2What is the rupee value of the export receipt before the forward settlement?

   • A

     Option A. ₹84,00,000

     Why it is wrong: This applies the forward rate to the full receipt.

   • B

     Option B. ₹82,50,000 — Correct answer

   • C

     Option C. ₹33,00,000

     Why it is wrong: This values only the unhedged 40% at spot.

   • D

     Option D. ₹49,50,000

     Why it is wrong: This values only the hedged 60% at spot.

   Answer: B. The spot conversion gives 100,000 × ₹82.50 = ₹82,50,000. The forward cash settlement is added separately. Remember: Separate the underlying cash receipt from the derivative settlement.

   Hint, shown before you answer in practice mode: Convert all USD 100,000 at the settlement spot rate.

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3. Q3What is the cash-settled gain on the forward sale?

   • A

     Option A. ₹1,50,000

     Why it is wrong: This incorrectly applies the rate difference to all USD 100,000.

   • B

     Option B. ₹60,000

     Why it is wrong: This assumes a ₹1 change rather than the stated ₹1.50 change.

   • C

     Option C. A loss of ₹90,000

     Why it is wrong: A dollar seller gains when the settlement spot rate is below the contracted sale rate.

   • D

     Option D. ₹90,000 — Correct answer

   Answer: D. The gain is 60,000 × (84 − 82.50) = ₹90,000. The forward sale receives compensation for the lower spot dollar value. Remember: Hedge profit is calculated on hedged exposure, not the entire business receipt.

   Hint, shown before you answer in practice mode: Use only the USD 60,000 hedged amount.

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4. Q4What are the total rupee receipts after adding the forward settlement?

   • A

     Option A. ₹82,50,000

     Why it is wrong: This omits the forward gain.

   • B

     Option B. ₹84,00,000

     Why it is wrong: That result would require the whole receipt to be hedged at ₹84.

   • C

     Option C. ₹81,60,000

     Why it is wrong: This subtracts the gain instead of adding it.

   • D

     Option D. ₹83,40,000 — Correct answer

   Answer: D. Total receipts = ₹82,50,000 + ₹90,000 = ₹83,40,000. The effective rate is ₹83.40 per USD because only 60% was hedged. Remember: A partial hedge leaves some sensitivity to the final spot rate.

   Hint, shown before you answer in practice mode: Add the spot proceeds and the positive derivative settlement.

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